U.K. Trade Deficit Widens, Non-EU Gap Reaches Record

Sep 11, 2007 - The U.K. trade deficit widened more than economists forecast in July as the gap with non-European Union nations reached a record, suggesting the pound's appreciation is making British goods less attractive overseas.

The goods trade deficit was 7.1 billion pounds ($14.4 billion), compared with 6.5 billion pounds in July, the Office for National Statistics said in London today. Economists forecast a 6.4 billion-pound gap, according to the median of 26 estimates in a Bloomberg survey.

A pickup in manufacturing, which helped power quicker economic growth in the second quarter, may be waning after the pound reached a 26-year high against the dollar in July. Exports may falter if a surge in corporate borrowing costs, caused by the U.S. subprime mortgage crisis, cools the global economy.

"There's a risk from subprime to global demand," said George Buckley, chief U.K. economist at Deutsche Bank AG in London. "The stronger pound won't help and may weigh on exports."

The goods deficit was close to the record reached in March, the statistics office said. The gap swelled as imports increased 4 percent, outpacing the 2.6 percent gain in exports.

Exports to countries outside the European Union fell 6.2 percent, while imports rose 5.1 percent, the statistics office said. The overall goods deficit with those nations swelled to a record 4.5 billion pounds.

Pound Strength

The pound reached $2.0654 on July 24, the highest since 1981, and traded at $2.0286 in London today. Exports to the U.S., which fell on the month, account for about a tenth of overseas sales.

Cobham Plc, a U.K. supplier of radio antennas to the U.S. military, said today that its first-half profit dropped 35 percent as a weaker dollar and the sale of subsidiaries hurt revenue. The company gets almost half its revenue from the U.S.

The Organization for Economic Cooperation and Development cut its 2007 forecasts for economic growth in the U.S. and Europe on Sept. 5 and said further reductions may follow after the collapse of U.S. subprime mortgages. The OECD trimmed its U.S. forecast to 1.9 percent from a May figure of 2.1 percent, and for the euro region to 2.6 percent from 2.7 percent.

U.K. factory output, which accounts for 15 percent of the economy, unexpectedly fell in July, the first decline in five months, a government report showed Sept. 6.

Services Growth

Services, the largest part of the economy, are likely to support growth. Services growth unexpectedly quickened in August, a survey by the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland Group Plc. showed on Sept. 5. Gross domestic product growth accelerated to 0.8 percent in the second quarter, from 0.7 percent in the previous three months.

The Bank of England kept its benchmark interest rate unchanged at 5.75 percent on Sept. 6 as policy makers sought to prevent higher credit costs from damaging the economy. The bank said that economic growth has sustained its pace and it is too soon to tell how financial market turmoil will affect lending.

The U.K.'s trade figures have been distorted by value-added tax fraud. The statistics office said today that it has revised 'substantially' its estimates of the fraud for 2006, which may show lower imports than previously measured. This could affect the assessment of net trade on gross domestic product and the deflator. The new estimates will be released with growth data on Sept. 26.

Oil trade showed a deficit of 300 million pounds in July, compared with a gap of 100 million pounds the previous month. The measurement for June was changed from a surplus after the tax authorities detected a duplicated submission from an oil trader of 300 million pounds, the statistics office said.