How Windy Is It . . . ? Monday, 4th April 2016 – No.173
‘Annual income twenty pounds, annual expenditure nineteen (pounds) nineteen (shillings) and six (pence), result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery’ – Charles Dickens – David Copperfield
The quote above might well apply to UK PLC as last Thursday evidenced the announcement of the UK’s current account position and it leaves us vulnerable, as Mark Carney Governor of the Bank of England stated, more reliant than ever on the ‘kindness of strangers’.
The latest quarterly data implies that the UK needs to borrow or sell assets to the tune of around 7% of Gross Domestic Product (GDP) or £32.7bn to fill the yawning gap in its trading position with the rest of the world. For all of 2015 it came to £96.2bn or 5.2% of GDP. Deficits are all about more money going out than coming in. Unlike the budget deficit, the one that the current government has pledged to wipe out by 2020, the current account deficit refers to the country as a whole, both private and public.
Does this matter? The answer is both no and yes. This is a huge deficit, the biggest in the developed world, and not only raises questions about the balance of Britain’s economy but leaves us vulnerable should there be a change in perception as to the attractiveness of UK assets to foreigners – as they are plugging the gap. So far this has not mattered as Britain’s deficit is in part a reflection of the relative strength of the UK economy. It seems that foreigners remain happy at present to finance the deficit, whether by purchasing industrial assets (eg Tata’s ownership of Land Rover- Jaguar) or through purchases of prime London real estate.
Looking under the covers helps identify why the current account has deteriorated so significantly. Historically the usual culprit was due to the performance of exports. This isn’t currently the case as the trade deficit (exports less imports) has remained relatively stable in recent years. The big change has been a fall in net investment income that is the amount that British investors earn on overseas holdings. This has fallen while the converse, the amount that foreigners earn on investments in the UK, have held up. The Office for National Statistics (ONS) suggests that this may account for 80% of the deterioration and this has been further exacerbated by the falls in commodity prices.
So to date running a large current account deficit has not been a problem but we should remain alert that any threat to confidence may alter that position. It will be interesting to see whether the ‘Brexit’ campaign will cause concern amongst foreign investors. It is difficult to believe that overseas investors would be sanguine to a ‘No vote’ in June.