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.
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.