THE UK'S PERSISTENT TRADE DEFICIT

Abstract

The UK current account deficit reached a peak in excess of £20bn in 1989, equivalent to 4 per cent of GDP. In the next two years, as recession took its toll of domestic spending, it shrank quickly - on the latest data the deficit was only £4.4bn last year, 3/4 per cent of nominal GDP. Over the same period the trade gap narrowed front £25bn to £10bn, in each case taking the deficit back to the levels of 1987, before the late 1980s' boom really got under way. Since 1989, therefore, both 011 trade and the current account, there has been a significant reduction in the external deficit. Yet it remains the case that, despite the length of the recession - non-oil GDP has fallen for six successive quarters - the current account is still in deficit. Moreover, despite there being no concrete data to point to the beginnings of recovery, the shortfall is widening. The low point was the second quarter of last year, with a rare current surplus recorded in June, since when the trade deficit has steadily widened again as the consequence primarily of a 5.5per cent increase in the volume of imports over the last 12 months. Why is it that, in contrast with the experience in the 1980-81 downturn, this recession has not produced a trade or even a current account surplus? Does this mean that the recovery, when it does come, will inevitably widen the deficit with the possible consequence that ‘balance of payments problems’ will undermine the pound inside the ERM? We conclude that, while it is disappointing that UK producers have not managed to claw back more of the domestic market - in contrast with the experience of exporters in world markets - our forecast of a current account deficit of 0–2 per cent of GDP should be relatively easily financed and will riot therefore cause serious problem for economic policy. This conclusion would riot necessarily hold if the recovery occurs more rapidly than we expect arid sucks in a greater volume of imports. It may be the case that the UK will continue to run a current deficit with Japan in particular as the counterpart to ongoing Japanese direct investment in this country.