UK trade gap hits 1-1/2 yr low as imports drop

Britain's goods trade deficit with the rest of the world unexpectedly narrowed to its lowest level in 1-1/2 years in December as imports fell, official statistics showed on Tuesday.

The Office for National Statistics said Britain's goods trade gap fell to 7.367 billion pounds ($11 billion) from 8.114 billion in November — the lowest since June 2007 and compared with analysts' forecasts for a deficit of 8.1 billion pounds.

The narrowing was driven by a 2.5 percent monthly fall in imports, which may be a result of weaker demand in Britain for overseas goods given how much the pound has fallen over the last year. Exports were only slightly higher.

"The improvement is basically to do with weak domestic demand rather than a pick up in exports, even if we did see some improvement in exports in the month," said Ross Walker, UK economist at RBS Financial Markets.

The goods trade gap with non-EU countries also narrowed more than expected, to 4.214 billion pounds from 5.214 billion in November, as exports shot up 4.9 percent and imports fell 4.3 percent. Analysts had forecast a gap of 4.8 billion pounds.

"It's certainly encouraging. It's suggesting that there is an underlying improvement coming through in the structural trade position for the UK and we're very hopeful that as global activity picks up we'll see a significant stimulus to the UK," said David Page, economist at Investec.

With the British economy already in recession, the Bank of England has predicted the sharp fall in the exchange rate will help boost activity over the coming year.

But this will probably not be enough to prevent the economy from shrinking sharply in 2009.