Surging trade deficit hits hopes of recovery

HOPES that manufacturers would drive the UK economy into stable recovery were dealt a blow yesterday as official figures revealed a record £8.7 billion trade deficit with the rest of the world in July.

Imports far outpaced exports despite the low value of the pound - a factor economists had hoped would boost firms selling their goods abroad.

The shock deficit cast a shadow over the economy as the Bank of England's monetary policy committee (MPC) voted to keep interest rates unchanged at 0.5 per cent.

Speculation is mounting that the central bank will have to resume its quantitative easing programme as early as next month as the likelihood of another period of depressed economic activity increases.

One respected group, the Centre for Economics and Business Research (CEBR), said recent gloomy data proved the need for further stimulus.

Ben Williams, senior economist, said: "The base rate has remained at 0.5 per cent since March 2009 and the size of the Bank's asset purchases has held steady at 200 billion since November 2009.

"However, recent economic data suggest that the Bank's current laissez faire attitude towards monetary policy could be about to change. It seems increasingly clear that a greater amount of monetary stimulus is required."

Williams pointed to this month's surveys from the services and manufacturing sectors. The purchasing managers' index (PMI) for services fell to a 16-month low while manufacturing data dropped to a nine-month nadir.

The CEBR's analysis was supported by the latest report from the Organisation for Economic Co-operation and Development (OECD), which warned that central banks in all G7 nations may need to extend further support.

The Paris-based group said the UK would enjoy the strongest third-quarter growth among the G7 economies but this was a dubious honour as growth across all seven nations would slow rapidly to 1.4 per cent in the third quarter after expansion of 3.2 per cent and 2.5 per cent in the first and second quarters respectively.

Yesterday's slew of economic news heightened fears about how the UK economy would overcome government austerity measures and subdued consumer spending.

David Kern, chief economist at the British Chambers of Commerce, said Westminster must act urgently to support British exporters through schemes such as short-term trade finance.

"Although longer-term comparisons for this year still show that the trend in exports is up, July's disappointing figures highlight the importance of supporting Britain's exporters," Kern said.

"A major improvement in our trading position remains a key element in any successful economic strategy."

July's worse-than-expected trade figures were blamed on a surge in oil and chemicals imports while exports fell. Exports for the UK as a whole were 0.3 per cent lower than the previous month on a volume basis, according to the Office for National Statistics.