Britain's global trade gap narrowed slightly in September, but economists say it remains a drag on the economy and VAT fraud is clouding the horizon.
The Office for National Statistics said on Thursday Britain's goods trade gap narrowed to 6.560 billion pounds in September from 6.856 billion in August. Economists had forecast a deficit of 6.5 billion pounds and said the slight slimming did little to change the bigger picture.
"The UK is running an unsustainable large trade deficit and it is continuing to act as a drag on overall GDP growth," said Peter Dixon, an economist at Commerzbank.
"Without a pick up in the euro zone next year, trade will continue to drag on UK growth. That suggests the Bank of England will have to be much more circumspect about the pace of monetary tightening in 2007."
The goods trade gap with non-EU countries narrowed more than expected to 3.854 billion pounds in September from 4.223 billion in August. Analysts had forecast a deficit of 4.1 billion pounds.
The figures showed significant falls in exports and imports recorded for the three months to September, but the ONS said these should be treated with caution because the changes reflected lower trade in commodities associated with VAT fraud. The so-called carousel fraud involves exporting goods so that VAT can be reclaimed from the government and later re-importing the goods.
Goods can then be sold and VAT collected from customers before the traders disappear without passing any sales tax to the government. Nonetheless, the value of trade affected by VAT fraud has fallen, dipping to 1.0 billion pounds in September from a peak of 4.5 billion in June and March this year.
The ONS said the value of trade affected by the fraud this year now totals 26.3 billion pounds and in simplistic terms, the actual value of the fraud is around 17.5 percent of that total.
The UK government says it is tackling the international crime but on Monday suffered a setback when several EU countries objected to a British idea to recoup losses through a "reverse charge" scheme where only the end retailer pays sales tax.