The UK finds itself in a very uncomfortable position at the moment. Although most of the scary headlines recently have surrounded the question of whether we vote to leave the EU or not, we see the news this week that the UK’s current account deficit has hit a record high as much more disturbing in the longer term. At some point, the deficit will have to be reduced, and unless the World economy is about to enjoy a massive growth spurt, the process will require some tough decisions.
The further we delved into the problems facing the UK, and how the twin deficits (current account and budget) could be rebalanced, the more disturbed we became. This is a far larger subject than can be covered by a short weekend research piece, and so we will publish a more in depth piece next week (please reply to this email if you wish to see this note). So let’s crack on with the shortened version.
Although the UK has been running a persistent current account deficit for a number of years now, the sheer size of the deficit was a shock. In the fourth quarter, the UK’s current account deficit amounted to 7% of GDP, the highest peacetime level since records began 244 years ago. This is a vivid sign that the UK is living well beyond its means as seen in chart 1 below.
