Page last updated at 20:38 GMT, Tuesday, 9 March 2010

UK trade deficit widens to biggest in 17 months

Containers for goods
An unexpected fall in UK exports meant January's trade gap widened

The UK's trade gap with the rest of the world widened unexpectedly in January to its largest since August 2008.

Exports saw their sharpest drop in more than three years, according to the Office for National Statistics (ONS).

The UK's trade gap in goods and services widened to £3.8bn, compared with £2.6bn in December.

The news came as a disappointment and caused the pound to weaken, dipping 0.4% to 1.10 euros and losing 0.75% against the dollar to below $1.50.

The UK's currency has fallen by some 24% against a basket of world currencies since early 2007 - before the global economic crisis.

By Hugh Pym, Chief economics correspondent
Blip - or trend? That is often the question that comes up with monthly economic statistics. With a series as volatile as the monthly trade figures, particular care needs to be taken when deducing longer-term trends.

On the face of it, a 6% drop in exports in January from December is worrying. The sharp fall in the value of the pound over the last year should be doing more to help exporters. And, if British companies are producing fewer goods and services than expected for overseas markets, that will hardly help the overall growth picture for the first quarter.

And yet... the heavy snow in January may have held up traffic from factories to ports. Employer surveys suggest a rise in optimism among exporters.

We might have to wait another month before joining more of the dots on the UK trade picture.

That fall in the value of the pound, making UK goods cheaper abroad, might have been expected to boost sales overseas.

But BBC economics editor Stephanie Flanders said that in difficult economic conditions, UK manufacturers may have taken advantage of a weaker sterling to increase their profit margins rather than increase sales.

"There is no doubt that the sharpest fall in the value of sterling since the war happened at a bad time for exporters to make the most of it," she said.

"It is perhaps not surprising that our exporters tried to extract every last penny out of the demand that was still there."

The trade gap in physical goods widened to £7.99bn, well above the £7bn economists had forecast.

Meanwhile, December's figure was revised down to £7bn from its original £7.3bn.

The goods trade gap with non-European Union countries was also wider than forecast. That stood at £4.8bn, from £3.4bn in December, after exports to countries outside the EU dropped by 12.5% on the month and imports rose by 1.6%.


The ONS said there was no obvious reason for this month's deteriorating picture, although some have suggested that the particularly bad weather in January may have disrupted trade flows.

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Jeremy Stretch, senior market strategist at Rabobank, said: "It could be that the weakening of sterling is taking time to feed through - but that may be painting too much of a positive on a negative set of numbers."

"It's a pretty disappointing number," said analyst Alan Clarke, of BNP Paribas.

"Trade is one area where people have been expecting an improvement but it doesn't seem to be happening."

Opposition parties blamed the failure of government policy.

The Conservatives called the new figures "disappointing", while the Liberal Democrats said they were "deeply alarming".

Shadow business secretary Ken Clarke said: "We need to build a new economic model based on saving, investment and exports instead of the debt-fuelled model of the last decade."

For the Liberal Democrats, Vince Cable said the figures showed that relying on exporting as a means to recovery was misguided.

"It is wrong to suggest that the British economy can escape from this recession by just relying on exports," he said. "We need an economy that is strong and secure across the board."

But the Trade Minister, Lord Davies of Abersoch, warned against reading too much into the monthly figures.

"The overall long-term export figures are good, with exports rising by £2.6bn to £60.3bn in the last quarter," he said, adding that the benefits of the weaker pound would only be felt once demand in the UK's main markets started to pick up more strongly.

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