Trade deficit narrows to pounds 861m after April surge

DIANE COYLE

Economics Correspondent

Britain's trade deficit fell back below pounds 1bn in May, reversing April's alarming rise due to the import of the cruise ship Oriana from Germany and aircraft from the US.

The headline deficit fell a third to pounds 861m, helped by the export of precious stones - although this was still the highest monthly shortfall since December. The underlying trade position, excluding oil and erratic items, was virtually unchanged at pounds 1.4bn from pounds 1.3bn in April.

The Central Statistical Office said the trend in the deficit was flat. The underlying shortfall has been around the same level for six months. Export volumes in the first five months of this year were almost 10 per cent higher than in the same period last year, while import volumes were up only 2.5 per cent. But due to the fall in sterling, import prices have risen 12 per cent compared with 8 per cent for export volumes.

Some City economists voiced concern that prices of exports to the EU were rising faster than expected, suggesting that British firms were taking advantage of the weak pound to increase margins rather than market share. In the three months to April export prices to the EU rose by 6.4 per cent while import prices were up 4 per cent.

Others were encouraged by the narrowing in Britain's trade gap with other EU countries in May, although half of this reflected the pounds 250m rebound after importing the Oriana the previous month. The deficit with the EU dropped from pounds 768m in April to pounds 227m, the lowest for two years.

''The EU trade position remains healthy and could improve further as the boost to competitiveness from sterling's fall kicks in,'' said Jonanthan Loynes, an economist at HSBC Markets. The value of exports to the main European trading partners rose, while imports were broadly unchanged. The CSO attributed all the gains in exports to the price increases, with export volumes flat during the three months to May.