Export collapse pushes UK into record pounds 2.8bn deficit

THE UK trade deficit reached a record high in January, official figures revealed yesterday, with the strong pound and weaker world growth pushing exports to a four-year low.

The January deficit on traded goods widened pounds 0.6bn to pounds 2.8bn, the Office for National Statistics said - the highest since records began more than three hundred years ago.

An across-the-board collapse in exports - down by 5.5 per cent to pounds 12.5bn - lay behind the disappointing trade figures. Exports to non-EU countries were hit particularly hard, falling 8.5 per cent in the month.

Analysts said sterling, which strengthened another 0.34p against the euro yesterday to 66.46p, was partly to blame. Against the German mark the pound is now close to DM2.95, a level not seen since last summer.

Richard Iley at ABN Amro said: "Given that the lion's share of sterling's appreciation over the last two years has been against the euro zone, the resilience of the UK's export performance to the EU has been puzzling. The trend in volumes now appears to have decisively weakened, however."

Lower world growth was also part of Britain's export problem, said analysts. Few were surprised to see that UK exports to Germany, whose economy contracted in the final quarter of 1998, were sharply lower in January. "Weaker EU growth is certainly part of the story," said Sharda Persaud at Paribas.

Even UK trade in services, which traditionally turns in a healthy surplus, was not immune. The surplus on services fell by pounds 100m to pounds 800m, the lowest for more than two years. The overall trade deficit on goods and services in January was pounds 2.1bn, also a record high.

Despite better-than-expected preliminary figures for February, analysts predicted that the trade deficit was set to deteriorate further this year.

The ONS provisionally estimated the February goods deficit with countries outside the EU at pounds 1.7bn, pounds 400m less than January's record high.

However, analysts said the renewed strength of the pound and continuing slowdown in the euro zone would undermine British exports in coming months.

Ms Persaud said: "I don't think the February numbers are the beginning of a trend. We see the widening of the deficit continuing."

City experts warned that the widening trade deficit would continue to depress economic growth this year. In 1998 the UK trade deficit wiped almost two percentage points from the growth rate.

Mr Iley at ABN Amro said: "We may not see such an intense drag on growth from trade in 1999 as we did in 1998, but it could still slice as much as a full percentage point from growth."

The prospect of continuing misery for British exporters prompted lobby groups to call for further cuts in interest rates.

David Kernohan, senior economist at the Engineering Employers' Federation, said: "The absence of inflationary pressure in the economy presents the Bank of England with a clear opportunity to cut interest rates to help stem the deterioration in engineering and manufacturing."

The trade minister, Brian Wilson, said that in the light of the pressures on trade, it was imperative that the world's leading economies promoted financial stability and resisted protectionist measures.