Britain's trade picture took a severe turn for the worse last month when its balance of payments showed a massive deficit of $3.25 billion (2.06 billion pounds), the second-worst monthly figure ever, the government said Wednesday.
The deficit compared to a shortfall of $2.5 billion (1.5 billion pounds) in June, and its size surprised economic analysts who had forecast an improvement in the trade gap.
The report was a blow to government hopes that the figure, which measures trade in goods and services, had taken a decisive downturn as a result of government policy of pushing interest rates higher to cool the economy.
The Central Statistical Office said the deficit on trade alone was $3.9 billion (2.46 billion pounds), but this was offset by a surplus of $630 million (400 million pounds) on invisible items such as banking, insurance and tourism.
The surprisingly large deficit sent the British pound tumbling. It slid more than 1.5 cents to $1.5720 from $1.5895 on Tuesday.
No Single Reason
Britain recorded its worst current account deficit of $3.7 billion (2.33 billion pounds) last October as a runaway consumer boom, which is only now beginning to wind down, sucked in imports.
Although Britain's seaborne trade was affected by a three-week dock strike in July, the government said there was no single reason for the jump in the deficit.
Imports increased by 4%, while exports rose 2%.
Imports in July included an influx of cars ready for the start of the new registration year in August, when sales reach their annual peak.
The bad July trade figures countered more encouraging recent economic reports, including the first fall in inflation since the start of 1988 and a halt to growth in pay rises.
Analysts said Britain's finance minister, Chancellor of the Exchequer Nigel Lawson, was less likely to cut interest rates from 14% despite pressure from businessmen who fear that the economy risks moving into recession.
Lower interest rates could push sterling down further against the dollar and the West German mark and give a fresh twist to inflation.