Tuesday 31 March 2015

Amid the cheering GDP, the current account deficit is puzzling

GDP has been revised up to 2.8% growth for 2014. George Osborne, the UK Chancellor, is merrily tweeting about how well the economy is currently going. And well he might, after the 2008/9 crisis and then the 2011 Euro crisis it is about time the UK had a little period of growth to help its people along.

However, at the same time as the good news, there is some bad news. This is that the current account deficit has maintained its all time high at 5.5% of GDP. In the recent past, say 1992, we have had economic crises put upon us by the poor state of our current account deficit.

To some extent, this has been ignored in more recent times because of low interest rates. These mean that we can service the excess debt we are accruing adequately. Indeed, with Quantitative Easing, we are printing excess money for ourselves and yet the Sterling exchange rate remains over-weight by international standards.

Perhaps we are a few years away from a crisis when rates rise and people start to question the wisdom of the UK overspending. Certainly if George Osborne has ended up creating a consumption boom then we will live to regret the current good times.

My hunch though is there is something more complex at work. The huge influx of immigrants to the UK and the ease with which they enter the Labour market has given the UK more opportunities for growth - especially when compared with neighbours such as France. As such, capital is flowing into the UK to invest (sadly, in London property mainly!) and the new population is sucking in imports of telly's and sofa's.

So it could be a really good sign that the Current Account Deficit is at all time highs as it signals we are the growth economy of Europe; or it could signal that we are on the precipice of a Sterling crisis once more. As ever with economics, you only get a hindsight view....


dearieme said...

The apostrophe surplus is growing too.

BE said...

It's only a problem if people suddenly stop wanting to buy pounds. I think we Brits are making a rational choice to borrow to invest/spend while it is more profitable (in the loosest sense) to borrow than it is to save/invest. We do need to save more, though, in the longer term.

Sebastian Weetabix said...

I wonder in these globalised days if the current account deficit has any real meaning. I work in a group formulating and marketing specialty chemicals. The prototyping is done here, using small amounts of bulk chemicals mostly bought from overseas. We then fly to China to supervise mass production; the resulting products get shipped everywhere. At no point do we ship materials overseas in return for money - indeed we are a cost centre, not a profit centre, but all the high value jobs and IP are here... and our multinational employer books the profits in a metaphorical Timbuktoo somewhere. In the meantime with my slice of the pie I import all sorts of consumer goods and put some in my SIPP where I buy, inter alia, US shares, which then give me lots of lovely dollar divis for my little pension pot.

As I say, I doubt all that is adequately captured by current account numbers, largely focused as they are on physical goods.

phil5 said...

Mr Weetabix, how can you buy US shares inside your SIPP? Thought it was UK shares only.

Sebastian Weetabix said...

As long as you have signed a W8-BEN form you can trade US & Canadian shares in a SIPP.

andrew said...

The UK GDP is ~3 trillion USD
5% of that is 150bn USD ~ 100bn gbp.

That is about 2 very nice big flat screen teles per person (70 million of us).

Something else is happening.

If there was an influx not just of people buying flats and big teles, but people buying flat and big teles and goods that are fairly cash-like but not cash, you might be on to something
10 000 people bringing in 10m each would roughly equal the current account defecit.

Paul Ralley said...

Isn't this driven by the accounting convention? China manufactures sofas and tellys, the UK manufactures prime London property, but then we call it investment so it makes the current account deficit smaller.

CityUnslicker said...

SW - yup, I think there is more going on. But I am very wary of ever saying 'this time its different'

Paul - Yes but we do capture that FDI and set it of against the deficit - so there must be more to it or else FDI would cancel out the account surplus - which it does not.

As I said, puzzling.

andrew said...

Someone else much cleverer than me has looked into this

Mark Wadsworth said...

Yes, there is a bit of an apostrophe surplus round these parts.

"the Sterling exchange rate remains over-weight by international standards."

Does it? It's still about 6% below its average against a basket of other major currencies since 1990. Basically,

a) we are all as bad as each other.

b) the high interest rates of the 70s an 80s were a blip and an aberration, we are closer to 'normal' now than we were then.

c) we get some of our trade deficit back by selling our utilities, factories and London land to Johnny Foreigner.

Suffragent said...

I’m not an economist, so call me a numpty CU but I don’t understand the question/ puzzlement
Are you asking,
A) why are we still able to sell bonds, when our borrowing has increased 2.7% more than our income? (and this is the smallest margin since 2008)
For the Private investor, return of capital not return on capital. We are the least stinky underpants in the basket. You can only turn them round and inside out so many times. They all went way past the shirt analogy in 2008
The same people who buy bonds are the same people who receive QE. Risk is irrelevant and cash is worthless
B) Why is our GDP growth so low when the government is borrowing (sorry investing) money like a student on freshers week?
C) Why is government investment increasing when the economy is booming “its people “have more cash than a rapper in a blond strip joint?
I have answers to b and c but I feel a rant coming on and you have been very patient with my previous rants.

MyEarlyMorningName said...

I'm not sure I believe much of anything I read these days, especially with an election in the offing.

Last month we had mortgage figures that were the lowest in years at 14k per month, yet only a month later we hear that mortgages are a a 6-month high.
You'll note of course that a '6-month high' is a very bizarre measure. Its not yearly or monthly.

There is a huge disconnect between what the media reports and what is actually happening - the gov minister paedo ring scandal being the obvious example.

We have deflation (apparently) even though I notice my favourite fruit juice has shrunk from 1L servings to 860ml and the multibuy price has risen. Prices are rising very rapidly as far as I can see. Again (my bugbear) housing costs are not included in inflation figures. Where would we be if water and utility costs were included - Sky for example, is that included?
The economy badly needs a rate rise and for the still underwater debtors to be flushed out of the system. Remember, almost 50% of mortgages taken out after 2005 were interest only.
If our current 'successes' are predicated on ZIRP and emergency money pumping we remain in deep, deep trouble.