The last quarters of 2013 saw the largest current account deficit on record as shown in the chart below from the ONS’s latest economic review.
The UK’s current account measures the net flow of income from abroad: from trade, investments and other transfers. Running a growing current account deficit means we receive less income from abroad than we pay out, leaving us increasingly reliant on borrowing from overseas to fund the gap.
That the value of our imports outweighs our exports is old news: the last time the reverse was true was 1997. Throughout the 2000s, we were consuming more from abroad than we could sell. The one saving grace was net income on our investments in overseas assets – such as dividends, profits and interest payments- which stopped the current account going too far into the red. The current Government came into power promising a much needed rebalancing towards more exports: needed, because it looked increasingly unlikely that domestic spending alone could power the economy.
Now, the position is somewhat reversed. Whilst imports outweigh exports, the gap is smaller than it used to be, driven by higher goods and services exports and lower imports. What has really changed is net income: the positive flow has turned into a negative one. The past few years have seen a substantial decline in returns on our direct investment in other countries. This is perhaps unsurprising: the top destinations for UK overseas investments are countries in the developed world hit hard by the economic downturn: the United States, Netherlands, Luxembourg, France and Ireland. And the presence of the Netherlands and Luxembourg is more to do with their use as a base for companies to benefit from lower taxes rather than investment that genuinely adds value. Would we be doing better if more of our investments were in the high growth emerging markets?
We have worried a lot about expanding our exports. And we have worried a lot about promoting the UK as a place for foreign investors to put their money in. But we have worried much less about the role of investment overseas in boosting our national prosperity. Evidence shows that such investment has positive economic benefits – and not only for those who already have wealth enough to invest.
Investing is a way for UK firms to better access customers overseas, and can complement exports. In some services sectors, setting up a branch overseas is the only way of serving overseas customers. By lowering costs, it can increase productivity and increase economic growth. And there is little evidence to suggest that it damages overall employment levels in the UK: instead, many studies show a positive effect. But the places we currently have investments in – whilst easier to access – do not look like the best prospects for growth in the future. Compared to all the work done on removing barriers to trade in goods and services across countries and helping firms to export more, we have done comparatively little to removing barriers to overseas investments. Given our increasing reliance on other countries to fund our income gap, perhaps it’s time we did.