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U.K. struggles for growth, inflation shows surprise dip

Governor of the Bank of England, Mervyn King.


Inflation fell unexpectedly in June, while the trade gap widened, pointing to more weakness in the economy and providing support to those in the Bank of England who want to keep interest rates at a record low.

A raft of real economy evidence on Tuesday showed Britain struggling to grow in the second quarter, with house prices sliding and retail sales showing a sluggish annual rise in June.

The Office for National Statistics said that consumer price inflation fell to 4.2 per cent in June from a 2-1/2 year high of 4.5 per cent in May, after the first drop in prices for a month of June since 2003.

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Sterling fell and gilt futures extended gains after the inflation and trade numbers as investors pushed expectations of a first post-financial crisis increase in interest rates towards the end of next year.

The figures are likely to bring some reassurance to Bank Governor Mervyn King, who has said repeatedly that the factors behind soaring prices are likely to be temporary, and warned on Monday that attempts to bring inflation down quickly may harm the economy.

Discounting of video games and other consumer electronics helped drive the fall, suggesting retailers are responding to weak consumer demand. The core rate of CPI - which excludes rising fuel and food prices - eased to 2.8 per cent, its lowest since November 2010.

"This might be the first real sign that the weakness of households' spending power is starting to bear down on underlying price pressures in the high street," said Jonathan Loynes of Capital Economics.

British inflation has been much higher than in other developed economies since the financial crisis - partly due to sterling's weakness and sales tax rises - and economists still expect CPI to exceed 5 per cent later this year.

Utility companies have cranked up prices for heating and energy, and further rises are in the pipeline.

Separate ONS data painted a gloomy picture of Britain's net exports, which the government and Bank of England will help drive economic recovery in place of government and consumer spending.

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The goods trade deficit widened unexpectedly in May to £8.478-billion, casting doubt about the scale of net trade's contribution to second-quarter GDP data due later this month. Economists had forecast a deficit of £7.37-billion.

This deficit came as both exports and imports hit record highs. There were hefty imports of chemicals, while British exports of silver leapt.

The weak overall performance of net exports may herald a decline in second-quarter economic activity as a whole. Industrial output has failed to bounce back as expected from a break in April to mark the royal wedding, while construction has also been weak. Some economists even think GDP may have contracted in Q2.

"The net trade performance was the one bright spot of the U.K. economy in the first quarter as it added an exceptional 1.4 percentage point to overall GDP growth of just 0.5 per cent," said Howard Archer, economist with Global Insight in London.

"The weakened trade performance in May adds to concerns that the UK economy saw minimal growth at best in the second quarter."

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