Balance of payments current account: still running deficits

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

  • The deficit worsened sharply in 2019Q1, registering £33.1bn (6.0% of GDP), before narrowing to £25.2bn (4.6% of GDP) in 2019Q2. The main movement was in the goods deficit, which improved sharply from £48.4bn in 2019Q1 (affected by high imports ahead of the original Brexit Day, 29 March) to £34.1bn in 2019Q2.
  • On an underlying basis, the UK continues to run sizeable current account deficits, which need to be financed.
  • In 2018 the current account deficit widened to £92.5bn (4.3% of GDP) from £72.3bn (3.5% of GDP) in 2017. There was also a small deficit on the capital account in 2018 (£3.2bn). The total deficit that needed financing was, therefore, £95.7bn in 2018.
  • In 2018 the deficits were funded, by and large, by total foreign investment in the UK (liabilities) exceeding total UK investment abroad (assets), resulting in a net increase in liabilities, other things being equal.
  • Given persistent current account deficits, the UK’s net international investment position (NIIP), the balance of assets and liabilities, has tended to deteriorate. At end-year 2018, NIIP was minus £224bn (liabilities exceeded assets by £224bn).

Concerning other data releases:

  • The ONS confirmed that GDP fell 0.2% (QOQ) in 2019Q2, after a 0.6% rise (revised from 0.5%) in 2019Q1. The quarterly data in the first half of 2019 were very erratic, distorted by business preparations ahead of the original Brexit Day (29 March).
  • The Markit surveys for September were weak, suggesting contractions in all three sectors: manufacturing, construction and services (though a very modest contraction for services).
  • The Bank of England’s latest “Agents’ summary of business conditions” (September release, surveys in July and August) was fairly subdued, with Brexit uncertainty “dampening companies’ appetite to invest”.
  • The Bank’s latest consumer credit suggested that growth was slowing, but not dramatically so. Growth was 5.4% (YOY) in August, compared with 5.6% in July.
  • The Bank also noted that the mortgage market was fairly stable, though August’s figures were weaker after a very strong July.
  • The ONS revised public sector net borrowing (PSNB) up by £17.8bn to £41.4bn for FY2018, reflecting changed methodology for student loans. The revisions make it all the harder for the fiscal rule, that structural borrowing should be less than 2% of GDP in FY2020, to be met.

Finally, the Government published its Brexit proposals to the EU, including plans to replace the “Irish backstop”, on 2 October. The plan would see Northern Ireland essentially staying in the European single market for goods, but leaving the customs union

Ruth Lea said, “…the continuing current account deficits are all too infrequently discussed because they can be financed. But they are substantial, over 4% of GDP in 2018, and, if anything, deteriorating. Moreover, they are financed by worsening the UK’s the net international investment position (NIIP). NIIP at end-2018 was minus £224bn – in other words, liabilities exceeded assets by £224bn.”

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.

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