Ignore the hyperbolic headlines and misuse of statistics – the UK did not ‘lose’ £500bn overnight

 
Jonathan Athow
TOPSHOT-BRITAIN-CHURCHILL-BANKNOTES-HISTORY
No money had in any way gone missing (Source: Getty)

In recent weeks, several articles have suggested that £500bn of the UK’s money has somehow “gone missing”.

But what was it all about, has any money actually disappeared, and how worried should we be about it?

The articles all related to the UK’s net International Investment Position (IIP) with the rest of the world. That is, the difference between all the foreign investments held by UK resident businesses and individuals on the one hand, and all the investments held in the UK by the rest of the world on the other.

Read more: The UK's current account deficit was even bigger than we thought

Put simply do UK residents own more abroad than the rest of the world owns in the UK?

The values are vast, with over five times UK GDP held in both directions. However, if you look back over the last 20 years, in most periods, the rest of the world held slightly more assets in the UK than vice-versa. For example, in 2015 the UK held £9.6 trillion abroad, while the rest of the world held £9.9 trillion here.

The pound’s depreciation following the EU referendum boosted the value of assets held in foreign currencies when converted back to sterling.

The initial estimate from the Office for National Statistics (ONS) for 2016 therefore showed a larger than usual positive figure for net IIP, though the UK still only held 4.2 per cent more assets overseas than the rest of the world held here.

Since the initial estimate, the ONS has updated its figures as part of its annual Blue Book and Pink Book publications, which include detailed up-to-date information about the UK economy and its relationships with the rest of the world.

Mainly due to new data and sources for measuring bond and share holdings, as well as incorporating large foreign takeovers of UK businesses, our new improved estimate showed a revised net IIP of minus £20bn. This is much closer to the net position seen in previous years.

This did not of course mean that any money had in any way gone missing, as the UK is still estimated to have £10.94 trillion of assets held in other countries. It simply means the rest of the world is estimated to have slightly more invested here.

Our new improved figures also include better estimates of the interest paid on UK corporate bonds.

As many of these bonds are held overseas, the new figures show the UK’s current account balance – its total balance of payments with the rest of the world – was more negative than previously estimated over a number of years.

The UK has had a large and quite persistent current account deficit with the rest of the world for a number of years. The big question is does this really matter?

Rather irritatingly, economists would say it all depends. Some countries have managed to run persistent deficits without problem, but others have found the current account deficit to be a source of instability.

The answer probably comes from understanding why the deficit arose. For example, if the deficit reflects large inward flows of investment, this might be the sign of a healthy economy, while if the cause is low levels of savings, this might be a cause for concern.

The current account and IIP, together with other economic data, help us to understand what is going on in the economy, but interpreting those statistics is not always straightforward. In short, the UK has not “lost” £500bn.

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