The UK exposes itself to peril by ignoring its persistent balance of payments deficit

In these suddenly volatile times- The US Dow Jones Industrial Average fell 334 points yesterday after rising 275 points the day before- there is one familiar certainty about today and that is that the balance of payments for the UK will show a deficit when they are released this morning. It has become an unfashionable topic to discuss because in human psychology familiarity can breed a form of contempt. In this instance this means that many assume that because it has been a problem for a considerable period and that in recent history it has not directly led to an economic disaster that it will not do so. In other words many assume that deficits can go on and on and on.

What has been the scale of the problem?

Those of an especially nervous disposition might like to look away now.

The UK has run a combined
current and capital account deficit in every year since 1983, and every quarter since Quarter 3 1998.

If we look to the second quarter of 2014 to gain a little perspective from the recent data we see this.

The United Kingdom’s (UK) current account deficit was £23.1 billion in Quarter 2 2014, up from a revised deficit of £20.5 billion in Quarter 1 2014. The deficit in Quarter 2 2014 equated to 5.2% of GDP at current market prices, up from 4.7% in Quarter 1 2014.

A rising current account deficit has been a feature of the last year or so. Actually it is not quite so simple as the UK’s relative economic out-performance sucking in imports although there was a phase  of that. More recently we have also seen a deterioration in our income account.

The primary income deficit widened to £9.5 billion in Quarter 2 2014, from £7.1 billion in Quarter 1 2014. This was mainly due to UK private non-financial corporations profits on their direct investments abroad falling from £14.4 billion in Quarter 1 2014 to £11.7 billion in Quarter 2 2014.

In essence in these low yield times we have downgraded the return we expect from their overseas investments.Although at a time when we are told that corporate profitability is high that does strike me as being somewhat odd.

The past was worse than we thought

The recent revisions to the UK national accounts also reached the balance of payments under what is called BPM6. Actually the main themes here are not especially different with one exception. Whilst the impact of the credit crunch on economic output has been trimmed the impact on the balance of payments has ballooned. Let me provide some details of this.

with the exception of 2008, which shows a bigger deterioration in the trade balance of around £12 billion.

In the period 2008 to 2009 the revisions lead to a relatively large deterioration in the income balance, with the  biggest revision (-£30 billion) in 2008.

Before I explain what has happened in these changes let me point out that they illustrate the fundamental unreliability of analysing anything other than broad trends in trade data. The year 2008 has been poured over by analysts and statisticians and suddenly it is £43 billion worse than we thought it was!

Whilst there are a multitude of factors at play here you may not be surprised to read that the major change is a review of our financial sector and a substantial downgrade of its trade position as the credit crunch took effect. One example is that it is assumed that UK banking operations abroad were more of the investment banking kind and therefore took much more of a hit than foreign banks operations in the UK which tended to have more of a retail banking bias. Put like that it does not sound a big deal but it does albeit with some smaller factors end up in a number as large as £30 billion.

There was also an impact on 2009 but of a lesser size then we returned to a more normal pattern at least until 2012 which is as far as the current revised data sets go.

One thought that this leaves me with is that in a way it is a surprise that the UK managed to revise upwards its economic output for 2008/09 with this going on.

A New Hope 

In the trade gloom there have been a flicker of hope in more recent data and it comes from the service sector.

In August 2014, the UK’s estimated surplus on trade in services was £7.2 billion.
Exports in August 2014 were estimated to have been £17.0 billion and imports £9.8 billion.

Whilst this is one months data from this morning it reflects a pattern over the past year where our monthly services surplus has been revised up from £6.5 billion to £7.2 billion. As good news on UK trade is rare let us take a moment to enjoy that. However this is the least reliable section of an unreliable report unfortunately. You see the statistical bulletin gives us twenty pages of data on trade in goods giving us sectoral and geographical detail whereas we get a bare page on services. What information we have is gleaned from quarterly and annual surveys so the truth is that we are flying virtually blind in an important area of our economy.

What are the latest numbers?

This morning we have been told this.

In the three months ending August 2014, the deficit on trade in goods was £29.2 billion, increasing
by £2.7 billion from the three months ending May 2014.
Total exports decreased by £2.2 billion (3.1%) to £70.4 billion and total imports increased by £0.5
billion (0.5%) to £99.6 billion.

As you can see it appears that our mini-boom is not sucking in as many imports as we might have expected from looking at our past experience, but exports have disappointed. Perhaps there is some evidence of the Euro area stagnation here as in terms of countries we export too Germany is second, France is fourth and Italy is ninth.

Comment

There is much to consider in the situation here. Whilst I would like to repeat one more time that the data is unreliable I think that a continuous annual current and capital account deficit since 1983 does give a clue! We need to do better but unfortunately our political class has hamstrung us via its concentration on and obsession with Europe. This is not especially an anti-EU point as many of these countries have long been our friends and I hope that they remain so but they do not have to be our only friends and interests.

Meanwhile there is a fundamental gap between the current level of the UK Pound and our persistent balance of payments deficit. Except that we have a problem because when the Pound fell in 2007/08 it did us little good in trade terms. This is of course part of the problem and another factor is provided by the fact that the list of countries which would like a lower currency feels like it is growing day by day. As they can only fall against each other there is an obvious problem and I think that this is a factor amongst others (Ebola, Euro area stagnation…) which is seeing equity markets take a dive an example of this is a FTSE 100 which is down 1.2% so far today.

