U.K. Current-Account Deficit Widens; GDP Growth Revised Up

Updated on
  • Current-account gap climbs to 5.9% of GDP from 5.7% in 1Q
  • GDP growth revised to 0.7% on the back of services, investment

The U.K. current-account deficit widened in the second quarter as the trade gap hit a 2 1/2-year high and Britain continued to record heavy outflows of investment income.

The difference between money coming into the U.K. and money sent out was 28.7 billion pounds ($37 billion), the Office for National Statistics said on Friday. That equates to 5.9 percent of gross domestic product, up from 5.7 percent in the first quarter. The shortfall hit a record 7 percent at the end of last year.

Brexit has thrown the current-account gap into the spotlight, with some analysts warning that foreign investors may be less willing to finance the deficit by buying U.K. assets. Mounting concern has contributed to the sharp fall in sterling since the June 23 decision to leave the European Union.

Separately, the ONS said the economy grew 0.7 percent in the second quarter, slightly more than the 0.6 percent previously estimated. Consumers stepped up their spending and business investment increased, offsetting the biggest drag from net trade since 2013.

At 5.4 percent of GDP last year, the current-account deficit was double that of the U.S. Bank of England Governor Mark Carney has warned of a reliance on “the kindness of strangers” and credit-rating companies highlighted the gap as a key weakness when they downgraded the U.K. in the wake of the Brexit vote. Trade Secretary Liam Fox added his voice on Thursday as he chided British companies for exporting too little.

Growing Concern

“The widening in the current-account deficit is a concern,” said Suren Thiru, head of economics at the British Chambers of Commerce business lobby. “While the post-referendum slide in sterling should help to improve the U.K.’s external position in the coming months, the size of the deficit means that the country will remain vulnerable to external shocks and changing market sentiment, and risks a further downgrade to our credit rating.”

The total trade deficit widened to 12.7 billion pounds in the second quarter, or 2.6 percent of GDP. The deficit on secondary income, which covers remittances and government transfers, also grew. The gap between what British investors earn on their foreign investments and what foreigners earn on their investments in Britain narrowed but still totaled almost 10 billion pounds.

There are hopes that a more competitive pound will help boost demand for exports and reduce spending on imports. Economists surveyed by Bloomberg see the current-account deficit narrowing to 4 percent of GDP in 2017 from a record 5.5 percent this year.

No Alarm

Citigroup Inc. Chief Economist Willem Buiter, a former Bank of England policy maker, said there is no reason for alarm over the current account. “It is simply a reflection of the fact that investment is weak, capex, saving is even weaker,” he said in a Bloomberg Television interview with Tom Keene and Francine Lacqua. “Britain needs to both save more and invest more, but it’s not a banana republic.”’

The GDP figures paint a picture of an economy that held its own prior to the Brexit vote and there are signs of continuing resilience.

In July, services, the largest part of the economy, rose by healthy 0.4 percent, boosted by retail sales, the film industry and computer programming. Industrial production rose 0.1 percent in the same month and construction stagnated. Together with business surveys for August, it suggests Britain is on course to avoid contraction in the third quarter. Investors put the probability of the BOE cutting interest rates again by year-end at less than 24 percent.

Weathering Brexit

“This fresh data tends to support the view that there has been no sign of an immediate shock to the economy, although the full picture will continue to emerge,” said ONS statistician Darren Morgan.

The revision to the second quarter was due to services and investment being higher than previously estimated. Business investment rose 1 percent instead of 0.5 percent and services grew 0.6 percent, up from 0.5 percent. Net trade knocked 0.8 percentage points off growth as exports fell 1 percent and imports gained 1.3 percent.

GDP grew 2.1 percent in the second quarter from a year earlier. On an annualized basis, it expanded 2.7 percent, compared with 1.4 percent in the U.S.

Economists expect a sharp slowdown next year as Brexit hits hiring and investment and accelerating inflation saps consumer spending, the engine of growth in recent years. Real disposable income grew 0.6 percent in the second quarter while the saving ratio fell to 5.1 percent from 5.6 percent.

(Updates with comment from Citigroup chief economist.)
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