Sharp drop in consumer demand narrows trade deficit

LONDON Thu Jun 9, 2011 11:10am BST

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LONDON (Reuters) - Britain's goods trade deficit with the rest of the world narrowed more than expected in April, although the improvement was driven by a sharp fall in demand for consumer goods, rather than any big improvement in exports.

The Office for National Statistics said that the goods trade gap narrowed to 7.389 billion pounds in April from 7.708 billion in March, lower than analysts' forecasts for a deficit of 7.55 billion pounds.

Economists said that while the figures suggest net trade would make a positive contribution to overall economic growth in the second quarter, the broadly steady level of exports was slightly disappointing.

There was no market reaction to the data, which did little to alter the view the Bank of England would leave interest rates on hold at 0.5 percent when its monthly policy meeting concludes at noon and for some months to come as rate-setters wait for the economic recovery to gather pace.

"While the latest numbers are mildly encouraging, they are not giving a firm confirmation that exports are making a more meaningful contribution to the UK's recovery," said Philip Shaw, economist at Investec.

The ONS said exports rose by 0.1 percent on the month, while imports fell 0.9 percent.

The decline was driven by sharp falls of imports of cars and consumer goods -- in particular clothing, footwear, jewellery and artwork -- which were 319 million pounds lower on the month.

Imports of intermediate and semi-manufactured goods also fell sharply.

Policymakers have been counting on exports to boost Britain's economy at a time when domestic demand is being hit by high inflation, low wage growth, rising taxes and worries about public spending cuts.

But recent worrying signs of a slowdown in some of Britain's biggest markets have raised doubts about the ability of exporters to drive growth.

Net trade was a driving force of economic growth in the first three months of this year, contributing 1.7 percentage points to overall economic output, which grew by just 0.5 percent.

Economists said April's muted export growth suggested that was unlikely to be repeated in the April-June quarter.

"While the external sector should continue to provide a positive contribution to GDP growth in the coming months, we doubt that it will continue to carry the recovery as it did at the start of the year," said Vicky Redwood of Capital Economics.

The trade deficit with the European Union -- its biggest trading partner -- narrowed to its smallest since last June, with imports down 2.2 percent while exports fell 1.5 percent on the month.

The goods trade gap with non-EU countries was slightly wider than expected at 4.339 billion pounds, down from 4.495 billion in March, as oil imports rose.

The ONS said there had not yet been any impact on April's figures from Japan's earthquake and tsunami in March. Any effects were likely to show up in the May data because most goods imported from Japan are shipped, resulting in a six-week lag.

(Editing by Toby Chopra)

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