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Britain's trade position deteriorated unexpectedly in July after imports increased more than exports, frustrating the coalition government's ambitions to rebalance the economy.
The trade in goods deficit – exports minus imports – widened to £10.2bn from £9.4bn in June, disappointing City expectations that the deficit would narrow to £9.1bn. It was almost matched the largest monthly deficit on record, which was £10.3bn in April 2012.
The broader trade in goods and services deficit also widened in July, to £3.3bn from £2.5bn in June.
The Office for National Statistics data showed a larger goods deficit in July driven by a £1.3bn rise in imports to £34.2bn, outpacing a £500m increase in exports to £24bn.
Rising imports of fuel, chemicals and aircraft drove the deficit higher, while the rise in exports was driven by oil trade with non-EU countries and pharmaceutical exports.
The National Institute of Economic and Social Research thinktank estimated separately that the UK economy grew by 0.6% in the three months to the end of August, suggesting the rate of growth is starting to slow.
Despite the disappointing trade figures, which underline the challenge the chancellor is facing in his ambition to rebalance the economy away from domestic consumer demand and towards exports, there was slightly better news for manufacturing output which increased by 0.3% in July, in line with expectations.
Pharmaceutical products, food, drink, tobacco, computers and electronics were all behind the growth in manufacturing. It took the annual rate of growth to 2.2%
In 2012, George Osborne set a target of doubling UK exports to £1tn by 2020 as part of a broader ambition to rebalance the economy away from consumer spending and towards manufacturing and exports. However, exports increased by just 2.1% in 2013 to £505.6bn, and the chancellor's target is looking increasingly challenging. The British Chambers of Commerce (BCC) warned last month that the target will be missed at current rates of progress. The business lobby group said exports would have to grow by 10% a year to meet it.
Separate figures from the ONS on Tuesday showed manufacturing output increased by 0.3% in July, in line with expectations. Pharmaceutical products, food, drink, tobacco, computers and electronics were all behind the growth in manufacturing. It took the annual rate of growth to 2.2%.
The broader measure of industrial production, which includes mining and utilities as well as manufacturing, rose by 0.5% in July, beating expectations of a 0.2% increase. The annual rate of growth was 1.7%.
David Kern, chief economist at the BCC, said: "These figures highlight the strength of the recovery and the challenges still facing the UK economy. On the positive side, the production figures confirm that the recovery is still on course, although the pace of manufacturing growth shows some signs of easing.
"However, it's a concern that the trade deficit has widened, as this will hamper our ability to rebalance the economy. Stagnation in the eurozone remains a challenge, and reinforces our position that the Bank of England's monetary policy committee should not raise interest rates in the immediate future."
Despite the poor headline goods deficit figure, the data did show the first increase in exports since March.
The rise in exports was driven mainly by trade with countries outside the EU, encouraging hopes that the UK can strengthen trade ties with fast-growing emerging economies, though it also underlines the risk posed to the UK economy by a flagging eurozone.
Martin Beck, senior economic advisor to the EY ITEM Club: "With around 45% of UK manufactured goods exported, overseas sales are key for continued growth in the sector. The recent fall in the value of sterling should, temporarily, boost prospects for UK exporters. However, with the eurozone economy remaining in the doldrums and ongoing unrest in Eastern Europe and the Middle East, export growth is likely to remain muted in the short term."
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