March 31, 2016 2:34 pm
Britain’s current account deficit has hit a new postwar high, underlining the country’s reliance on foreign capital.
In the final quarter of 2015, the UK borrowed £33bn — or 7 per cent of gross domestic product — from the rest of the world.
Chancellor George Osborne said the latest figures showed the danger of economic uncertainty and that “now is precisely not the time to put our economic security at risk by leaving the EU.”
However, analysts are less worried than they might be because the worsening of the deficit was mostly caused by a drop in earnings on overseas investments. The Office for National Statistics estimates that just under 80 per cent of the deterioration since 2011 has been caused by falling receipts from UK investments abroad and the majority of this was attributable to the UK’s largest 25 multinational companies.
Apart from during the 2008 financial crisis period, the UK has historically earned substantially more on its foreign investments than it has paid out. But since 2011, earnings have fallen dramatically.
While there is no consensus as to why this has happened, the ONS suggests two main reasons.
First, the UK’s biggest companies have invested heavily in oil and other commodities and returns have been hit by falls in prices.
Second, key destinations for UK investment, including many Eurozone economies, have been struggling to grow, and this has also depressed earnings.
The annual figures for the UK current account are also bleak, with the deficit rising to 5.3 per cent of GDP.
Both the annual and quarterly figures are the worst on record since comparable data began after the second world war.
The data overshadowed news that the UK’s economic recovery was a little stronger than thought, with GDP growing by 0.6 per cent in the fourth quarter.
Mark Carney, the Bank of England governor, has previously warned that Britain relies on the “kindness of strangers” to finance its current account and that the referendum on EU membership on June 23 was the biggest domestic risk to the economy.
Chris Hare, economist at Investec, said the deficit was “eye-watering” and Howard Archer, economist at IHS Global Insight, said the data were “truly horrible”.
The UK economy at a glance
Rupert Seggins, senior economist at the Royal Bank of Scotland, has said that the problem with the current account as an indicator of economic trouble in the UK is that “it is always crying wolf”.
He added that the average maturity of UK government debt is 16 years, meaning it has a cushion against any sharp rises in how much it has to pay to borrow and it has a good credit history. So far, international investors have been happy to lend to the UK economy. The concern is that any loss of confidence — particularly because of worries about Brexit — would lead them to demand higher returns on money lent to the UK, which would be a drag on sterling and UK assets.
John Wraith, head of UK rates strategy at UBS, said that so far the mood in the capital markets is “pretty sanguine” and investors “do not seem to be showing any real signs of aversion”, having bought an average of £2bn a month in gilts over the past year.
But he said that the picture was notably different in the currency markets, where sterling has fallen sharply since the start of the year.
“There has been a clear drop in the willingness of overseas investors to keep diversifying into UK assets at the previous pace. We do think this is linked to Brexit, and we do think it is likely to continue right up to the vote itself,” he said. If there was a vote to leave, he suggested that sterling could need to fall close to parity with the euro to move the current account deficit towards more “manageable” levels in an uncertain environment.
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