Current account deficit rains on George Osborne’s parade

The chancellor made the most of yesterday’s news that GDP growth for the last quarter of 2015 was slightly higher than expected and the UK’s post-recession growth has now overtaken the average for the G7. He said:

Today’s figures confirm that Britain remains one of the fastest growing major advanced economies, finishing the year with stronger economic growth as annual business investment and living standards strengthen further.

Well the first bit is true:

Chart from ONS Quarterly National Accounts, 31 March 2016

Not sure about that last bit though. Household income might be higher than it was a year ago but it fell slightly during the last quarter of last year.

Chart from ONS Economic Well-being, 31 March 2016

So did some other things. GDP and GDP per head might still be rising but Net National Disposable Income (NNDI) fell again in the last quarter. NNDI is the income payable to UK residents. This is effectively GDP minus income owed to foreign residents plus income from abroad owed to UK residents. (See previous post.) Once foreign investors had taken their cut, the amount of GDP payable to people in the UK fell during the last quarter.

Source: ONS Economic Well-being, 31 March 2016

The gap between what foreign investors take from the UK and what UK investors take from abroad is part of yesterday’s other big story, this country’s current account deficit with the rest of the world. The shortfall between money coming into the UK and money going out is now at its highest since the ONS started counting in 1948.

The RBS Economics team published a presentation yesterday putting all this into context. The balance of the income from Britain’s investments has been negative for most of the last 40 years but got quite a lot worse during the last few.

Chart from RBS Economics, 31 March 2016

How much of a problem is this? The RBS economists warn against crying wolf, arguing that the current account has been bumping along like this for years.

Chart from RBS Economics, 31 March 2016

Duncan Weldon doesn’t agree:

The economics team at RBS are far less concerned than me. And whilst they are completely correct that the current account has historically been a poor indicator of recessions or steep currency falls, I’m not sure that means policymakers can ignore it. It’s at least a potential vulnerability — and I’d rank it along side productivity growth & median wages as one of the UK’s three key short to medium term challenges.

To me it’s a warning light and one that is now flashing. That doesn’t mean we face an imminent crisis (although it does mean any Brexit vote could trigger a reappraisal of UK risk appetite and get a far bigger reaction than if the current account deficit was smaller) but it does perhaps tell us that something else has gone amiss in the economy.

And, outside the two major wars, this is the worst it has ever been:

At 7% of GDP, Britain’s current account deficit is the biggest peacetime shortfall since 1772 pic.twitter.com/oI5uuuABqn

— Ed Conway (@EdConwaySky) March 31, 2016

GDP growth is all very well but if a lot of it leaves the country then most people won’t be any better off. Eventually, if there is more money going out of the country than coming in, it will affect living standards. Someone, be it government, companies or households, will end up borrowing more.

Of course, this could all be a blip. It may be that the last few months of last year, with its rising current account deficit, drop in productivity and falling wage growth, will turn out to be an anomaly in an otherwise healthy recovery. Perhaps the OBR was a bit premature when it called time on the recovery.

But, as Duncan says, there is a sense that something has gone amiss. This has been a hideously slow recovery. As the blue line on the second graph shows, it’s only in the past year or so that people began to feel they had recovered from the recession. There are signs that a mediocre recovery might already be running out of steam. It feels like a party that never really got going.

Update:

Ambrose Evans-Pritchard thinks we should be very worried:

In a sense, Britain is like a giant hedge fund. Its financial players borrow short and lend long on a huge scale across the world, earning a fat spread in good times. This income stream has shriveled up in our new era of secular stagnation, negative rates, and a global savings glut.

Yields have fallen to historic lows. The Government is betting that the current account deficit will fall again automatically as the world economy returns to normal and yields rise again, and therefore that Britain will be let off the hook. This may be wishful thinking. Low returns may now be a permanent way of life.

So the income from abroad that used to get us off the hook on the trade deficit might have dried up for good. This couldn’t have come at a worse time:

The moral of the story is that if you want to call to a referendum on such a neuralgic issue as EU membership, don’t do it when you are running the worst current account deficit in 244 years of recorded history.

No doubt we will hear more about this in the next few weeks.