UK trade with Europe shows surprise surplus

Britain has a trade surplus with its European neighbours for the first time in five years despite the strength of the pound against the euro, official figures showed yesterday.

Britain has a trade surplus with its European neighbours for the first time in five years despite the strength of the pound against the euro, official figures showed yesterday.

The performance took analysts by surprise, and came as Eddie George, the Governor of the Bank of England, said the euro was "substantially undervalued". He said any attempt to force down the pound could trigger an inflationary boom.

Figures from the Office for National Statistics showed that exports to the Continent exceeded imports by £31m in August, after a deficit of £258m in July. It is the first surplus since November 1995 and only the fifth since records began in 1988.

The performance was driven by a 3 per cent surge in export volumes, which outpaced a 2 per cent rise in imports. The largest rises were to Germany, Holland, Belgium and Italy - all single currency members. The turnaround was achieved despite a relentless rise in the value of the pound against the euro. Sterling is close to a lifetime high against the euro, which has lost 13 per cent of its value since its launch last year.

Mr George said the strength of the European economy would eventually feed through to a strong euro. Speaking in Paris, Mr George said: "The euro is substantially undervalued in terms of the medium-term fundamentals, so in the same way sterling is... substantially overvalued against the euro."

He warned that cutting interest rates to drive down sterling to a "more sustainable level" risked stoking inflation and destabilising the whole economy. "Frankly, it is not clear to me this is a risk which would be in the interests of either the UK or the eurozone to take in today's conditions".

He said the "best bet" was for the UK and eurozone authorities to continue to pursue fiscal and monetary stability. "This strikes me as a more reliable path to the sustainable convergence which the Government has set as the essential criterion on which its decision to move ahead to a referendum on UK entry to the euro will be based."

The Confederation of British Industry said the trade figures did not mean that businesses had learnt to live with a strong pound. Sudhir Junankar, a senior CBI economist, said they showed exporters had cut their prices by 0.5 per cent over the last year. "This shows the pressure on margins," he said. "The acid test for whether companies are living with the weak euro is if we have a sharp weakening in demand in European markets."

Danny Gabay, an economist at JP Morgan, said: "Exporters ... must be getting close to the bone, because it has been four years now that sterling has been rising."