The balance of payments data continue to disappoint

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK data, including the balance of payments data for 2018:

  • The deficit on the current account of the balance of payments deteriorated in 2018, with the deficits on trade, primary income and secondary all worsening in 2018, after some overall improvement in 2017.
  • The worsening in the trade deficit in 2018 mainly reflected a fall in the services surplus, but the goods deficit increased further.
  • Looking at longer-term trends for the current account, the trade deficit has been relatively “stable” in recent years, as the increases in the goods deficit have been largely offset by increases in the services surplus.
  • The primary income deficit (mainly net investment income), however, showed a sharped deterioration in the mid-2010s, partly reflecting poorer rates of return on UK investments abroad. There has been a fairly steady worsening in the secondary income deficit (transfers) in recent years.
  • The ONS confirmed that GDP increased by 0.2% (QOQ) in 2018Q4 and by 1.4% (YOY) in 2018. Net trade was a drag on GDP growth in 2018.
  • Retail sales grew by 0.7% (QOQ) in the three months to February.
  • The Bank of England’s Agents report (March) concluded that activity had been “softening”. They also concluded that two-thirds of their contacts were preparing for a No Deal Brexit. Half of the remaining third had not taken action because they did not think they would be affected.
  • The Bank reported that the growth of unsecured consumer credit eased further in February, to 6.3% (YOY).
  • The labour market remains robust, with strong employment growth, falling unemployment and near-record vacancies. Annual earnings growth continues to firm.
  • CP inflation was 1.9% in February, under the Bank’s 2% target, whilst there were modest increases in the PPI inflation indicators.
  • The annual increase in house prices eased further in January, to 1.7%. London house prices were 1.6% (YOY) lower.
  • The public finances continue to improve. Public borrowing so far in FY2018 (April-February) was £23.1bn, compared with £41.0bn in FY2017 (April-February).

In addition:

  • The Bank of England left monetary policy unchanged at their March meeting.
  • The Fed left the fed funds rate unchanged at their March meeting, projecting no interest rate increases for 2019 (in December they had projected two 0.25% rises).

On Brexit:

  • At the European Summit of 21-22 March, the EU offered to delay Brexit (by extending the Article 50 negotiations) until 22 May, if the “deal” was approved by the Commons, or until 12 April, if the “deal” was not approved. The originally agreed date for Brexit of 29 March 2019 was subsequently postponed.
  • The Government lost the “meaningful vote” on the Withdrawal Agreement (the EU “deal” excluding the Political Declaration), on 29 March 2019.

Ruth Lea said, “The deterioration in the current account deficit, in general, and in the trade deficit, in particular, in 2018 is disappointing. The trade balance acted, therefore, as a drag on GDP growth last year. It is all the more disappointing, that the goods deficit continues to increase despite the sharp depreciation of the currency in 2016 and the subsequent boost to competitiveness”.

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

Tel: 020 8346 3482
Mobile: 07800 608 674
Email: ruthlea@arbuthnot.co.uk

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