Trade deficit narrows to pounds 1.06bn

BRITAIN'S trade gap narrowed slightly in September but is expected to widen dramatically this month because of the rise in import prices resulting from the devaluation of the pound, writes Robert Chote.

The shortfall between exports and imports of visible goods was pounds 1.06bn last month, down from pounds 1.15bn in August, the Central Statistical Office said yesterday. Excluding surpluses in trade in oil and erratic items - such as ships and precious stones - the trade deficit narrowed by pounds 354m in September to pounds 1.3bn.

Including a projected surplus of pounds 100m on trade in 'invisible' items such as insurance and tourism, the current account deficit in September was estimated at pounds 963m. The deficit in the year so far is pounds 8.77bn, compared to the Budget forecast of pounds 6.5bn for the whole year.

But the Treasury accepted that 'the tendency will be for the trade balance to get worse before it gets better'. The CSO said the devaluation had not boosted Britain's import bill by as much as it had expected last month. Most of the short-term rise in import prices would feed through in October's figures, it added.

The financial markets showed little reaction to the figures, waiting instead to see the size of the devaluation effect in the next few months. Import prices rose 0.9 per cent between August and September, having fallen steadily since last year. Fuel import prices rose 6 per cent on the month, while manufactured import prices rose 0.9 per cent.

Import prices are not expected to rise by as much as the pound has fallen because exporters to the UK are expected to trim profit margins to maintain sales.

Excluding oil and erratic items, export volumes rose 2.7 per cent in September. But export volumes in the three months to September were 0.8 per cent lower than in the previous three months, reflecting slowdown in the economies of many of Britain's trading partners.

Import volume fell by under 2 per cent in September, but is 1.5 per cent higher on a three-month comparison. Import volumes have been rising despite the depressed level of spending because British companies have been losing market share to foreign competitors.

Import volumes in the three months to September were 8 per cent higher than a year earlier, a period during which the economy has been weakening.

The volume of intermediate goods imports dropped 5.6 per cent in September. Ian Shepherdson, economist at Midland Montagu, said this pointed to a further slowdown in factory output because companies were ordering fewer components to put in manufactured goods. Consumer goods imports rose, perhaps reflecting higher housing turnover.