UK Current Account Research Articles

Persistent current account imbalances: Are they good or bad for regional and global growth?

This paper examines the regional and global growth effects of current account imbalances in Japan, Germany, and the People’s Republic of China (PRC)—the three largest persistent surplus countries—and the United States and United Kingdom, the two largest persistent deficit countries. Controlling for a set of macroeconomic determinants, we use a structural vector autoregression (SVAR) framework to show that positive shocks to current account balances in the PRC, Germany, and Japan transmit positive regional and global growth effects, particularly in the case of spillovers to regional growth from Japan. As expected, the global growth response is lower in magnitude than the regional growth response. In addition, the extent of the effect is amplified by global value chains, pointing to the significant role played by trade in intermediate goods. For current account deficit countries, the magnitudes of the responses of growth to shocks are much lower on average than in the case of current account surplus countries. We find some marginal positive effects on regional and global growth emanating from a positive shock on the UK current account—i.e., a reduction in the deficit. For the US, a positive shock to its persistent current account deficit marginally drags on global growth, possibly reflecting declining import demand and wealth effects linked to the US dollar’s status as the global reserve currency. Our findings have important policy implications, particularly in light of discussions in recent years on whether current account surplus countries are hindering growth abroad.

Persistent Current Account Imbalances: Are they Good or Bad for Regional and Global Growth?

We examine the regional and global growth effects of current account imbalances in Japan, Germany, and the People’s Republic of China (PRC)—the three largest persistent surplus countries—and the United States and United Kingdom, the two largest persistent deficit countries. Controlling for a set of macroeconomic determinants, we use a structural vector autoregression framework to show that positive shocks to current account balances in the PRC, Germany, and Japan transmit positive regional and global growth effects, particularly in the case of spillovers to regional growth from Japan. As expected, the global growth response is lower in magnitude than the regional growth response. In addition, the extent of the effect is amplified by global value chains, pointing to the significant role played by trade in intermediate goods. For current account deficit countries, the magnitudes of the responses of growth to shocks are much lower on average than in the case of current account surplus countries. We find some marginal positive effects on regional and global growth emanating from a positive shock on the UK current account—i.e., a reduction in the deficit. For the US, a positive shock to its persistent current account deficit marginally drags on global growth, possibly reflecting declining import demand and wealth effects linked to the US dollar’s status as the global reserve currency. Our findings have important policy implications at the global level, particularly in light of the re-emergence of discussions on global imbalances in recent years.

Paying Our Way in the World? Visible and Invisible Dangers of Brexit

ABSTRACTThe UK economy has long been associated with a weak balance of payments, reflecting an underlying growth model reliant on private household consumption. A deficit in goods trade, chiefly with the EU, has been offset by surpluses in services trade and foreign investment earnings. The Single Market provided wider markets for the UK, but did not fundamentally alter Britain's structural weaknesses. The Brexit vote took place against the background of Britain running its largest peacetime current account deficit. Financing Britain's external position represents a key challenge post-Brexit. Post-Brexit models for Britain partially address this. Any emergent model will critically depend on the nature of the Brexit deal with the EU, not least in terms of the impact on financial services and on supply chains. This paper sets out the recent evolution of the UK's current account position, particularly in relation to the EU. It then highlights particular areas of potential disruption from Brexit and sketches out scenarios of possible evolution of the Britain's external position in response to this.

UK Current Account Sustainability in the Post-Brexit Era: Insights from an Intertemporal Current Account Framework

British voters decided in a June 2016 referendum that they wanted the UK to leave the European Union (EU). The Brexit referendum result represents a critical turning point for the UK and the EU alike, and the decision to exit the bloc is bound to have far-reaching consequences. UK’s persistent current account deficits and its outsized external assets and external liabilities reflect Britain’s deep economic and financial integration with the European Single Market System, and highlight London’s central role as Europe’s financial capital. Unraveling of the symbiotic relationship between the UK and the EU will profoundly impact Britain’s ability to entice foreign investors to fund its current account deficits. Using a rich intertemporal current account framework that incorporates valuation effects, this study examines the potential impact of Brexit on UK’s current account sustainability and on UK’s net foreign debt position. It argues that a “hard Brexit” outcome would imperil UK’s ability to sustain current account deficits. UK’s role as a gateway for non-EU states looking to invest inside EU, and the benefits enjoyed by UK-based financial institutions from the European “financial passport” system would both be endangered if UK is shutout of the European Single Market system. UK is bound to become far less attractive to foreign investors in such a scenario, and a rapid and painful current account deficit reduction is probable. On the other hand, the study shows that a “soft Brexit” outcome in conjunction with a sustained and orderly depreciation of the pound would actually improve UK’s current account balance and its net foreign debt position.

