Trade Adjustment

How long will it be before the UK once again runs a current account surplus?

To even pose the question might appear a flight of fancy, after all we have become accustomed to reading that our trade deficit in goods continues to claim new records - in 2008 the gap between exports and imports was £93 billion. It is more than ten years since the current account was last ‘in the black’ and as a trading nation surely the UK is badly placed to weather the darkening storms of a severe contraction in global trade and investment - de-globalisation?

In fact in 2008 our current account deficit came in at just £24 billion - equivalent to just 1.7 per cent of UK national income.

Yes the trade deficit in goods nearly two billion pounds a week but keep in mind that the current account is the sum of four separate balances - here are the figures for last year:

1. Net Trade in Goods (-£93bn)
2. Net Trade in Services (+£48bn)
3. Net Income from overseas assets (+£33bn)
4. Net Transfers (-£-14bn)

Our combined surplus in trade in services and the net income from external assets climbed over £81bn last year - another record, but one that didn’t make the headlines.

And there are solid grounds for believing that the UK balance of payments on current account will continue to improve during 2009.

(a) Lower sterling - sterling has depreciated by more than 25% on a trade-weighted basis and, despite the weakness of the world economy, this provides a sizeable competitive boost to our export industries. It also increases the sterling value of profits made from overseas investments and it increases for example the sterling value of CAP farm payments made to UK farmers.

(b) Consumer spending in Britain is set to fall by perhaps 3% this year due to rising unemployment, falling house prices, a collapse in consumer confidence and the prospect of wage freezes or pay cuts. UK consumers have a high income elasticity of demand for foreign produced goods and services so in a recession, demand for imports will contract - the incentive to spend less is reinforced by the higher price of imported products because of a lower value for sterling.

A much cheaper currency and a severe domestic recession - two powerful forces causing a re-adjustment in our balance of payments accounts during 2009.