Even ESA 10 cannot help Greece

Regular readers will be aware that the national accounts revisions under the ESA 10 banner have in general boosted recorded economic output. There is now one major exception which is Greece. It is a crude measure to add up the annual GDP changes from 2008-13 but if you do the answer is -2.8%. Simply horrible in the circumstances.

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12 thoughts on “The UK exposes itself to peril by ignoring its persistent balance of payments deficit

  1. poor Greece – couldn’t Gerry Mander enough sex & drugs into the figures huh!

    or the figure would have been too high and people would have to ask questions……..

    “it appears that our mini-boom is not sucking in as many imports as we might have expected from looking at our past experience,”

    Maybe because we’ve not had a boom at all , all smoke and mirrors stuff , double entry accounting and vague unquantifiable items added ?

    The worry about a weaker pound is that actually it makes no difference now because most of our industry is sold off or gone . There ain’t much there to take advantage!

    Add the fact that since Thatchers day we’ve relied on our Banking services to keep us afloat and look where that got us . I suspect in the end this will be our “Darien scheme” and we’ll be forced into the United States of Europe……

    Forbin,

    PS: from yesterday post – yes ,Shaun, its of interest that the oil price is so low , we’ll see some benefits at the pump but not much as most is tax! Does a low price mean it affects our trade balance more ? I think so badly . Also it price’s out all those little fields that were profitable at $115 . ………

    Super market price wars – do they happen at the times HMG takes the inflation snapshot ? one does wonder…….

    Sit back , grab a bag of popcorn and on with the show !

    • Hi Forbin

      Actually there is no mention of adding drugs and prostitution into the Greek national accounts so I can only assume they were already included. Having had a look at the back data too now I can say that the pre credit crunch period had lower economic growth than previous reported too.

      As to the oil price we are net importers now especially if we include gas so a falling oil price does benefit the trade position but not by a large amount.

      As to your question about supermarket price wars I would be surprised if they didn’t….

  2. I couldn’t agree more, and it really worries me. It also worries me that very few people understand this or its implications. I have discussed the UK’s economy with well educated people holding down the sort of jobs that you would expect them to have a wider interest and their knowledge of the UK’s financial situation is woeful. I would bet you could ask similar questions of the man in the street and be shocked by the ignorance of such matters. Eyes glaze over when the subject is raised! Sadly our politicians are afraid to ‘tell it as it is’ as they would frighten the electorate and worry the financial markets. I would like the next government to have a safe majority and then to publicise the state of our finances and accumulated debt and then put to the people a proposal to reduce them. It’s going to need cuts plus higher taxes (a small temporary vat increase?) to get things in order but I just wish for once that they would spell it out. I won’t hold my breath though!

    • If my memory is still behaving itself, Maggies 12.5 to 15% temporary increase in VAT to fill in the hole left by the poll tax riots might be a warning ….

      • Hi dl and welcome to my part of the blogosphere

        There is a long history of taxes and tax rises which have entered under the “temporary” banner and are still here. Wasn’t income tax in the UK a temporary measure to help pay for the Napoleonic war?

    • Well said. It’s unbelievable how many indicators of our economic health are flashing red right now. The general tone from Mme Lagarde, Osborne etc is one of negativity, and as a result I can see confidence starting to evaporate again. It all seems like a managed decline to me and everyone’s looking for someone else to blame rather than confront the issues head-on. As you say, the question is who will have enough spine to confront these issues? Guess what? I’m not holding my breath either….

  3. I remember a time when the balance of payments was a regular feature of economic news on the main news bulletin on the BBC. It must have been some time in the 70s I remember asking my father about it and being a bit worried we were in debt as a country. I was a teenager at the time. I suppose we are too lily-livered as an electorate to face reality now.

    • BBC shallow ? no really ? get away ! Just remember BBC is “entertainment” so’s ITV

      if it not on X factor or Strictly then it aint “news” !!

      Economics is boring , money is boring , science is boring , we have made TV and MSM to keep the public’s eye away from what TPTB are doing ……….. Don’t look behind that curtain , Dorothy!!

      And yes it works , our TPTB are really good at this – We have got what was needed , an easliy distracted public

      look Squirrel!!!

      Forbin

      PS; when discussing anything of importance remember to include the cat video……….

      • Don’t forget in some quarters Robert Peston was blamed for causing the queues outside Northern Rock and the resulting after-effects of the financial crisis with all his negative reporting and scaremongering! So I would say in defence of the BBC they do cover a lot of the present economic issues especially in documentary form. Admittedly, their coverage is not going to be as in depth as Shaun’s who obviously digs much deeper but I would say lot of our understanding of the global economic challenges we face comes from this source.

        I am not a BBC employee by the way!

  4. Good post, just wanted to drop a comment to let you know another faithful user has migrated. Very happy to see your site and get away from that stupid popup at Mindful!

    FTSE and DOW red as red. Interesting times…

    • Hi Progrock and welcome back.

      Has nobody told equity traders that falling stock markets are no longer allowed?! In the US they have a little time to think now as it is a holiday weekend.

      I guess the Bank of Japan is already revving up to buy the dip on Monday morning…..

  5. I wouldn’t take the silence to be ignoring the BoP; after all, we’ve just seen the most unedifying undermining of democracy in British history, and I believe that was linked to the realisation of how much more the BoP would deteriorate if Scotland had voted for Independence.

    The elite KNOW that tackling BoP means actually investing in exportable goods and services and that and supporting the bankocracy are mutual exclusives.

    Everyone’s overused metaphor is the “elephant in the room”, but this is the most apt scenario for its use.

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