A Financial Perspective on the UK Current Account Deficit

A drop in net FDI investment income has been the primary factor in the recent deterioration in the measured UK current account balance, with the trade balance relatively stable. We argue that financial engineering (with little net impact on the underlying international investment position for the UK) may have contributed to the decline in net FDI investment income, such that the headline current account balance cannot be interpreted as a sufficient indicator of the state of the UK's external position. A more granular analysis of cross-border financial linkages than is possible with currently-published data would be required in order to provide a comprehensive assessment of external sustainability.

Economic Review

Gross Domestic Product expanded by 0.7 per cent in the third quarter of 2010. This was slower than in the previous quarter and reflected lower contributions to growth from household consumption, government consumption and net trade. On the other hand, changes to inventories and Gross Fixed Capital Formation made larger contributions to growth. The household saving ratio has fallen since the summer of 2009 as consumption recovers and growth in disposable income remains weak, although it edged upwards in 2010 Q3. The Private Non Financial Corporations sector remains a strong net lender to the rest of the economy, largely due to a strong fall in investment spending in the recession and a slow pick up during the recovery so far. Central government though is increasingly a net borrower due to sharply falling net taxes on income and wealth. The UK Current Account remains in deficit, but a growing deficit on the trade in goods and services balance has been largely offset by a rising surplus on the investment income balance.

Economic Review, January 2007

GDP continues to grow robustly in 2006 quarter three, driven by services and manufacturing output. On the demand side, business and government investment made a positive contribution to growth; however, consumer expenditure made a more modest contribution to growth. The labour market appeared weaker in quarter three but matters may be reversing in quarter four. The UK current account deficit widened in quarter three; and public net debt continued to rise. Public sector net debt continued to rise in 2006 quarter three. Consumer and producer price inflation rose in November 2006.

Sterling Implications of a US Current Account Reversal

This paper investigates the potential implications for sterling of the US current account returning to balance. The analysis is conducted using a three-country model comprising the United Kingdom, the United States and a block that is meant to represent the rest of the world. The main conclusion from our analysis is that the potential implications for sterling of a US current account reversal are highly uncertain - one can derive a wide range of estimates for the potential changes. Estimates of the sterling adjustments are smaller than the implied movements in the dollar and depend heavily on (a) the cause of the US current account adjustment; (b) the assumptions one makes about the associated adjustment of the UK current account deficit; and (c) assumptions about key model parameters.

Is the UK current account: moving into surplus?

James Nixon and Andrew Sentance argue that the recent improvement in the UK current account indicates a more favourable medium term balance of payments outlook. But despite stronger oil revenues and investment income, a surplus will not quite be achieved unless the world economy grows more strongly than our forecasts suggest.

THE UK'S PERSISTENT TRADE DEFICIT

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.

Is the UK Balance of Payments Sustainable?

The UK current account deficit John Muellbauer and Anthony Murphy The UK has a large and persistent current account deficit. Policy makers argue that the deficit is easily financed, temporary and therefore not a sign of structural weakness. We examine the conditions in which it is appropriate for a country to overspend its current income with the intention of repaying loans out of future income. These include: an increase in international capital mobility, larger net holdings of foreign assets, and expectations of faster productivity growth. All three apply to the UK, so official reasoning is, in part, correct. Even so, for several decades there has been a trend deterioration of UK trade performance, most markedly in manufacturing, and we detect no underlying improvement in the 1980s. We highlight structural deficiencies in both demand and supply. On the demand side, we show the importance of rising house prices and easier consumer credit in fuelling the consumer boom to an unwarranted extent. This we trace to unjustifiable subsidies to house ownership. On the supply side, we stress vastly inadequate investment in skill formation, education and physical capital. These structural deficiencies lead us to a less optimistic view than official policy. We draw the policy lessons for the UK and consider whether continental Europe will face similar problems as financial markets are liberalized.

Focus: Supply‐Side Improvements in UK Exporting of Manufactures

The present difficulties with the UK current account deficit have breathed new life into longstanding doubts in some quarters about the fundamental state of UK manufacturing, despite the supply side reforms of the last ten years and the large increases in labour productivity. The deterioration in trade in manufactured goods from a small surplus of £2bn in 1982 to a deficit of £21bn in 1988, is taken to be the most stark illustration of this deep structural malaise.

The UK Balance Sheet

With net overseas assets of well over $100bn the UK is now the world's second largest creditor nation after Japan. This has come about because the UK current account benefited from large‐scale oil revenues from 1980 onwards, which produced a series of current surpluses. Fortunately the funds were invested overseas at a time of significant recovery in world equity markets. As a result of the increase in its external assets, the UK now receives £5bn p.a. or more from interest, profit and dividend earnings on these assets ‐ a valuable cushion to the run‐down in oil revenues.