The UK Current Account deficit and GDP downgrade are not an early Christmas present

As we reach what is now called Christmas Eve Eve we have an opportunity to review the UK economy and see where it stands as 2014 heads to a close and we look forwards to 2015. If we look at the position regarding total economic growth then the UK is continuing to perform reasonably well. From the National Institute for Economic and Social Research (NIESR).

Our monthly estimates of GDP suggest that output grew by 0.7 per cent in the three months ending in November after growth of 0.7 per cent in the three months ending in
October 2014.

In their data series the UK returned to sustained growth in February 2013 and each month so far in 2014 has ended a rolling quarter with growth of at least 0.7%. The only fly in the ointment is that growth has slowed since the peak of 0.9% in June.

Today’s data release

This morning has seen the release of the final numbers for the third quarter of 2014 and the headline is “steady as she goes” as the quarterly growth rate is unchanged at 0.7%. However there is a shark alert as we look as the back data.

Between Q3 2013 and Q3 2014, GDP in volume terms increased by 2.6%, revised downwards by 0.4 percentage points from the previously published estimate.

In fact the preceding five quarters have all been revised downwards and the total downwards revisions if we use a rough and ready measure have wiped out the economic growth observed in the latest quarter. We do then see a measly 0.1% upgrade in the first quarter of 2013 but these are not good numbers on any account as they raise the issue of possible systematic errors at the Office for National Statistics (ONS).


As someone who has argued on a sustained basis that we need to take more interest in our trade and current account data (the latest of which was written on the 10 th of this month) my eyes shot to this part of today’s economic statistics.

The United Kingdom’s (UK) current account deficit was £27.0 billion in Quarter 3 2014, up from a revised deficit of £24.3 billion in Quarter 2 2014. The deficit in Quarter 3 2014 equated to 6.0% of GDP at current market prices, up from 5.5% in Quarter 2 2014.

It was not so long ago that we were worried about the UK current account deficit going above 4% in 2013! Now we see that as well as our traditional issues our income account has deteriorated substantially.

The widening of the current account deficit was mainly due to a widening in the deficit on the primary income account from £8.2 billion in Quarter 2 2014 to £12.6 billion in Quarter 3 2014. This reflects receipts from foreign direct investment falling and payments to foreign direct investors rising.

Also our balance sheet situation is getting worse too.

The international investment position recorded UK net liabilities of £450.7 billion at the end of Quarter 3 2014.

The main hope here is that the numbers are so large that the margins for error are enormous.

UK external assets abroad increased by £429.8 billion from the end of Quarter 2 2014, to a level of £9,706.1 billion at the end of Quarter 3 2014…………UK external liabilities increased by £468.1 billion in Quarter 3 2014, to a level of £10,156.8 billion

I discussed the issues here in more detail back on the 10th of this month and the words of Taylor Swift seem even more appropriate now than they did then.

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

What about interest-rates?

So far this has been the dog that has not barked and this is in spite of the fact that on more than one occasion in 2014 a rise was signalled by Bank of England Governor Mark Carney. From his Mansion House speech on the 12th of June.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced…….It could happen sooner than markets currently expect.

Of course nothing of the sort has taken place meaning that back then markets were right and Governor Carney was wrong. Oh and that was not the only example of what in basketball is called a head fake taken place that day as due to another crisis in Iraq the price of a barrel of crude oil rose to US $111.

If we return to UK Base Rates it is my opinion that the view of the majority on the Monetary Policy Committee is to continually promise them six months ahead but it will be a rolling six months. In other words another type of open mouth operation. They had better hope that markets and economic agents are not fans of the Who.

Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
No, no!

Now that UK economic growth has been revised down quite substantially the chances of a Base Rate rise are moving even further than six months away. Indeed if we look at the consumer inflation picture my view that a Base Rate cut is as likely comes into play here.

What about the rest of monetary policy?

Longer-term interest-rates or bond yields have been applying an easing to UK monetary policy as they have followed other European bond yields lower. The benchmark 10 year bond yield which opened the year at 3% is at 1.81% now as bond investors have had yet another party.

If we move to the exchange rate then the value of the UK Pound has remained remarkably stable at around 87/8 on an effective or trade-weighted basis. There have been individual shifts with falls against the US Dollar being offset by minor strength against the Euro (1.27ish) and of course rallies against the Japanese Yen and Russian Rouble in particular.


There is not much seasonal cheer to be found in today’s official numbers for the UK economy. However I have ferreted out one bit.

The surplus on trade in services equates to 5.1% of GDP which is the largest proportion since records began in 1955.

As we look forwards we will also see a benefit from lower crude oil and commodity prices after an initial back step to account for a lower value for North Sea Oil and Gas output. But we see that the boasts about our growth performance being the best of the G7 nations have withered on the vine and that our current account is following a traditional path in a UK housing market inspired boom. Indeed maybe worse than a traditional path. As ever the Balance of Payments numbers are unreliable even on a quarterly basis but with such a large number there is plainly a problem yet again.

How does our establishment deal with troublesome GDP numbers? In a move of which the apocryphal civil servant Sir Humphrey Appleby would be proud we now have.

