The Balance of Payments

The UK deficit in goods reached a record last year at £125bn. Therefore, despite a services surplus of £90bn, the overall trade deficit was £35bn. This has been partly explained by the slow-down in China, since they are now buying fewer of our exports but more significantly, these record deficit figures reflect the competitiveness of the UK economy. Possibly, if one feels optimistic, one could argue that the recent fall in the value of sterling will make us more competitive and our exports will increase. However evidence about the price elasticity of demand for exports is not promising. Our invisible surplus has declined in recent years, largely because of the falling contribution from net overseas income (interest, profit and dividends which have fallen as interest rates have dropped and  earnings from dividends and profits have been hit by the recession).

We have had a current account deficit for over thirty years so does it matter? If a country has a deficit, it must either  use its reserves, sell assets or borrow  to pay for the deficit. Fortunately foreign banks and individuals are happy to purchase UK assets, buying shares and government securities, and investing directly in the UK. However what might happen if the UK economic position deteriorates, the currency weakens (possibly because of fears of a possible exit from the EU) and banks start to sell sterling?

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One thought on “The Balance of Payments

  1. Nick Johnson says:

    Thanks for this post. I agree that sluggish growth in foreign demand relative to the UK’s growth in domestic demand is partly to blame for the large current account deficit. The strength of sterling also does not help. Some economists have argued that a large devaluation, if sustained over a number of years, would help a great deal. I would also argue that the deficit will, sooner or later, need to be reversed, or at least move towards balance, as this is the only way that growth can be maintained while the UK’s private and public debt are reduced as a proportion of GDP. Just because we have managed a trade deficit for more than thirty years does not mean that it can be sustained for ever.

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