LONDON, Sept 8 (Reuters) - Britain's manufacturing output expanded at the strongest pace this year in July, but there was little sign of improvement in the trade deficit despite sterling's sharp fall since last year's Brexit vote.

The data, released on Friday along with figures for the construction industry, suggest Britain's economy continues to expand at a modest pace at the start of the third quarter after suffering the slowest start to the year since 2012.

The Office for National Statistics said manufacturing output rose 0.5 percent in July, above economists' forecasts in a Reuters poll, after car production reversed a dip in the previous month.

Growth in the broader measure of industrial output slowed to 0.2 percent from 0.5 percent, in line with forecasts as a continued lack of seasonal maintenance of North Sea oil fields boosted energy production.


Business surveys over the last week suggested manufacturers look set for a stronger end to the year, boosted by exports - especially to the European Union. But muted investment intentions also pointed to nervousness about the economic outlook ahead of Brexit.

The economy is "treading water" ahead of Brexit, the British Chambers of Commerce (BCC) said on Friday after it downgraded forecasts for growth over the next two years.

The BCC expects growth next year to be the weakest since the 2008-2009 recession, with gross domestic product rising by just 1.2 percent, down from an earlier 1.3 percent forecast. Growth in 2019 is predicted to be little better at 1.4 percent.

The ONS said Britain's trade deficit in goods edged up to 11.576 billion pounds from a sharply downwardly revised 11.527 billion pounds for June.

Although slightly undershooting the Reuters poll consensus, July's deficit was the biggest since March. Britain's total trade deficit in goods and services was little changed at 2.872 billion pounds.

The ONS said goods exports to the EU increased but this was offset by falling goods exports to the rest of the world.

In volume terms, goods exports in the three months to July grew by 1.2 percent compared with the previous three months, the weakest increase since October and showing little sign of a boost from the pound's post-Brexit vote plunge.

Rising inflation and slow wage growth is expected to weigh on the economy throughout this year although the Bank of England hopes that will be eased by stronger exports helped by the fall in the value of the pound since the Brexit vote.

The ONS also released figures for construction output in July, which dropped by 0.9 percent on the month - the biggest drop in three months and below all forecasts in the Reuters poll.

On the year, output was 0.4 percent lower, and a sharp fall in second quarter orders raises the prospect of further decline.

((Reporting by Andy Bruce and David Milliken))