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Britain to have worst 2014 trade deficit in industrial world on EU forecasts
UK's burgeoning current account deficit suggests recovery is driven by credit-fuelled consumption
The EU Commission said Britain still has a structural budget deficit of 5.7pc of GDP even after years of austerity, showing the sheer scale of Britain's rebalancing task. Photo: PA
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By Ambrose Evans-Pritchard
2:27PM GMT 05 Nov 2013
95 Comments
Britain's commercial deficit will be the highest in a quarter century next year, a sign that recovery is badly out of kilter and that the country is still living far beyond its means.
The European Commission forecasts that Britain's current account deficit -- covering both trade in goods and services -- will rise to 4.4pc of GDP in the 2014, with little improvement after that.
This is the highest deficit of any major industrial country, and far worse than the US as it moves towards energy independence. It is also the highest since the Lawson boom in 1989 when the Treasury's policy of 'shadowing' the German D-Mark at the wrong time caused the economy to overheat.
The Commission said in its Autumn Report that Britain will have the fastest-growing economy for the next two years among the major European countries, doubling its GDP growth forecast to 2.2pc in 2014 and 2.4pc in 2015. "2013 has thus far exceeded expectations and the outlook is quite bright," it said.
However, the mini-boom is being driven by a steady fall in the household savings rate, down to 6.2pc this year from 7.3pc in 2010. The Commission said it expects UK consumers to "dip into their savings" to cover spending. "The debt burden of households remains a distinct risk to private consumption."
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With the exception of the late 1980s, Britain has not run a current account deficit of this magnitude since the Second World War. It raises concerns that the recovery is being fed by a premature return to bad habits of house price inflation and credit-driven spending rather than a revival of manufacturing and productive investment.
The 20pc devaluation of sterling after 2007 has had remarkably little effect on the trade balance, in contrast to comparable episodes in 1992 and 1931 where the trade gains fed though quickly.
Michael Saunders from Citigroup said the double-dip recession in Europe had the effect of smothering demand for British export and nullified most of the gains from a weaker pound, but this will diminish over time. "We're more optimistic than the Commission. In any case, it is better to have unbalanced growth no growth, given the human cost of high unemployment. GDP per capita is still 7pc of below its previous peak," he said.
Simon Ward from Henderson Global Investors said the UK is structurally unbalanced, relying heavily on imports to meet demand as confidence returns. "The supply-side of the economy is performing very poorly. The Bank of England claims there is massive overcapacity in the economy but we don't think that is correct, and the current account deficit is the evidence."
"A lot of the output before the recession was phantom. It has gone forever, and that means our capacity to produce and export is less than we thought," he said.
Mr Ward said his gauge of money supply growth -- six-month real M1 -- is surging at double-digit rates. This is a level that usually triggers inflationary booms. This time a large part of this stimulus is leaking into imports, at least so far.
The Commission said Britain still has a structural budget deficit of 5.7pc of GDP even after years of austerity, showing the sheer scale of Britain's rebalancing task. This compares to minus 1.5pc in the eurozone, minus 0.8pc in Italy, and a surplus of 0.5pc in Germany.
It warned in an earlier report on imbalances that Britain's income from foreign investment has been falling since 2008 and turned negative in 2012, adding to the long-term risks. "The United Kingdom is experiencing macroeconomic imbalances, which deserve monitoring and policy action."
"In particular, macroeconomic developments in the areas of household debt, linked to the high levels of mortgage debt and the characteristics of the housing market, as well as unfavourable developments in external competitiveness, especially as regards goods exports and weak productivity growth, continue to deserve attention," it said.
UK's burgeoning current account deficit suggests recovery is driven by credit-fuelled consumption
The EU Commission said Britain still has a structural budget deficit of 5.7pc of GDP even after years of austerity, showing the sheer scale of Britain's rebalancing task. Photo: PAGet unlimited access to your Experian credit report and expert advice on monitoring and improving your financial situation. Get access now!
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By Ambrose Evans-Pritchard
2:27PM GMT 05 Nov 2013
95 Comments Britain's commercial deficit will be the highest in a quarter century next year, a sign that recovery is badly out of kilter and that the country is still living far beyond its means.
The European Commission forecasts that Britain's current account deficit -- covering both trade in goods and services -- will rise to 4.4pc of GDP in the 2014, with little improvement after that.
This is the highest deficit of any major industrial country, and far worse than the US as it moves towards energy independence. It is also the highest since the Lawson boom in 1989 when the Treasury's policy of 'shadowing' the German D-Mark at the wrong time caused the economy to overheat.
The Commission said in its Autumn Report that Britain will have the fastest-growing economy for the next two years among the major European countries, doubling its GDP growth forecast to 2.2pc in 2014 and 2.4pc in 2015. "2013 has thus far exceeded expectations and the outlook is quite bright," it said.
However, the mini-boom is being driven by a steady fall in the household savings rate, down to 6.2pc this year from 7.3pc in 2010. The Commission said it expects UK consumers to "dip into their savings" to cover spending. "The debt burden of households remains a distinct risk to private consumption."
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With the exception of the late 1980s, Britain has not run a current account deficit of this magnitude since the Second World War. It raises concerns that the recovery is being fed by a premature return to bad habits of house price inflation and credit-driven spending rather than a revival of manufacturing and productive investment.
The 20pc devaluation of sterling after 2007 has had remarkably little effect on the trade balance, in contrast to comparable episodes in 1992 and 1931 where the trade gains fed though quickly.
Michael Saunders from Citigroup said the double-dip recession in Europe had the effect of smothering demand for British export and nullified most of the gains from a weaker pound, but this will diminish over time. "We're more optimistic than the Commission. In any case, it is better to have unbalanced growth no growth, given the human cost of high unemployment. GDP per capita is still 7pc of below its previous peak," he said.
Simon Ward from Henderson Global Investors said the UK is structurally unbalanced, relying heavily on imports to meet demand as confidence returns. "The supply-side of the economy is performing very poorly. The Bank of England claims there is massive overcapacity in the economy but we don't think that is correct, and the current account deficit is the evidence."
"A lot of the output before the recession was phantom. It has gone forever, and that means our capacity to produce and export is less than we thought," he said.
Mr Ward said his gauge of money supply growth -- six-month real M1 -- is surging at double-digit rates. This is a level that usually triggers inflationary booms. This time a large part of this stimulus is leaking into imports, at least so far.
The Commission said Britain still has a structural budget deficit of 5.7pc of GDP even after years of austerity, showing the sheer scale of Britain's rebalancing task. This compares to minus 1.5pc in the eurozone, minus 0.8pc in Italy, and a surplus of 0.5pc in Germany.
It warned in an earlier report on imbalances that Britain's income from foreign investment has been falling since 2008 and turned negative in 2012, adding to the long-term risks. "The United Kingdom is experiencing macroeconomic imbalances, which deserve monitoring and policy action."
"In particular, macroeconomic developments in the areas of household debt, linked to the high levels of mortgage debt and the characteristics of the housing market, as well as unfavourable developments in external competitiveness, especially as regards goods exports and weak productivity growth, continue to deserve attention," it said.
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