238 views

The UK's mammoth current account deficit hasn't disappeared

Jake Cordell
Follow Jake
Cargo ship
Sterling's depreciation could held soften the trade deficit, but not yet (Source: Getty)

Fears over the UK's massive current account deficit have resurfaced today as the extent of the UK's most recent balance of payments shortfall has been revealed.

The Office for National Statistics (ONS) said the current account deficit, which measures the difference between the amount of money coming in and going out of the country, was £28.7bn in the second quarter of the year. This was equivalent to 5.9 per cent of the GDP, and up from a revised 5.7 per cent in the first three months of 2016.

Economists have been worried about the size of the deficit in the context of the EU referendum putting pressure on the willingness of overseas investors to pump money into the UK in the form of loans. Mark Carney, governor of the Bank of England, famously warned about Britain's reliance on the "kindness of strangers", hinting this could be tested if the UK decided to leave the EU and sparked the economic turmoil which many believed that would entail.

Despite the fact the UK economy has performed better than most expected since 23 June, the multi-billion pound current account, which has hit record high levels in recent years, has still raised fresh worries.

"The widening in the UK’s current account deficit is a concern, and taken together with the growing trade deficit provides further evidence of the persistent weakness in the UK’s external position," said Suren Thiru, head of economics at the British Chambers of Commerce (BCC).

Read more: Should the UK worry about its current account deficit

Nevertheless, the depreciation of sterling should provide something of a cushion to the ballooning deficit as investing in the UK or buying British goods and services becomes a little cheaper for foreigners, while money brought back into the country in the shape of returns on investments such as dividends, are worth more in sterling.

Ratings agency Fitch also recently said it believes "concerns about foreign investors’ willingness to fund the UK’s current account deficit after Brexit are premature and may prove misplaced".

Explained: The current account

The current account is made up of three different components - trade, primary income and secondary income - and the UK is running a deficit in every single one of them.

  • The trade balance is the difference between exports and imports
  • The primary income account measures the difference between how much UK residents earn on foreign assets and how much foreign residents earn on UK assets
  • The secondary balance includes more unconditional or one-way transactions such as remittances and other payments coming into and out of the UK such as foreign aid

Related articles