UK Balance of Payments 2013 - Current Account Deficit could be a real threat to recovery. Download the full report.
In 2013, overseas investment earnings collapsed and the trade deficit persisted. The UK current account deficit was over 4% of GDP. This has happened in only two years since the 1950s. The first time was in 1974 and the second time was in 1989.
In each of the two years, UK base rates were hiked to 12% and 14% respectively. In 1976 the IMF paid a visit to assist with funding.
We do not know as yet if the fall in investment returns last year was a blip or a statistical error which may be reversed in due course.
We do know that if the trends in investment income continue, the UK will face a balance of payments problem of Tsunami proportions. Capital outflows would become difficult to finance - international investors already own 30% of the gilt market and over 50% of quoted stocks. Forward guidance would be of little value in the enforced knee jerk reaction required. International - not domestic developments would force base rates higher. The Bank of England would have to act to prop up sterling.
“A new generation of economists will have to come to grips with the terminology of a balance of payments crisis, a run on sterling and the concept of the balance of payments as a constraint to growth.”
In this short report, we analyse the UK balance of payments from 1955 to the current day. Developments in the current account, particularly in investment income, if continued, will present a real challenge to recovery and growth in the UK.
Download a copy of the report here. Download a copy of the Keynote Files Here.
The Saturday Economist
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