BRITAIN's trade gap with the rest of world narrowed in July as demand from the US fuelled a surge in exports.

But the Office for National Statistics showed manufacturers' profit margins are still suffering from high raw material costs.

Higher crude oil prices meant input costs rose 0.4 per cent last month while the price of goods leaving the factory gate fell 0.1 per cent.

Philip Shaw, chief economist at Investec, said: "A combination of rising input and falling output prices shows profit margins are under pressure again."

Economists had expected a small rise in output prices in August but the ONS said food, electrical and optical equipment goods were weaker.

The drop means the prices of goods leaving the factory gate are now just 0.3 per cent higher than a year ago as manufacturers battle the economic downturn.

Trade figures for July showed, however, that UK firms benefited from a pick-up in demand from the US two months ago.

The trade goods deficit fell back to £2.5bn from £2.8bn in June as export volumes to the rest of the world rose by 8.5 per cent. Car exports rose 14 per cent in the three months to the end of July, while exports to the US rose by £800m.

Mr Shaw said: "The global picture is one of nervousness about prospects and I'd be surprised if domestic exports continue to fare as well."