News Analysis: British economy performing well, but fears over sustainability of current account deficit persist

Britain's economy has grown strongly over the past three years, and is forecast to continue growing, but concerns remain over the current account deficit.

The UK's current account balance - the difference between money coming in and money going out of the country in payments, goods and services - reached minus 26.5 billion pounds (41.4 billion US dollars) in the first quarter of this year, itself a reduction from a peak of 31.8 billion pounds in the third quarter of 2014. As an annual figure, it was 5.5 percent of UK GDP in 2014.

The Q3 2014 figure was a record, and in the spring the central bank the Bank of England (BOE) said it would now closely monitor this figure, because the high deficit might cause investors to lose faith in the British recovery, which could ignite a crisis as they either stop investing or charge more to do so.

The National Institution of Economic and Social Research (NIESR) forecast on Wednesday that the current account deficit would "shrink gradually" but the UK would still remain a net borrower from the rest of the world, noting "by 2020 we expect the UK to require external financing of around 3.5 percent of GDP".

Simon Kirby, principal research fellow at NIESR, told Xinhua that the sharp deterioration in the current account balance from 2013 onwards had been caused by the balance with the EU area, and the main driver of this was a widening of the deficit on the primary income account as a result of a sharp fall in credits.

Kirby said that he expected this fall to be transitory and part of a cycle.

But he was puzzled that as credits from the euro area had declined, there should also have been a matching decline in the rate of return. But that had not materialized.

He said: "We should also have seen a collapse in the rate of return, but the rate of return has held up. So, have assets been marked down somehow? It is very difficult to determine what is going on. Maybe those asset write-downs on balance sheets will be reversed, and rates of return will remain consistent with that because the income flow starts to come."

But if the collapse in credits was permanent then the overall aggregate income surpluses which the UK relied upon pre-crisis would no longer be there.

"That has implications for the overall income flows for the UK. Our income growth will be less than it was pre-crisis because we are not generating the return we used to enjoy on those foreign assets, in particular European assets," said Kirby.

He added: "If that is reversed that will be added on top of the fact that the UK does run a permanent trade deficit we will be more reliant on foreign financing.. and if that is to change it has some fundamental implications for our ability to consume."

If Kirby's forecast that it was a transitory collapse in credits was wrong, then the UK would need about 6 percent of GDP per year in foreign investment.

He said: "Foreigners might begin to be concerned about the economy generally... and demand a higher rate of return. At that point in time do we fund more investment domestically or do we pay more to those investors and run down our asset stock potentially more quickly by selling it abroad?

"If we are to pay for more domestically the mechanics of that means we need to be saving more, which means less consumption now." (One pound = 1.56 US dollars) Endit