UK current account deficit near all-time high

The UK current account deficit for the fourth quarter of 2014 was £22.4 billion, according to the Office for National Statistics, nearly as high as the all-time record of £22.8 billion in the third quarter. Economists were surprised, having expected a £14 billion deficit, and described the figure as “alarmingly large.”

The UK current account deficit for the whole of 2013 was £71.1 billion, equivalent to 4.4% of the country’s GDP (gross domestic product). The UK’s highest ever recorded current account deficit was 4.6% of GDP recorded in 1989 during the Lawson boom.

The country’s trade deficit with the rest of the world was £5.7 billion in Q4 2013, compared to £10 billion in Q3 2013.

UK service sector growing rapidly

The UK’s service sector, which makes up nearly four-fifths of the country’s economic growth, recorded a surplus of £1.4 billion in Q4 2013.

The trade deficit in goods was £3 billion, lower than the previous quarter, but due to declining imports rather than stronger exports.

Imports dropped by £3.4 billion, the Office for National Statistics reported. The following imports declined in Q4 2013:

  • Oil by £1.4 billion
  • Semi-manufactured goods by £1 billion
  • Finished manufactured goods by £0.4 billion

British exports declined in value in Q4 2013 by £0.4 billion.

The BBC quoted Howard Archer, chief UK and European economist at IHS Global Insight, who said “It has to be hoped going forward that improving global growth not only supports UK exports but also lifts earnings on UK investment abroad.”

UK current account deficit

(Source: Office for National Statistics)

City’s low returns driving UK current account deficit

The UK near-record current account deficit is in great part caused by the City (financial area of London) and government, and not a deluge of container ships from China docking at British ports.

The main problem is that the returns made on assets owned by the UK have declined compared to the returns foreigners receive on their assets in the UK.

A growing proportion of the poor returns on UK assets owned abroad are in the financial sector. From about 2005, British banks had enjoyed healthy returns on their investments abroad, including profits and dividends on financial instruments and assets. Since the global financial crisis and the Great Recession that followed it, this income has fallen dramatically.

In Q4 2013, there was a £10.3 billion net deficit on the UK’s income account, much higher than £5.9 billion in Q3 2013. Before the financial crisis the country would have expected a positive balance of at least £14 billion.

In an interview with the Financial Times, Simon Wells, chief economist at HSBC, explained that the Office for Budget Responsibility forecasts rely on better income returns to reduce the current account balance. Wells said “(if it continues to deteriorate) the UK could find it harder to sustain its persistent trade deficit. Eventually, this could mean that lower sterling and/or slower growth may be needed to narrow the current account deficit.”

Household saving ratio fell steeply

In Q4 2013, the household saving ratio dropped steeply to 5%, from 5.6% in Q3 2013. According to economists, UK economic growth over the last 15 months has been financed more by household savings than people’s disposable. Income.

Rising wages and falling inflation should bring improvements to people’s purchasing power this year. John Bulford at Oxford Economics said to the Independent “With real wage growth returning … as early as April, the foundations underpinning the consumer recovery should be more solid.”

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