Trade gap outside EU widens

BRITAIN'S TRADE deficit with non-European Union countries unexpectedly widened last month. That took the shine off a surprise narrowing in the overall deficit in May on the back of a rise in exports to the EU.

The shortfall with countries outside Europe rose to pounds 1.7bn from pounds 1.2bn in May against City forecasts of pounds 1.0bn, according to figures out yesterday.

Analysts said the widening was a disappointment, particularly as export volumes had picked up on the back of the recent fall in sterling, especially against the dollar.

However, a surge in imports, up by 5.4 per cent on the month, more than offset the improvement in exports.

May's deficit with the EU narrowed sharply to pounds 386m from pounds 735m previously, consistent with a recovery in euroland.

The Institute of Export said the figures were in line with the growing confidence among exporters. "There are signs that the cycle ... may be starting to turn," said a spokesman. "Companies have had to learn to live with the strong pound and get their costs down."

The EU trade performance helped the trade gap with the rest of the world narrow to pounds 1.6bn in May from pounds 2.1bn in April, compared with a forecast of a pounds 2.0bn deficit. But stripping out erratic items such as aircraft and an increase in exports of precious stones to the EU, the underlying trend was broadly flat at pounds 2.1bn.

Richard Iley, of ABN Amro, said: "Underlying goods trade deficit was little changed while the more timely data on trade outside the EU was also disappointing. "With exporters still struggling and domestic demand healthy, net trade will remain a drag on GDP growth this year."

Dharshini David of HSBC said the rise in non-EU deficit probably reflected a rise in UK domestic demand. "But even if burgeoning domestic demand does prompt imports to be sucked in at a more rapid rate, this should not mean a further sharp deterioration in the trade deficit in the coming months," he said.

The non-EU figures were also distorted by precious stones - this time an import from Switzerland - leaving many economists to described the data as "the usual mixed bag". Sterling was little moved on the foreign exchange markets.