Bank of England governor Mark Carney said in January that the UK’s large current-account deficit left it relying on the “kindness of strangers” – a risky tactic as the country nears the referendum on European Union membership in June. Today’s current-account data show that reliance is even heavier than thought.
The country’s current-account deficit now stands at £32.7bn for the fourth quarter, the Office for National Statistics said, much higher than the (revised) £20.1bn seen in the previous quarter, and larger than the £21.2bn expected by economists in a Bloomberg poll, writes Katie Martin. That’s the biggest deficit as a share of GDP since records began in 1955, equating to some 7 per cent of GDP, up from 4.3 per cent in the third quarter.
Chancellor George Osborne said in a statement:
The UK is not immune to risks in the global economy as slowing global growth weighs on our outlook. Today’s figures expose the real danger of economic uncertainty and shows that now is precisely not the time to put our economic security at risk by leaving the EU.
Within the breakdown, the trade deficit widened to £12.2bn in the fourth quarter, from $8.9bn, driven by a drop in exports and a rise in imports. Lower returns to the UK from investments abroad led to a large increase to the primary deficit, which more than doubled to some £13.1bn (on which, some analysis from the ONS can be found here.)
Today, she notes:
This is essentially is an external imbalance that the country needs to either borrow or sell assets to fund. So far, international investors have proved happy to lend to the government, but economists have repeatedly flagged the risk that the upcoming Brexit vote could dampen sentiment.
The concern is that any loss of confidence in the UK’s economic outlook would lead investors to demand higher returns on money lent to the UK, driving a fall in the price of sterling and UK assets.
For the year as a whole the picture was also bleak, with the annual deficit rising to 5.3 per cent of GDP – again an unwelcome new record. The current account, or the country’s ability to pay its way in the world, is comprised of the trade balance, plus earnings from investments held overseas.
The latest decline was driven both by the country’s worsening trade position and by a further fall in receipts from investments abroad.
Economist Howard Archer at IHS described the data as “truly horrible”:
The sharp widening in the current account deficit in the fourth quarter of 2015 is a particularly uncomfortable development for the UK economy.
While the markets have so far taken a relatively relaxed view of the UK’s elevated current account deficits, it could become an increasing problem if the markets lose confidence in the UK economy for any reason – especially given the size of the fourth quarter 2015 shortfall. This would make it harder for the UK to attract the investment inflows that it needs to finance the current account deficit and could weigh heavily down on sterling.
An obvious potential trigger for the markets losing confidence in the UK economy could be a vote to leave the EU in the 23 June referendum.