The recent period of expansion has been very welcome for the UK economy but it has come with a handicap which is familiar to students of UK economic history. However general analysis of the situation is very different to the past and a considerable amount of complacency is displayed. But even the Bank of England has its concerns. From the latest Financial Policy Committee Minutes.
The Committee discussed the potential risks relating to the UK current account deficit position. The current account deficit had widened to 6% of GDP in Q3 2014 which was high by historical standards in the United Kingdom and elsewhere.
They then spend some time concluding that this is really okay (which if so begs the question of why they raised the matter!) After all does anybody actually believe the hype in the sentence below.
Moreover, to the extent that fiscal policy was credible and investors were confident in the monetary and fiscal policy frameworks and the United Kingdom’s continuing openness, current account deficits would be easier to finance.
In the current election debate I have mostly only seen incredible efforts on fiscal policy and monetary policy is still at the emergency Base Rate of 0.5%. Oh well. the result of all of this was the classic bureaucrats solution.
The Committee agreed to keep their assessment of this risk under close review and would monitor the maturity and liquidity of the financing of the deficit
Should the horse ever bolt they will be there to close the stable doors afterwards!
Step Back In Time
If we go back to 1967 then things were very different as in November the UK government devalued the exchange rate of the UK Pound £ from US $2.80 to US $2.40 in response to a balance of payments crisis. You may have a wry smile at the numbers involved. From The Sterling Devaluation of 1967.
That deficit was estimated at the time to be approaching £800m, but later revised down to nearer £300m.
Of course our minds have been distorted by the financial inflation of these times so let me convert the numbers for you as the panic of the times was caused by a current account deficit of around 2% of annual economic output or GDP. Putting that another way it was somewhere around a third of the number being discussed by the FPC.
There are of course differences as a fixed exchange rate puts more pressure on such matters as those in the Euro area and of course Denmark and Switzerland have discovered in recent times. But you see here we have something of a (space) oddity as the present UK balance of payments problem has been accompanied by a rising exchange rate for the pound. Since the recent nadir of March 2013 the trade weighted index has risen from 77.9 to 90. So one more time we need to tear a page out of economic textbooks. Or to put it another way it would not be the best of times to ask HAL 9000 to open the pod doors if you were out in space!
Also you may note another feature of balance of payments numbers which is their inaccuracy. Due to later revisions which were years and sometimes decades in the making it was discovered that the 1967 Sterling Devaluation one of main symbolic points in UK economic history was unnecessary. As the Rolling Stones put it so aptly about accurate economic statistics at around that time.
You can’t always get what you want
You can’t always get what you want
Today’s Numbers
We get an idea of the position in the early part of 2015 from this.
Seasonally adjusted, the UK’s deficit on trade in goods and services was estimated to have been £2.9 billion in February 2015, compared with £1.5 billion in January 2015. This reflects a deficit of £10.3 billion on goods, partially offset by an estimated surplus of £7.5 billion on services.
So a more hopeful picture for January seems to have been replaced by a same as it ever was February. Even the more hopeful picture involved a deficit as it is quite some time since we had a surplus of any sort. Also the January numbers had a familiar feature.
The total trade balance in January was revised downwards by £0.9 billion from the January 2015 UK Trade release
So not only are the numbers unreliable it is good news that is particularly so. This leaves us with a continuing issue.
In the 3 months to February 2015, the trade in goods deficit narrowed by £0.1 billion to £29.4 billion.
Also those who argue for trade benefits from our membership of the European Union would do well to mull the number below.
In the 3 months to February 2015, the trade in goods deficit between the UK and countries within the EU reached a record high of £21.1 billion, since comparable records began in 1998.
A little care is needed as we have a surplus for services but the position above is dire.
Is there any hope?
There is a thematic hope for the UK economy and it comes from the services sector where we put in a strong performance as shown below.
The surplus on trade in services was estimated to be £7.5 billion in February 2015.
Somewhat bizarrely the actual number is £7481 million. Why is this bizarre? Well actually they have nothing like this level of accuracy as they confess here.
However, the information on trade in services is
mainly obtained from quarterly surveys, in some cases underpinned by larger annual surveys. That means that the data for the latest months are inevitably uncertain.
A cursory examination of the one page of detail we get on services trade would miss that as would anybody who looks at numbers measured to £1 million. I analysed this issue in reference to the UK “productivity puzzle” on the second of this month and concluded that we need to get more accurate numbers for this area as our view of our economy could be transformed and would as a minimum be more reliable. After all we do live in an information age don’t we?
But the picture such as we have it is of an improving position illustrated by our services surplus being revised up by around 10% on a year ago.
Also the lower oil price is helping us as whilst we produce oil we are a net importer. Although if today’s news from UK Oil & Gas Investments Ltd comes to fruition maybe….
London quoted UK Oil & Gas Investments PLC (LSE AIM: UKOG) is pleased to announce that US-based Nutech Ltd (“Nutech”), one of the world’s leading companies in petrophysical analysis and reservoir intelligence, estimate that the Horse Hill-1 (“HH-1”) well in the Weald Basin has a total oil in place (“OIP”) of 158 million barrels (“MMBO”) per square mile,
Of course they will only be able to get to a relatively small proportion of that and such announcements are prone to what I shall politely call hype but it could be a bonus.
Comment
The complacency over the UK Balance of Payments has partly been driven by the fact that we have been numbed by year after year of deficits. So there is a natural tendency to assume that the problem does not matter. What could go wrong? Well this as I pointed out on the 2nd of this month.
