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Fasten your seat belts – a balance of payments crisis looms
By Jeremy Warner Economics Last updated: March 27th, 2013
122 Comments Comment on this article
Whatever happened to the holy grail of a more balanced UK economy? Britain has been living substantially beyond its means for more than thirty years now. Spending more than we earn long pre-dated the Labour years. And it's getting worse, not better.
Fact: Britain has not enjoyed a current account surplus since 1983. Fact: the deficit is still growing, the very reverse of what you would expect for a country in the midst of a protracted domestic recession, when appetite for imported goods is supposed to plummet, and with a substantially devalued currency, which is supposed to boost net trade.
Office for National Statistics data released today show just how far the UK still has to go in getting back to economic sustainability, with the current account deficit leaping to £57.7bn last year, or 3.7 per cent of GDP, it's highest such level since 1989. Only twice in modern British history has it been substantially bigger than this – and on both occasions, Britain was fighting an all embracing European war. And never before has there been such a protracted period of failure to pay our way.
Perhaps the most worrying feature of the figures is the very rapid deterioration in net investment income. This is the difference between what Britain earns on its overseas assets and what foreigners earn on their British assets. For a long time now, this legacy of past investment in overseas territories has paid good dividends and helped to disguise an even worse deterioration in the underlying trade position.
But now it's beginning to go sharply in the wrong direction. If this persists, then the UK's external imbalance will be exposed as an even bigger and more intractable problem than it already seems. There is every indication it will. Persistent current account deficits have to be funded somehow or other, and the way this occurs is through inflows of foreign capital. To finance the trade deficit, we are selling ever more of ourselves to foreigners. This phenomenon finds its most obvious expression in the influx of foreign buyers into the London property market, but it's mainly less evident things, such as growing reliance on foreign capital to fund the national debt.
As can be seen from the chart beneath, the net international investment position – that is the stock of foreign assets owned by UK residents minus UK assets owned by foreigners – has slipped sharply into negative territory and is deteriorating fast.
click to enlarge
All this points to further pressure on the pound. This should be good for exporters, but it is also bad for inflation. Unfortunately, with no letup in the eurozone crisis, we may be denied the positive aspects of a declining currency, while still being forced to suffer its negatives.
I'd like to be more positive about the UK economy, which has indeed shown some encouraging signs of life in recent months, but the data continues to point to very worrying times ahead.
By Jeremy Warner Economics Last updated: March 27th, 2013
122 Comments Comment on this article
Whatever happened to the holy grail of a more balanced UK economy? Britain has been living substantially beyond its means for more than thirty years now. Spending more than we earn long pre-dated the Labour years. And it's getting worse, not better.
Fact: Britain has not enjoyed a current account surplus since 1983. Fact: the deficit is still growing, the very reverse of what you would expect for a country in the midst of a protracted domestic recession, when appetite for imported goods is supposed to plummet, and with a substantially devalued currency, which is supposed to boost net trade.
Office for National Statistics data released today show just how far the UK still has to go in getting back to economic sustainability, with the current account deficit leaping to £57.7bn last year, or 3.7 per cent of GDP, it's highest such level since 1989. Only twice in modern British history has it been substantially bigger than this – and on both occasions, Britain was fighting an all embracing European war. And never before has there been such a protracted period of failure to pay our way.
Perhaps the most worrying feature of the figures is the very rapid deterioration in net investment income. This is the difference between what Britain earns on its overseas assets and what foreigners earn on their British assets. For a long time now, this legacy of past investment in overseas territories has paid good dividends and helped to disguise an even worse deterioration in the underlying trade position.
But now it's beginning to go sharply in the wrong direction. If this persists, then the UK's external imbalance will be exposed as an even bigger and more intractable problem than it already seems. There is every indication it will. Persistent current account deficits have to be funded somehow or other, and the way this occurs is through inflows of foreign capital. To finance the trade deficit, we are selling ever more of ourselves to foreigners. This phenomenon finds its most obvious expression in the influx of foreign buyers into the London property market, but it's mainly less evident things, such as growing reliance on foreign capital to fund the national debt.
As can be seen from the chart beneath, the net international investment position – that is the stock of foreign assets owned by UK residents minus UK assets owned by foreigners – has slipped sharply into negative territory and is deteriorating fast.
click to enlargeAll this points to further pressure on the pound. This should be good for exporters, but it is also bad for inflation. Unfortunately, with no letup in the eurozone crisis, we may be denied the positive aspects of a declining currency, while still being forced to suffer its negatives.
I'd like to be more positive about the UK economy, which has indeed shown some encouraging signs of life in recent months, but the data continues to point to very worrying times ahead.
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