UK Current Account Deficit Widens Again as Addiction to Imports Persists

When it comes to the Pound - keep the current account in mind - it is arguably the single most important economic concept when it comes to determining currency value.

This is the country’s bank balance with the rest of the world and the currency’s fundamental long-term valuation depends on a combination of how much we import, export and how much foreign capital the country attracts.

Unfortunately for Sterling, the current account has been in deficit for many years now as the UK imports more than it exports, leaving it reliant on foreign investment inflows to keep the Pound propped up.

The reason the Pound is so vulnerable to Brexit is because a bad outcome could hit our exports or stop foreign investor inflows from shoring up the account.

There had been some improvement in the current account towards the end of 2016; however latest data from the ONS has confirmed the improvement has stalled.

While the UK is an exporter of services the country remains hampered by an inability to export goods, particularly to Europe.

“The total trade deficit widened to £8.8 billion in Quarter 1 2017 following a sharp narrowing of the deficit in Quarter 4 2016 (£4.8 billion); this was due to a widening in the deficit on trade in goods and a narrowing in the surplus on trade in services,” report the ONS.

A current account deficit of £22.2 billion was recorded with the EU in Quarter 1 2017 whilst a surplus of £5.3 billion was recorded with non-EU countries.

In terms of the Brexit debate this point is irrefutable - the European Union gains a great deal more value from the UK than does the UK benefit from the EU.

Looking ahead, there are however signs that the UK’s trading position might improve.

“The latest monthly trade data and surveys of export orders suggest that net trade will start contributing positively to GDP growth in the coming quarters,” says Scott Bowman, UK Economist at Capital Economics.

As can be seen, the UK’s reliance on foreign goods is as sizeable as ever.  

There were hopes that the fall in value of Pound Sterling would go some way in boosting exports and reducing imports.

Analysts at Goldman Sachs believe the size of the fall in Sterling must be far greater than that already experienced for this to come about.

Goldman Sachs research shows a decline in Sterling of between 20% and 40% from pre-Brexit levels was needed to bring the current account deficit back to sustainable levels.

This is a huge adjustment that would surely push inflation to levels that would shatter economic growth.

“At the end of Q4, balance of payments data showed a sizeable improvement in the UK current account which would imply that the correction towards a sustainable current account has already happened, but we highlighted that it is still too soon to assume this improvement will prove persistent,” says Silvia Ardagna at Goldman Sachs.

It looks as though the current account deficit is going to a millstone around Sterling’s neck for a while longer.