Surging exports halve Britain's trade deficit

Exports are still showing no signs of being held back by the strong pound, according to official figures. Unless export growth slows soon, interest rates are likely to rise again, reports Diane Coyle, Economics Editor.

Britain's trade balance improved sharply in July thanks to a surge in exports. The deficit more than halved during the month, falling by pounds 500m to pounds 450m, while the value of exports hit a new record.

"Despite the chorus of gloom and doom from industry, exports are holding up well to say the least. Even if they start to slow, I would be amazed if we do not get another rise in interest rates," said Michael Dicks, UK economist at investment bank Lehman Brothers.

Figures for trade with countries outside the European Union in August showed that the shortfall rose to pounds 359m from an unusually low pounds 62m in July, but it remained well below its average during the previous few months.

Taking out erratic items such as oil rigs and precious stones, the picture was less favourable, with the underlying deficit climbing by nearly pounds 300m to pounds 1.2bn in July. Even so, underlying growth in export volumes has continued to outstrip import growth.

In the latest three months exports have climbed 3.5 per cent and imports only 1.8 per cent. Both exports and imports are at near-record levels in underlying terms.

Most economists have been predicting that the strong pound would worsen the trade position enough to slow down the economy's overall growth and avert the need for the Bank of England to raise borrowing costs again. But with figures earlier this week showing that growth last quarter was higher than first estimated, yesterday's trade figures suggest the economy could also expand more than expected this quarter.

Even experts who reckon talk of a booming economy has been overdone admit that the latest trade position increases the risk that the Bank of England will take more action. "There is just not that much evidence of the strong pound hitting exports. You can't yet signal the all-clear on interest rates," said Eric Fishwick of Nikko Europe.

The pound rose as a result yesterday. It gained more than a pfennig to just under DM2.88, while its index against a range of currencies rose 0.8 to 101.1.

However, the surprisingly good news does not mean Britain's export performance will not suffer as a result of the 17 per cent rise in the pound in the past year. "Exporters are not cutting prices fast enough to prevent some weakening in the trend in the months ahead," said Kevin Darlington of ABN-Amro.