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!

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16 thoughts on “The UK trade and current account deficits continue to disappoint

  1. Spot on, Shaun – a perfect storm brewing…

    Worth asking whether the deteriorating income account is not partly a consequence of the government’s enthusiasm for selling UK “investment opportunities” (whether HS2 or NHS contracts) to overseas entities?

    I also wonder what will happen when lawyers, accountants, advertisers, bankers etc. in big emerging economies get their acts together and no longer need their over-priced, London-based counterparts…

    • Hi Martin

      I can only agree with your first point. The phrase selling the family silver is often used in other debates but we are robbing Peter to pay Paul in these cases and rather like the PFI contract scandal the costs run and run and run.

  2. Hello Shaun,

    Despite the mantra that we are post industrial its increasingly clear that being post industrial means the UK will be , to put it mildly , a 3rd world or less country

    The big city boom of the early 80’s gave a one off boost that apparently ended in zero gain in 2008 , if not out right loss (!) – makes you wonder where the money went – no , nothing useful it appears.

    If Korea can build a Steel industry from scratch and make money ( before it was privatized ) and if Japan can build cars and electricals , both countries not having their own resources . Why can’t we?

    Possibly because we are all decended from Pirates?

    Rover car Group turned around the old BLM image and made very good cars despite not getting the same state support as French manufactures . And because of the Free Market mantra , they still have a owned car industry , we do not . We sold it to the fab 5 and what did they do – gut it and pump up their own porfolios and damm everyone else …..

    Ownership matters , the profits go to the home country .

    Being cheap on labour does not make for a prosperous country , our Banking Chums have not saved us , and oil is going the way of the Cod ……

    So solutions anyone ?, how can we pay our way ? more low paid part time jobs? The RoW will out compete us on that . More education ? cheating on lowering the standards blew that idea up , along with Uni charges ( and what money did it save the taxpayer ? apparently very little ) . And even if you disagree that education is bad , whats the point if they end up on the dole , or move abroad?

    Dunno Shaun , pass the popcorn ….

    Forbin.

    PS: The eye of the storm will pass and as low oil prices will stoke up demand just as low oil prices cut development of new fields and removes new supply ( current LTO drop rates will make Spring a time to watch ! )

    • LOL – Profits stay in the “home” country – google, amazon & apple profits go offshore ….

      As for ideas to improve the UK, start with value for money. Affordable housing and executing the promised “bonfire of the quangos” might make tax affordable. Rolling back to merit based education where exam results allow bright students to enter streamed schools. (Ticket collectors & plumbers don’t need advanced maths, but top engineers do)

      Get the basics right, set up an environment that allows businesses to thrive and they will create wealth. Just look at how German manufacturers are managed as “value creators”

      • hi Ex

        the only one I’d contend is an industry is Apple but don’t they all feedback to the USA in one way or another ( shareholders profit )

        the money eventually leaves the tax havens , either via investments or frivolous spending

        yes , “bonfire of the quangos” , was quite a farce , was is not? the Germans and I’d posit Japan before the “lost decades”

        Getting the basics right is the issue….

        Forbin

    • Maybe decide to become the first country/economy to institute appropriate regulations to limit corporate power, and put salary multiplier caps in place to start addressing inequality.

      To actually create a form of Capitalism that makes monopolies impossible. That encourages innovation and invention, rather than exploitation and speculation.

      Is there not an opportunity to accept the limitations of the current system, and instead to begin building the next iteration. With big, bold initial steps – that make a statement – that probably result in the capital flight of spivs and charlatans.

      We’re either nearing an end game for the current version of capitalism, or about to enter a rather unpleasant, but perhaps long deserved second half in which the first world becomes the third. The difference being that the first’s world’s exploitable underclass HAS tasted more equitable or ‘wealthier’ times, and ‘knows better,’ and therefore, may be much less willing to accept the inevitable change.

      As the third world underclass begins to expect more, will we get to a point where we’ll hear Wolfie Smith’s crying out “Workers of the world unite!” and though social media, and mobile communication, that workers could globally strike, and begin to see global income inequality being redressed, or will the ‘enfranchised’ working classes of the BRIC countries enjoy the cheap labour produced goods that will soon be available via sweatshops in rural or decaying urban GB.

      There’s a point surely, where there’s no one left to exploit, but robots… and we’ve all seen how that can end. 🙂

      • Love the rallying cry. However I’m afraid the first world underclass can be sold a pup. How? You do it along age lines.

        The UK has been at the forefront of an establishment experiment. How do you drop living standards. The answer? Pay older people with their own money via younger people. The transmission mechanism: housing.

        All done in a matter of 20 years. From financial independence to 4 accountants in a bedsit.

        The job has been done so effectively many young will defend the current system.

        • Hmmm… be interesting to see how it starts to play out as the older generations live longer and longer and see’s the grandchildren and great grand children suffering more and more as a result of their willingness to support and enjoy such a biased system.

          I wonder whether we’ll start to see Great grandparents and grand parents seeing their children die before them as they continue to be supplied with the panaceas of fast food and cheap/TV and gadgets that enable/encourage a mostly sedentary lifestyle.

  3. Even more astonishing is the governments willingness to subsidise franchises/operators of UK infrastructure which are run by Overseas government owned entities : EDF, German railways,amongst many others. If their nationalised industries can do it why can’t our be allowed to have a go.
    The latest example is the new Dart Charge for the Thames crossing at Dartford now run by a French operator part owned by the French Government, who also run the London congestion charge foreign car drivers know they can just ignore the charge as the cost of chasing the fine from European countries is to much. To this we will now find that foreign owned vans and lorries will also not be paying to cross the Thames. A percentage of the charge goes to the UK government and all the extra goes to help the French.

    • Hi Gandalf321 and welcome to my part of the blogosphere

      You are right to point out the implications of more and more of UK infrastructure being foreign owned. Our political establishment want the initial capital gain for short-yerm gain but forget the longer-term income stream that then leaves the economy. The other example us the way that EDF are providing us with our new nuclear capacity at what always looked a high price and now looks ever more exhorbitant as twhe oil price drops.

  4. Good post. Economists hold two things very close to their (stupid) hearts:

    1. deflation defers purchases
    2. currency depreciation benefits the manufacturing sector

    Normal people instinctively know that both are at least far more complex than this.

    ps it’s not your fault Shaun but UK reports are like watching a snail push a car over a cliff. It’s coming but boy is it slow…

    • Hi benefitzg

      Actually I am typing this on a example of deflation not being a deterrent. The lower price for the tablet I am using right now made me think it was good value and so I bought it. I saved £30.

      As to things seeming to happen in slow motion that often means you are correct. They go much more quickly if you are wrong,usually anyway…

  5. Could it be that HMG would be the last to impose capital controls in this mad world, hence the presence of parastate entities in Britain (France, Germany, Spain)?

    • Hi roland and welcome to my corner of the blogosphere

      I suspect that the UK would indeed be among the last group to introduce capital controls so yes. The Euro area blotted its copybook on this issue in Cyprus which may yet turn out to be a very expensive move especially for the Swiss and the Swiss Franc.

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