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UK living standards are at risk of a “sudden stop” squeeze, economists have warned, as official figures revealed that the current account gap stands at “unacceptably” high levels.
The current account deficit - the gap between the amount of money flowing into and out of the UK economy - stood at 6.9pc of the UK’s economic output in the first three months of the year, according to the Office for National Statistics.
Living standards are now vulnerable to a drying up of net capital inflowsSamuel Tombs
Samuel Tombs, a Pantheon Macroeconomics analyst, said that the gap was “enormous and unsustainable”. While the deficit shrank by £1.4bn to £32.6bn in the first quarter of the year, it was still much larger than the £28bn expected by analysts.
Mr Tombs said: “The UK’s current account deficit remained alarmingly wide in the first quarter, underlining that living standards are now vulnerable to a drying up of net capital inflows as international investors shun UK assets.”
This kind of a “sudden stop” in money flowing into the UK is thought to put the pound at risk of a steep devaluation. Christine Lagarde, the International Monetary Fund’s managing director, has said that the economy’s financing gap could exacerbate the economic hit from Brexit. The fund said that sterling was at threat of an “abrupt” fall.
“Financial outflows from the UK are likely to pick up following the [EU] referendum,” Mr Tombs said. He explained that this would Britons “to sell overseas assets quickly… or reduce current consumption sharply”.
Suren Thiru, head of economics at the British Chambers of Commerce, said that “Despite the slight improvement in the first quarter of the year, our current account deficit remains unacceptably large.
“Failure to achieve a major improvement in the next few years could leave the UK increasingly exposed to the negative consequences of a deteriorating global economy, and risks a further downgrade to the UK’s credit rating.”
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