Economic Well-being, Q3 2014

However even it has a mis-firing engine if we observe the opening data series. The emphasis is mine.

In Q3 2014, GDP per head increased 0.6% compared to Q2 2014 but remains 1.8% below pre-economic downturn levels. This was a slightly slower growth rate than the 0.7% quarterly increase seen in GDP.

Let me hand you over to Fleetwood Mac and Oh Well.

I can’t help about the shape I’m in
I can’t sing I ain’t pretty and my legs are thin
But don’t ask me what I think of you
I might not give the answer that you want me to


19 thoughts on “The UK Current Account deficit and GDP downgrade are not an early Christmas present

  1. Hi Shaun
    I never cease to be amazed by the quality of your daily blog…..
    Oh dear, oh dear, everything , including the kitchen sink thrown at this, and we are still below the ‘made-up’ GDP/head number. Underlying problems rearing their heads through the ‘fog’ of pre-election housing stimulus. Must be running out of stats to massage by now, surely?

    • Hi Shaun
      Couldn’t miss the opportunity to share this beauty.
      Remember when we discussed why the US Q1 number looked ropy and it emerged that they had excluded Obamacare expenditure, well as the link below demonstrates its all popped up in Q3 , so just before Xmas the US can bask in the glory of 5% GDP growth, well not really… wonder what they will fiddle next? ( makes the ONS look almost benign )

      If you don’t post tomorrow, have a great Christmas and prosperous New Year, and best wishes to all contributors to a great blog site.

      • Hi Shaun
        Sorry for a 3rd comment on an unrelated topic. But I thought you and fellow readers would like to share the link below. I came across it as I was commenting on the Naked Capitalism blog about Oil Prices and found that Kaletsky had made the same observation so much more fluently. Remember the ‘merit order’ for power generators , well Kaletsky argues and I agree completely, that the Saudis are trying to force all the producers to talk and agree a global ‘merit order’ for oil. As Katelski argues its economically sound and will produce a system marginal selling price reflecting the marginal production costs of the most expensive ‘swing’ producers , the frackers, probably somewhere near the present $60/barrel. It will take a lot of pain before the US will come to the table so $40 or less will be reached before enough wells stop producing to allow talks to proceed.
        But the end result would be a ‘price’ that reflected real well head prices and not financial contracts previously manipulated by trading desks.
        It is equivalent to the UK electricity wholesale selling price going back to the basis of ‘Pool’ prices rather than the present NETA price with all its inherent cross subsidies. I think the Saudis will be more successful in the endeavour.

  2. Merry Christmas Shaun and also all the commenters who add to my enjoyment of this blog. Another year packed full of interesting analyses giving me a much better understanding of what is going on in the financial world.

    See you in the New Year.

  3. Shaun, I couldn’t agree more about our trade and current account position! We could have good GDP while the economy goes down the toilet. I can only think that the government ignores them because they are the hardest to fix. There is a vague possibility that the current account may improve but I’ll bet that after the Xmas period the trade position hasn’t improved.

    Hope you have a great Xmas and best wishes to all the contributors who post their thoughts and opinions here.

    • Merry Christmas Pavlaki

      I am afraid that the timescale for fixing the UK’s Balance of Payments is way way beyond even several ministerial terms. It is a bigger problem than the fiscal deficit and look what a shambles is being made of that.

  4. Happy Christmas and thank you, especially Shaun, but to all who make this forum so interesting, informative and enjoyable.

    As far as the BoP is concerned, we could have an “I’m Backing Britain” campaign…

    Well we could if there was anything left that was really British worth buying.

    • apparently theres plenty of things to buy that are British locally – all Artesian stuff though

      apparently British management can’t handle anything big , or just sells it off lock stock n barrel like Rover Group .

      So we can do small , just our banks kill off anything bigger ….


  5. Enjoy the break Shaun ,

    I look forwards to the New Year when an epiphany *** happens in HMG and they put forward a cutting of budgets , starting with being “in it together” by cutting the House of Commons seats by 20% and same for House of Lords , followed by 10% pay cut for all MPs across the board including expenses and a conversion to money purchase pension schemes for MPs and top civil servants.


    PS: I won’t let my popcorn go cold waiting though……

    ***Epiphanies are relatively rare occurrences and generally follow a process of significant thought about a problem. Often they are triggered by a new and key piece of information, but importantly, a depth of prior knowledge is required to allow the leap of understanding +++

    +++ Well, we’re bu@@ered then with this lot….

    • Hi Forbin and Merry Christmas to you.

      I am trying to think of the last epiphany our political class had and am struggling!

      Whatever happened to the plans to cut the House of Commons by 50 seats? Afterr all with the new devolution developments would mean it should now be 50 plus.

      The reform of the House of Lords turned into a disaster and a debacle didn’t it?

  6. Hi Shaun, wishing you and all contributors here a a merry Christmas and after having read today’s post a,er,happy and prosperous New Year – I think!……

  7. Off topic, but noteworthy that Ukraine has voted to apply for EU and NATO membership.

    Next year may be interesting in more than just economic events.

    Compliments of the Season to all.

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