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UK trade deficit widens as weak pound fails to boost exports

Mixed news for economy as trade gap is widest in 11 months but manufacturing and construction activity increases

Cargo, shipping containers, at Felixstowe Container Port, Suffolk, UK, with container ships in the background.
 

The overall trade deficit widened to £5.6bn in August from £4.2bn in July, for the biggest gap between imports and exports in 11 months, according to the Office for National Statistics (ONS).

The figures on British trade will prove worrying for government ministers looking to expand relationships outside the European Union.

However, there were also more positive signals for the economy, with an increase in manufacturing and construction activity. Factories increased production by 0.4% in August from the previous month, according to the ONS, while building firms increased output by 0.3% over the same period.

ONS senior statistician Kate Davies said: “This latest set of key economic indicators presents a mixed picture with signs of improvement in UK manufacturing, offset by the continuing sluggishness of the construction sector and a widening of the underlying trade deficit in recent months.”

In an assessment of its record of predicting the path of the economy, the Office for Budget Responsibility said the average rate of productivity growth of 0.2% over the past five years was a better guide for 2017 than its forecast of 1.6% in March.

The OBR was expected to revise the productivity figures, which will be a headache for Philip Hammond as he prepares for his autumn budget on 22 November.

Treasury officials believe the downgrade will wipe out about two-thirds of the government’s £26bn budget surplus from 2017 to 2021. The stockpile, seen as a war chest for a potential slowdown after a disorderly and harmful EU exit, was set aside by the chancellor in the previous budget in March.

Hammond is under pressure to increase spending, despite weaker economic readings.

The Conservatives pledged to raise it at the party conference in Manchester last week, putting an additional £10bn into its help-to-buy scheme for first-time housebuyers and raising the repayment threshold on student loans.

In its seven-year history, the OBR has been forced to heavily revise several assumptions about the economy.

Last year, it revised down a forecast for the growth of household debt for the rest of the decade, in response to years of lacklustre increases in mortgage borrowing. The forecaster has also revised down the level of corporate borrowing after companies shied away from using bank loans to make large-scale investments.

Critics of the OBR accused it of being overly optimistic in sticking with forecasts that corporate and household borrowing would spur a dramatic revival in the UK’s economic fortunes.

Neither materialised and growth from 2014 to 2016 was mainly the result of an increase in real incomes following a slump in inflation.

The OBR said its March forecast assumed that trend productivity growth would rise slowly to reach 1.8% in 2021. However, that jars with recent readings, as the rate of labour productivity as measured by output per hour fell by 0.1% in the three months to June, according to the Office for National Statistics.

Robert Chote, the OBR chairman, refused to give details about how much his team of analysts, which includes former Bank of England governor Charlie Bean, would cut the forecast for productivity growth, saying that it would be published at the time of the budget.

He said: “Our assumption that productivity growth would return to a more normal rate within a few years reflected a judgement that whatever factors were depressing it in the wake of the financial crisis would fade as it receded further into the past.

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“But as the period of weak performance gets longer, the explanations that people pointed to immediately after the crisis [for an upturn] look less convincing and others seem more plausible.”

Low business investment was cited by the OBR as one of the main reasons for persistently low levels of productivity. And while investment could rebound in the wake of the divorce with the European Union, it seemed more likely that uncertainty would persist, keeping productivity levels depressed.

The revisions to productivity growth come after positive monthly readings on the budget deficit – the gap between government spending and income from tax receipts. It fell to its lowest August total since 2007 after an increase in VAT income and a squeeze on local authority borrowing.

They also come as the Bank of England considers putting up interest rates from as early as next month in an attempt to head off the recent rise in inflation, which has squeezed living standards.

Although the unemployment rate is at its lowest level since the mid-1970s, wage growth still lags behind the rising cost of living.

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