George Osborne's attempts to rebalance the economy took a further knock yesterday after figures showed a fall in exports for the third month in a row.
The worsening UK trade balance came as stock markets around the world fell and oil prices surged after US air strikes on Iraq and continuing unrest in eastern Ukraine.
Britain's trade position worsened in June after the trade in goods deficit widened unexpectedly to pounds 9.4bn from pounds 9.2bn in May, with one economist describing the data as "some of the worst seen in recent history." The Office for National Statistics (ONS) said British exports fell more than imports, denting expectations that the deficit would shrink to pounds 8.8bn.
Economists said tensions between Russia and the west, a weak eurozone economy, and a strong pound making British goods more expensive abroad, were all likely to weigh on foreign demand for UK goods in the short term at least.
Chris Williamson, chief economist at Markit, said Britain's trade position was likely to deteriorate in the coming months, weighing on growth.
"The trade figures are some of the worst seen in recent history," he said.
"Exporters are being hit on two fronts: first, by an appreciating exchange rate, which has risen 10% over the past year. "Second, already weak demand in many overseas markets is being hit further by growing uncertainty about the Ukraine crisis, especially in northern Europe. Escalating geopolitical events in Gaza and Iraq add to the sense that global risk aversion is creeping higher, which will inevitably mean slower economic growth."
The chancellor has long argued that a sustainable future for the UK economy depends on a lesser reliance on debt-fuelled spending and the financial services and a greater reliance on manufacturing and exports. He set a target in 2012 of doubling UK exports to pounds 1tn by 2020, but so far the rebalancing of the economy has proved elusive.
Better news came from the construction industry, where a rise in housebuilding spurred a better than expected performance in June. Overall, the sector stagnated in the second quarter, the ONS said, revising its previous estimate that the sector shrank by 0.5% over those three months. It said the change would not alter overall estimates that UK GDP grew by 0.8% in the second quarter.
However, the City was more concerned by geopolitical issues yesterday. Investors reacted to Russia's continuing support for Ukrainian separatists and the worsening situation in the Middle East by selling stocks in favour of safer assets.
The FTSE 100 fell 30 points yesterday. The index closed at 6567, down 4% from the end of last month.
The fall in the FTSE 100 since the end of last month. It lost 30 points yesterday to close at 6567, after a recent peak of 6840