There are growing concerns by economists over the UK’s current account deficit
The British economy has been relatively stable of late, in terms of growth and labour market performance, which are both signs of a strengthening economy. However, one economic indicator causing economists concern is the so-called ‘current account deficit’ – the size of the gap between the amount of goods, services and payments the UK sends to the rest of the world, and the amount coming in.
Mark Carney, the governor of the Bank of England, has said that the UK economy is “dependent on the kindness of strangers”, reflecting the current account deficit’s size. Expressed as a percentage of GDP, the deficit reached 5.1% of GDP in 2014. The International Monetary Fund flagged the indicator as an area of concern at the beginning of the year and in a separate speech delivered this week, Kristin Forbes, a Bank of England policymaker, noted that the level was the highest ever recorded by the nation’s statisticians.
Economists argue that as long as the current account deficit is being financed – foreign money is coming in and plugging the UK’s large hole – there is no reason for alarm.
However, a crisis of confidence could occur as a result of a “sudden stop” event and some claim the upcoming referendum on the UK’s membership of the EU may be the catalyst for such a crisis.
Duncan Montgomery, tax partner at UK200Group member firm Whittingham Riddell, said:
“The current account deficit on trading is of course a concern for economists and extrapolating the impact of a vote to leave the EU on the economy is simply not viable, as no other major nation has decided to depart an integrated political and trading block within memory. The risk of devaluation is clear and, while stable acquisition of UK assets and investment in UK financial instruments is holding it together at present, the risk does exist.
“SMEs do need to be forecasting now, what the impact of loss of exports and lack of access to European markets might mean for them, just in case. Future proofing today’s decisions for a possible rocky ride in the run up to and after a vote is important, particularly in sectors vulnerable to shifts in economic output, like construction. Cash flow immediately after a vote and at the next VAT quarter end – the normal pinch point for many – is something that needs examination and a proper forecast around, to minimise risk.”