A second deficit could hit chancellor George Osborne and the UK hard

 
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Cameron And Osborne Visit Arriva Traincare In Crewe
Osborne is likely to need his hard hat again when the latest balance of payments figures are published (Source: Getty)

The Budget generated a hefty amount of political shrapnel for chancellor George Osborne, forcing him to eat humble pie in parliament and raising questions over his ability to balance the country’s books.

This week, Osborne is likely to need his hard hat again when the latest balance of payments figures are published. The size of this gap between the amount of goods, services and payments the UK sends to the rest of the world and the amount coming in, has begun to raise eyebrows.

The trade gap, which is set to show a slowdown in exports, has been called the UK’s “second deficit”. This week’s data is expected to reveal that the gap widened to £23bn in the fourth quarter of 2015, up from £17.5bn in the third quarter. As long as the current account deficit is being financed – foreign money is coming in and plugging the UK’s large hole – there’s no real cause for concern.

However, some economists believe the UK is at risk of the kind of shock or “sudden stop” that may precipitate a current account crisis. Under this scenario, sterling could experience a fire sale. A currency readjustment like this can have a severe impact on the real economy: falling currencies make imports more expensive, and so in turn cause inflation to rise. Often such economic shocks will also hit growth.

What could be the trigger for such a drastic loss of confidence in the UK economy? For some, the answer is the upcoming Brexit referendum. In a recent Bloomberg survey of currency analysts, 29 out of 34 said that they believed the UK currency would slip to $1.35 or below if the UK votes to leave the EU.

Earlier this month, Kristin Forbes, a Bank of England policymaker, compared the funding gap with the economy’s position during the Suez crisis of 1956, when the threat of investors pulling back from the UK was enough to make the government turn back from a military campaign in Egypt.

That might all sound rather extreme, and of course it may not come to pass, but as things stand the trade gap could start giving Osborne sleepless nights and this week’s figures could well hand his many detractors another grenade to throw at his stewardship of the economy.

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