UK goods trade balance narrows in January but EU drags

LONDON (Reuters) - Britain's goods trade deficit with the rest of the world narrowed in January, but the gap with European Union countries was at its widest on record as Britain imported more goods.

The Office for National Statistics said on Friday Britain's total trade deficit narrowed to 3.459 billion pounds in January from an revised 3.699 billion pounds in December.

Its deficit in goods alone narrowed to 10.289 billion pounds from a revised 10.450 billion pounds, in line with economists' forecasts.

But the goods trade deficit with the European Union widened to a record high of 8.090 billion pounds in January from 7.428 billion pounds as British imports increased across the board.

Britain's trade with the European Union is in the spotlight, with some investors worried it will suffer if the country decides to leave the world's largest trading bloc at a referendum in June.

The British economy ended 2015 on a soft note, relying on its large services sector for the bulk of its growth as a slowing global economy hurt demand for British exports.

Separate data on Friday showed the construction sector started the year on a weak note with output unexpectedly falling by a monthly 0.2 percent after rising 2.1 percent in December, against expectations for a 0.3 percent rise.

Construction output grew 0.3 percent in the fourth quarter, the ONS said, sharply revising a previous estimate for a fall of 0.4 percent in the last three months of the year.

But the ONS said that the revision, along with improved estimates for industrial output this week, would have no impact on economic growth figures for the fourth quarter of 2015.

Chancellor George Osborne has warned that the economy was facing a "dangerous cocktail" of risks from overseas in 2016, as growth slows in major emerging markets, stock markets tumble and oil prices slump amid fading global demand.

Investors are also concerned about the economic impact of a British vote to leave the EU - a prospect which weighed on sterling after Prime Minister David Cameron set June 23 as the date for the vote.

A weaker pound is a double-edged sword for Britain's trade balance, making exports cheaper but imports more expensive.

Britain's trade data is volatile on a monthly basis, and the ONS said that in the three months to January as a whole, exports volumes were down 2.1 percent while imports were down 1.1 percent.

This compares with a decline in export volumes of 0.3 percent in the last quarter of the 2015, and a 0.6 percent rise in imports.

(Reporting by Ana Nicolaci da Costa and Andy Bruce)