U.K. Current Account Deficit Widens; Business Investment Falls

(Bloomberg) -- The U.K. current-account deficit stood at its highest in two years in the third quarter, raising fresh questions about its sustainability as Britain faces the prospect of a chaotic exit from the European Union in less than 100 days.

The gap grew for a third straight quarter to 26.5 billion pounds ($33.6 billion), the equivalent of 4.9 percent of gross domestic product. The Office for National Statistics left its estimate of GDP growth at 0.6 percent as consumers made up for another fall in business investment and a negligible contribution from trade.

Key Insights

• Brexit has put the current account back in the spotlight, with economists questioning the willingness of foreign investors to keep financing the deficit by buying British assets after Britain leaves the EU.
• The gap widened from 20 billion pounds in the second quarter as the trade deficit hit a two-year high and the shortfall in investment income reached the highest since the second quarter of 2016.
• Sharp negative revision to trade deficit means net trade contributed just 0.1 percentage point to economic growth in the third quarter, rather than 0.8. The economy grew 1.5 percent from a year earlier.
• But signs are pointing to a significant economic slowdown, with the Bank of England predicting growth of around 0.2 percent this quarter. Firms cut investment by 1.1 percent (revised from 1.2 percent) between July and September amid mounting Brexit fears. Investment has fallen for three quarters in a row, the longest period since the financial crisis.
• The budget deficit narrowed to 7.2 billion pounds in November, below forecasts and the lowest for the month since 2004, with revenue and spending including investment both growing just under 4 percent on the year. The shortfall in the first eight months of the fiscal year was down over 29 percent versus the same period in 2017.

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• Britons splurged during the summer heatwave -- consumer spending rose 0.5 percent on the quarter -- but pressures remain. Households were net borrowers for an eighth straight quarter, the longest stretch since the 1980s, as they continued to spend and invest more than they received.
• Real disposable income was unchanged and the saving ratio remained at historically low levels, with households saving 3.8 percent of their income compared with 4.1 percent in the second quarter.
• Widening in deficit on income was driven by an increase in the profits generated by foreign investors on their direct investment in Britain. Imports of goods and services rose 2.2 percent in value terms, while exports climbed 1.2 percent.
• Simple extrapolation of fiscal data suggests deficit for 2018-19 as a whole will come in around 29 billion pounds, higher than the 25.5 billion pounds (1.2% of GDP) forecast by the Office for Budget Responsibility in October. The gap in the first eight months of the fiscal year was 32.8 billion pounds.
• Budget deficit in November was almost 1 billion pounds lower than a year earlier, with the improvement due entirely to local authorities. Central-government revenue was boosted by value-added tax and income tax, both growing over 6 percent on the year. Current spending rose just 1.5 percent but overall outlays were lifted by an increase in net investment.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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