That massive UK current account? Don’t worry about it, yet
The UK has been told its record-high current account deficit may not be cause for concern, despite the result of the EU referendum raising fears over a potential balance of payments crisis.
Ratings agency Fitch has said it is too early to begin fretting about whether the UK economy will come under pressure from a mass exodus of funds, as some had warned would happen if the UK voted to leave the EU.
The UK’s current account deficit is currently running at 6.9 per cent of GDP – just shy of its largest shortfall in more than half a century which was reached at the end of 2015.
The deficit, which tallies up the difference between money coming in and leaving the country in the shape of exports, imports, and overseas earnings, needs to be matched by incoming sources of funds, such as loans and investments to avoid a funding crisis.
The governor of the Bank of England Mark Carney was one of those who sounded alarm bells over the size of the hole, criticising the UK’s reliance on the “kindness of strangers”.
However, Fitch’s managing director James McCormack said today: “Concerns about foreign investors’ willingness to fund the UK’s current account deficit after Brexit are premature and may prove misplaced.”
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; primary income measures the difference between how much UK residents earn on foreign assets and how much foreign residents earn on UK assets; while the secondary balance includes remittances and other payments such as foreign aid.
Fitch said because the UK’s deficit is “funded largely by non-debt flows”, the prospects for a rapid withdrawal and drying-up of cash were limited – at the moment. Looking to the longer-term prospects, McCormack said all would depend on how the UK’s mighty financial services fare after formally leaving the EU.
“It is possible that, with the right deals negotiated, the UK retains its access to EU markets and, by extension its status as a global financial centre,” Fitch said. Nevertheless it also noted: “The Brexit referendum results casts uncertainty over the economic outlook, undermining the UK’s attractiveness as an investment destination.”
In a “less favourable scenario”, McCormack said “direct investment could stop or reverse, and the current account deficit would be funded largely by external borrowing. Rising external debt would not be a positive development.”