UK trade gap soars to £9.7bn

CHANCELLOR Gordon Brown received an embarrassing setback ahead of today's Pre-Budget Report with the news that Britain's trade deficit has widened to record levels.

The gap between imports and exports soared 23% from the same period a year ago to £9.7bn as goods and services sales to EU countries slumped.

Although the deficit narrowed slightly last month, the Government admits it is likely to worsen again in the months ahead.

A new threat comes from sterling's ascent against the dollar. It rose a further cent to fresh 11-year highs of $1.74, ignoring the 'strong dollar' vows of US treasury secretary John Snow. This also lifts sterling against dollar-linked Asian currencies.

'It's pretty nasty,' said Jonathan Loynes, economist at City think-tank Capital Economics. 'We keep hearing about the pick-up in the world economy but if anything things are getting worse.'

The news raises questions over whether the Bank of England should have raised interest rates last month, and suggests it is likely to be cautious before raising them again.

The Office of National Statistics, already under fire over its data, raised eyebrows by partly blaming the bad news on September's weak oil prices.

Lehman Brothers economist Alan Castle said: 'The ONS were playing these figures down, but there has been an underlying weakening in the trade position over the past few months.'

Weak European Union economies dealt the heaviest blow to British industry. Despite the pound's sharp fall against the euro, sales of goods and services to EU countries fell 4.7% from a year ago.

Exports to the rest of the world rose 9.3%, with China rising 32% and Japan 12%. America remains Britain's biggest and best trading partner. Sales to the US rose 9.3% last year - and we run a massive trade surplus, which doubled in the last year.

Castle says an overall export recovery will rely on the EU economies finally picking up next year.