UK current account gap hits highest since 2016, pushed up by gold

By David Milliken and William Schomberg

LONDON (Reuters) - Britain's current account deficit with the rest of the world ballooned to its highest since late 2016 earlier this year, official figures showed on Friday, though much of the increase was driven by volatile gold trades.

At first glance, the bigger shortfall in the deficit -- which Bank of England Governor Mark Carney has long warned leaves Britain dependent "on the kindness of strangers" -- suggested greater vulnerability for the world's fifth-largest economy ahead of Brexit.

The deficit widened by 6.3 billion pounds in the first three months of 2019 to 30.0 billion pounds, or 5.6% of economic output, its biggest since the third quarter of 2016.

However, the ONS said the rise was driven by imports of unspecified goods -- mostly gold from London's major trading hub -- rather than a fundamental weakening of the trade balance.

Stripping this out, Britain's current account deficit would stand at 3.7% -- still large by international standards.

A drop-off in foreign demand for British assets after Brexit could trigger a further fall in sterling and make it harder for businesses and consumers to raise finance or borrow, the BoE has warned.

"An elevated shortfall is a potential source of vulnerability for the UK economy, particularly if there was any major loss of investor confidence in the UK for any reason, most obviously due to heightened concerns over the economy if there was a no-deal Brexit," EY ITEM Club economist Howard Archer said.

There was little immediate market reaction to the news.

The current account deficit was slightly smaller than the 32 billion pounds forecast by economists in a Reuters poll.

Q1 STOCKBUILDING CONFIRMED

Office for National Statistics figures also showed robust economic growth in early 2019 as businesses rushed to stockpile raw materials to offset the risk of trade disruption in March, when Britain was originally due to leave the European Union.

"GDP grew solidly and was unrevised in the first quarter of 2019, with manufacturing seeing strong growth due to orders being brought forward ahead of the UK's original EU departure date," ONS statistician Rob Kent-Smith said.

Quarter-on-quarter the economy grew by 0.5%. The 1.8% annual rate of gross domestic product growth was the highest since the third quarter of 2017.

Businesses increased inventories by a net 5.7 billion pounds during the first quarter on an adjusted basis. Unadjusted figures pointed to inventory building adding 0.9 percentage points to GDP growth.

Economists expect payback during the current quarter, however, and the BoE predicts zero GDP growth as business investment remains on hold ahead of the new Brexit date of Oct. 31. Annual growth will slow to 1.5% this year, even if Britain leaves the EU with a transition deal, it estimates.

Both contenders to become prime minister have said they are prepared to leave the EU without a transition deal if necessary.

Britain's economy has slowed since the Brexit referendum, and now faces increased headwinds from trade tensions between the United States and China and a slowdown in Europe.

Business investment showed an annual fall of 1.5%, a fraction bigger than earlier reported, while household spending remained the mainstay of growth, up 1.9% on the year.

There are some signs consumer demand is softening, however, despite a robust job market. A consumer sentiment survey showed morale fell in June.

(Reporting by David Milliken and William Schomberg; Editing by Catherine Evans)