Trade gap nears pounds 1bn as imports surge

Britain's trade gap expanded back towards the pounds 1bn mark in April as a surge in imports outpaced an increase in exports. Both rose to record levels.

Trade with non-EU countries went further into the red in May, with the deficit expanding to pounds 563m.

The underlying trend in trade volumes has remained roughly flat, analysts said. But most predicted that the shortfall would expand later this year as the combination of rapid growth at home and the strong pound continues to boost imports.

"The overheating of the economy will show up first in the trade balance," predicted Richard Iley of ABN-Amro.

In recent months the movements in imports and exports have been volatile, and the jump in both in April took economists by surprise. "Both imports and exports, in value and volume terms, rose sharply and are records," said Simon Briscoe of Nikko Europe.

The global trade deficit increased to pounds 961m in April from pounds 671m the previous month. Export volumes climbed 8.3 per cent during the month, while import volumes jumped by 11 per cent.

Both export and import volumes had fallen in March, and non-EU exports and imports fell again in May.

A large part of the explanation for the worsening trade position in April was a fall in Britain's surplus in oil. It was down to a more normal level of pounds 374m from pounds 604m in March.

The underlying gap, excluding oil and erratic items, was also up. It expanded to pounds 1.5bn from pounds 1.3bn the previous month. Apart from the unpredictability of the figures month to month, the robustness of export volumes in the face of the strong pound has been puzzling.

In the latest three months, underlying export volumes have gained 2.6 per cent, compared to a 0.8 per cent rise in imports. During the latest 12 months the figures are 6.7 per cent for exports compared with 4.6 per cent for imports.

"We are importing more from our European partners, which makes sense given the competitive advantage sterling strength gives EU exporters. But it is also the case that UK exports are holding their own," said John O'Sullivan.

Although business surveys have shown a pronounced decline in export orders, this is not yet reflected in the official trade statistics. Most economists - including those in the Treasury and the Bank of England - have been expecting the pound's appreciation to put the brakes on exports and hence on the economy's overall growth.

David Bloom at James Capel said a pick-up in world trade growth might be the explanation for the surprising export performance. While this was good news, it put even more pressure on the Chancellor to choke off consumer demand in next week's Budget, he said.

The pound ended slightly lower yesterday at just under DM2.87.

So far the impact of the pound on the trade gap has been muted by falling import prices. This effect is likely to wear off as the year progresses.

In addition, most experts still reckon the growth in export volumes will slow down, following the slowdown in orders reported by recent business surveys. When that happens, the buoyancy of imports as a result of booming consumer spending could lead to a very rapid deterioration in Britain's trade position.