The £22bn Current Account Deficit Mystery

The £22bn Current Account Deficit Mystery
Not so long ago Britain's current account balance was in surplus, now it is £22bn in the red - so just where did the money go?

The current account balance is one of those economic numbers that tends to linger in the backdrop these days.

In the era of the Gold Standard and Bretton Woods system, when a country’s economic policy was largely determined by its balance with the rest of the world, this measure of one’s international ledger was all-important.

These days, other numbers - gross domestic product (GDP), inflation, unemployment – tend to hog the headlines.

However, the current account matters. It is the comprehensive measure of how much a country is sucking in from overseas.

And as the International Monetary Fund (IMF) puts it, "when a country runs a current account deficit, it is building up liabilities to the rest of the world".

In other words, it is becoming ever more reliant on overseas exporters and lenders to keep it afloat.

When times are good, such deficits hardly matter - but when there is a sudden upsurge of fear in the global economy, countries with current account deficits tend to be hit hardest and quickest.

After all, most countries that have faced IMF bailouts in recent years have usually been nursing large current account deficits, whether you look at the Asian crisis or the euro crisis.

Even if you aren’t at risk of an economic crisis, the current account is nonetheless the ultimate measure of how well-balanced your economy is.

Countries with high current account deficits tend to be more indebted - they are, after all, sucking in more goods than they pump out, and borrowing to pay for those goods - and more imbalanced.

All of which is why there is likely to be much consternation about the eye-watering increase in Britain’s current account deficit in recent years.

In the final two quarters of last year, the deficit rose to £22.8bn and £22.4bn respectively. As a percentage of GDP the best way to compare these things over time and between countries, that amounted to 5.6% and 5.4% - the highest quarterly levels since comparable records began in 1955.

In fact, according to IMF figures, Britain’s current account deficit for 2013 as a whole (4.4% of GDP) was greater than in any other developed economy (including Greece, Cyprus and all that).

The so-called "twin deficits" – a term Ronald Reagan coined to take in both the budget deficit (the total amount the Government was borrowing each year) and the current account deficit (the total amount the country, as a whole, was borrowing each year from overseas) was also greater than any other developed country.

Now, on the face of it, the deficit is a major blow for the Chancellor. He pledged, after all, to try to get Britain to make and export more.

The deficit is partly a consequence of the fact that Britain isn’t exporting enough. This is doubly concerning because one would have expected the trade account to have improved after the pound dropped in value by a fifth early on in the financial crisis.

However, look at the breakdown of the deficit and a slightly different story emerges. Britain has never had a particularly good trade balance.

But for most of recent history this has been somewhat compensated for by the fact that British investments overseas (whether that’s businesses owned by Britons or dividends from foreign assets) have brought in a steady stream of cash to the UK.

In recent quarters this investment income has collapsed, dropping from a surplus of over £5bn to a deficit of £10bn.

Now, at this stage you’re probably expecting an explanation, but the truth is that no-one has been able to come up with a particularly compelling one.

Few economists had utterly convincing explanations for why Britain managed to bring in a steady stream of income in the pre-crisis years - few now have a definitive idea why that income stream has disappeared.

There are plenty of theories. One is that the UK, as an open, financialised economy with many investments overseas, is rather like a giant hedge fund, which makes lots of money on its investments when times are good - and loses lots when things turn bad.

On this basis, the drop may represent the lagged impact of the euro crisis. Another is that this investment account partly represents British banking assets overseas - assets which are now being repatriated (hence the recent fall).

But the reality is that no-one is really sure. All the same, the deterioration in the account is awkward for the Chancellor.

The economy may be growing more convincingly now than it has for some time, but it is difficult to claim you are rebalancing the country when the key measure of whether you are paying your way in the world is in such dire territory.

http://news.sky.com/story/1233565/the-22bn-current-account-deficit-mystery

Charts on the link.

That really gave me fool for thought. The government is keeping that dead quiet!