The UK trade and current account deficits continue to disappoint

A long-term feature of the UK economy has been its struggles with the issue of trade. It is not that the UK lacks volume in its trade as we are a trading nation with the stereotype that we depend on the seas to carry the trade still being true. However for a very long time we have had both a persistent trade deficit and current account deficit. If we look back we see that the UK economy has had what might be called two lost decades in this area as we have had a current account deficit since 1987 every year except for 1997 which is revised above and below zero regularly and is currently a small positive.

We are a trading nation

If we use what is called the Pink Book for UK trade statistics we are provided with both the enormous size of trade flows in and out of the UK but also the problem which is our propensity to import. In 2013 we put on a large export performance where we exported some £306.8 billion worth of goods. This makes us an exporting nation but when we note that our economy was expanding then but exports were only a smidgeon above that for 2012 and below that for 2011’s £309.2 billion we advance on the import numbers with some trepidation.

It turns out that we were right to do so as our recent phase of economic growth has seen our import volumes rise from £405.7 billion in 2011 to £419.4 billion in 2013. With exports lower and imports higher then we have a double whammy effect on our trade deficit which sees the £96.5 billion of 2011 rise to £112.6 billion in 2013. If you think of that as an outflow of cash from the UK then you see several things. Firstly the scale of the problem for us in the UK but also that in trade terms we are good global citizens as we provide plenty of demand for the goods of other countries.

What about services?

These are the bright spot of the UK trade picture as we are strong exporters in this area and we have been seeing growth in them too. For example we exported some £190.3 billion in 2011 but a much larger £204.5 billion in 2013. Imports of services rose too but more slowly in overall terms meaning that our services surplus rose from £72.7 billion in 2011 to £78.1 billion in 2013. Hooray!

The nagging worry in the services area is how well these numbers are collected and calculated. Let me give you an example from the series for our financial sector which only fell by 4.2% in export terms as 2007 moved to 2008 and has grown every year since. As it was the sector hardest hit it is hard to believe that the impact was so small. Also after recently reviewing the speech about declining world banking flows by Kristin Forbes of the Bank of England can we say with any great confidence that we believe our official figures that we export more financial services now than we did pre credit crunch? To do that we have to believe that our accident prone banks have put in a stunning performance and is against the trend of a piece of news a friend sent me earlier today.

RBS has decided to exit the Japanese fixed-income business, slashing 200 jobs, and surrendering its primary bond dealership.

We get a lot more detail on trade flows than we do on services flows. The services numbers for 2013 include some £50 billion of exports for “other businesses” which could not be more vague. If it was in the trade section it would be analysed for both composition and geographical nature.

The Current Account

At this point we have a total deficit of £32.1 billion in 2013 but the numbers do not stop there. Our government sends money abroad including the rather topic issue of payments to the European Union where the UK is a net contributor. Oh how we wish we paid on net trade flows! If we add in aid flows and the suchlike we see that around £23 billion was added by our own government.

The net area is the income account which if we exclude the government influence provided the final push which left our current account deficit at £72.4 billion. Sadly our income account (which represents what we receive from oversea investments less what foreigners receive from UK investments) has been deteriorating too in recent years. This means that if we put everything together we had a current account deficit of 4.2% of our GDP (Gross Domestic Product) in 2013. It was 1.7% in 2011 and 3.7% in 2012.

Accordingly we see that the UK’s current account was worsening before the current boom phase and that the boom has added to this. It is hard to argue with Taylor Swift’s summary of the situation.

Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

Even the UK political establishment is aware of this

This has been such a long lasting problem that our government has a plan. This is from the Financial Times last December.

Lord Livingston said the government must “change the pace” of export growth and push more medium-sized companies into overseas markets if it is to have any hope of hitting its target of doubling exports to £1tn by 2020.

Sadly that looks like something that would be advised by the apochryphal civil servant Sir Humphrey Appleby of Yes Minister fame. Quote a large number a fair distance into the future as by then you will not be in that job/role!

Today’s data

This morning’s data release is pretty much “same as it ever was” to quote Talking Heads with a few nuances.

In the three months ending October 2014, the trade in goods deficit narrowed by £1.3 billion to £30.3 billion. Exports decreased by £0.6 billion to £71.7 billion. Imports decreased by £1.9 billion to £102.0 billion.

This looks good news until we apply some thought to it. If we multiply it by four then we get a bigger deficit than last years. I also note that exports have fallen. It is also rather odd to see imports supposedly falling whilst we are booming and many of our trading partners are not. Perhaps the statistical bulletin has a sense of humour when it puts two thirds of this down to erratic items!

There is some cheer to be found from the services sector.

The surplus on trade in services for October 2014 was estimated at £7.6 billion, a fall of £0.1 billion from £7.7 billion in September 2014. Export and import levels both increased by £0.1 billion to £17.7 billion and £10.1 billion respectively.

I do realise that this shows a monthly fall but the bigger picture show a rise from not so long ago when we were told the monthly surplus was £6.5 billion and then £7 billion.

Also the disinflation we so often discuss seems entrenched in the UK trade sector.

In the three months ending October 2014, when compared with the previous three months, export prices decreased by 1.2% and import prices decreased by 0.8%. Excluding the oil price effect, export prices decreased by 0.1% and import prices increased by 0.4%.

Also we are much better Europeans that we ever get credit for.

In the three months ending October 2014, the deficit on trade in goods with EU countries narrowed by £0.2 billion to £18.9 billion.

Comment

There are many economists these days who argue that trade and current account deficits do not matter. I often wonder if they are the same group who told us that the imbalances which built up pre credit crunch did not matter! Many of the same crew seem to have returned to media prominence as if it never happened. On the other side of the coin the obsession with trade that financial markets had in the early part of my career was overdone if nothing else because the numbers they were reacting too were wrong and were often revised substantially.

To my mind there is a middle ground where a problem can build and build and then explode and that is the danger with the UK’s situation. After all we cannot provide cash to the rest of the world as Buzz Lightyear put it.

Too Infinity! And beyond!

Some argue that in a world of floating exchange rates the issue is non-existent. As the value of the pound has headed downwards over time then there is a cost which in theoretical terms would involve it going “Down,down” as Status Quo put it, into the future. But we know from the 2007/08 depreciation, where our trade weighted currency fell from 103.7 to aound 80 in subsequent years, that this was far from a magic wand, otherwise we would not be where we are now.

Should we be able to fix it then we would be in a situation summarised by Ariana Grande earlier this year.

One less problem without ya!