EXPORTS SURGED in the July-September quarter, in their biggest increase for 20 years, while manufacturing expanded faster than services for the first time in five years to boost the economy's overall growth.

Official figures yesterday turned upside down the received wisdom of an imbalanced economy with industry hammered by the strong pound.

They coincided with a glowing review of Britain's economic performance from the International Monetary Fund. A report by the IMF's annual mission to the UK described the economy as "remarkable" and expressed optimism about the future long-term outlook.

The deficit on trade in goods and services narrowed in the third quarter to pounds 3.3bn from pounds 3.7bn in the previous three months. The main reason for the improvement was that a rise of 8.2 per cent in the volume of exports outstripped a 5.2 per cent increase in import volumes. Both reached new record levels. The surge in exports was the biggest since the second quarter of 1979.

"Firmer export market growth for the moment appears to be outweighing the effect of the UK's high real exchange rate," said Richard Iley at ABN-Amro.

Offsetting the good news, there was a sharp rise in the deficit in trade with non-EU countries in October, to a record monthly shortfall of pounds 2.1bn. Douglas Peedle of the Engineering Employers' Federation said the latest month's figures showed manufacturing remained "at the mercy of precarious overseas markets". But official statisticians cautioned that month-to- month moves can be erratic.

All categories of exports rose in the third quarter, with the strongest gains in chemicals, up 15 per cent, capital goods, up 10 per cent, and cars, up 6 per cent. The higher oil price boosted the value of UK oil exports.

The trade deficit with the EU nearly halved to pounds 1.2bn between the second and third quarters, even though the pound has been strong against the euro. The deficit with non-EU countries widened somewhat to pounds 5bn, partly due to higher imports of erratic items such as aircraft.

Separately, the ONS said the economy grew by a robust 0.9 per cent in the third quarter, taking GDP to a level 1.8 per cent higher than a year earlier.

Manufacturing output grew 1 per cent during the quarter, and total production expanded by 1.2 per cent, the fastest since mid-1994. This compared with 0.9 per cent growth in services output. Growth in manufacturing outpaced services for the first time since the fourth quarter of 1994.

Consumers' expenditure slowed down, rising just 0.5 per cent in the third quarter. With weaker investment spending too, domestic demand grew by 0.7 per cent, less alarming than the pace earlier in the year.

Analysts said the figures would help limit the need for further rises in interest rates.