UK trade gap hits record high

Britain's trade gap reached a record high in the third quarter as insurance claims from Hurricane Katrina affected trading performance, figures revealed today.

The Office for National Statistics (ONS) said the current account deficit - the broadest measure of trade - had widened to £10.2bn from £1.3bn in the second quarter.

The larger than expected deficit was the biggest since records began in 1955, with the amount of red ink the equivalent of 3.4% of GDP - the highest amount since the fourth quarter of 2000.

Higher insurance claims arising from Katrina, bigger profits from foreign companies - particularly oil firms - and oil imports all contributed to the deterioration in trading figures.

"Despite the balance being affected by Katrina, we are likely to see more record-breakers over the coming years unless a more competitive pound can boost exports and limit import growth," Jonathan Said, of the Centre for Economics and Business Research, said.

In other figures, the ONS left GDP growth for the third quarter unrevised at up 0.4% on the quarter, as had been expected. This meant growth in the third quarter was below trend for a fifth successive quarter.

It was held back by weak exports and subdued business investment, and would have been even softer but for a significant contribution from inventories and government investment.

Analysts said consumer spending remained the key to the growth outlook.

Yesterday, figures from the CBI showed retail sales had picked up in the first two weeks of December, but the employers' organisation was cautious about the sustainability of the consumer rebound.

Minutes from the Bank of England's December meeting - at which policy makers voted 8-1 to leave rates at 4.5% - showed the majority had argued for no change on the basis of a modest recovery in retail sales and the housing market.

However, the unexpected split in the vote fuelled speculation that lower borrowing costs are on the agenda, although much will depend on the January pay round.

"Subdued growth is expected to help to contain underlying inflationary pressures and risks, underpinning our belief that interest rates will be cut by a further 25 basis points in February or March," Howard Archer, of the consultancy Global Insight, said.

John Butler, of HSBC, agreed that today's data strengthened the case for a rate cut.

"What can we take from this set of numbers? UK GDP remains below trend with no upward revision, the mix of growth is poor, and the current account deficit deteriorated to reflect the bad trade position," he said.

"Overall, we would argue this update supports our view that the next move in interest rates is down and should provide a negative for sterling."