In 2014, the UK’s current account deficit was £97.9 billion, up from a deficit of £76.7 billion in 2013. The deficit in 2014 equated to 5.5% of GDP at current market prices. This was the largest annual deficit as a percentage of GDP at current market prices since annual records began in 1948.
A factor here was a decline in our net international investment position partly created by the years of other deficits. There are flickers of hope for marginal improvements so far in 2015 but of course the numbers are unreliable. I also believe as I wrote on the 2nd of this month that we underestimate our services performance but if this was a bomb it is ticking albeit apparently slowly.
On the subject of the strength of the UK Pound I wonder how much of that has been driven by demand for UK assets such as property from abroad. In the vast sums of foreign exchange it may seem small but at the margin such things matter. Perhaps our greatest economic success of these times will be considered to be the sale of overvalued houses to foreigners!
You’re Unbelievable
I was reminded of this from EMF when I read this and in case you do not know he is the Governor of the Central Bank of Ireland.
@INETeconomics Direct bailout of the banks has been relatively small say @PatrickHonohan
I guess “relatively small” goes into my financial lexicon for these times.
Notayesmanseconomics's Blog 
Hi Shaun.
I don’t think that unreliable numbers are ever a good thing, for a number of reasons.
For one thing, consistently unreliable numbers cause consistently unreliable reactions.
(If the 1967 devaluation was unnecessary, a whole lot of imports inflation, (which could have led to a BoP crisis!) did us ordinary Joe consumers no good at all.
Secondly, because the figures have been consistently pessimistic, there is the danger of, “Wolf!” being cried, inasmuch as they may not always be so. (Past incompetent performance is no guarantee of future incompetent performance).
Indeed, what if a future set of figures underestimated a huge problem?
Do we know what a real BoP crisis is like?
Hi therrawbuzzin
Not in recent memory but the calling in of the IMF in 1976 and the deficits of the Lawson Boom qualify in the late 80s qualify. But since then (1997 excepted which veers in and out as numbers are revised) we have had a current account deficit every year. But nobody cares much anymore.
As to the accuracy of the numbers they are shameful in an era of technology…
Hi Shaun.
Mr Honoghan’s phrase “relatively small” surely invites the question “Relative to what?”
Hi Jim M
It is almost something out of a Monty Python sketch is it not?! The national debt to GDP ratio of Ireland rose by 100% at its peak from 24% to 124% and of that some 40% was direct banking bailouts. I would suspect that the Irish taxpayer might not regard that as “relatively small” at all!
hello shaun
currently we are on the coat tails of the Americans
when they pull out of the tide , then who will have shorts on?
We’ve basically managed for over 30 years on trade , haven’t we?
“Perhaps our greatest economic success of these times will be considered to be the sale of overvalued houses to foreigners!”
gotta laff , when the housing boom finally busts……
oh I forgot , all our Banks will go down the tubes as well
still they are bust , is it too late to do an “Iceland” on them ?
munches popcorn in favorate seat
Forbin
Hi Forbin
As soon as I read the 30 years then this came to mind.
“Three Lions on a shirt
Jules Rimet still gleaming
Thirty years of hurt
Never stopped me dreaming”
For younger readers the 30 years then was the gap to the 1966 football world cup victory and we did at least play well in the 1996 European cup under Terry Venables for which this became a theme song.
Of course in football terms it will soon be 50 years I doubt our current account deficit will have such longevity but who knows?
Shaun,
“There are of course differences as a fixed exchange rate puts more pressure on such matters ..”
Significant understatement there. It was never a BoP crisis at all. The “crisis” as depicted by the media, was simply that they could no longer keep the currency peg at its current rate. So no “crisis” at all. Since the collapse of the Bretton Woods agreement no one pegs their currency anyway.
Movements in the relative values of currencies help correct large movements in trade and invisibles – automatically.
If the UK trade weighted exchange rate is still high, it is only because the Euro has been devaluing faster than the pound. That won’t go on for ever.
Hi Charles J and welcome to my corner of the internet
In the end you choose price or quantity. Back in the days of fixed exchange rates the choice was price and you then had to take the quantity which did fairly regularly prove problematic for the UK although ironically not particularly in 1967. These days rather than trade flows it is the investment accounts which have often proved troublesome as money pours into countries which are perceived to be a relative safe haven.
It is these flows of “hot money” which have grown and can push exchange rates away from the correct levels for trade for sustained periods as Switzerland and Japan saw. If we add to that the central banking currency depreciators than the trade baalncing role of “free” exchange rates looks problematic does it not?
Shaun,
Note did say in my original comment “trade and invisibles”, which clearly eludes to flows of financial capital which correct themselves (mostly) in the same way…..yet…..
“It is these flows of “hot money” which have grown and can push exchange rates away from the correct levels for trade …”
Yes, a correction in one of the flows may be against the needed correction in the other. But there is no emergency, because the government (with the BoE) issues the currency and can run as large a deficit as required to finance both the CAD and the required private domestic sector surplus.
Kind Regards
Hi Shaun. I sometimes get worried about the fact that I no longer worry about the deficit; but these days I’m more worried by the state of the banks and the state of the mind of Central Bankers. And I really worry about the fact that our democratic vote has very little influence on anything.
Hi Eric
There is a link as whilst central bankers like to discuss the trade deficit they invariably conclude “Don’t Worry Be Happy”. Of course after the event that will morph into we told you so!
This era may be called the death of democracy but let us hope for ch-ch-changes.