One of the best ways of hiding something can be to put it in plain sight. There is a natural human tendency to, in some way, switch off the obvious, particularly if it becomes part of what is considered to be the normal landscape. Should this happen in the economic and financial world something worse then happens as it tends to invade our subconscious and we start first subliminally and then more overtly to think and believe that it does not matter. This was a lesson I learnt from my time analysing and trading options which is that human beings are poor at measuring changes in probability and if something does not happen for a time we increasingly believe that it cannot happen. Whereas of course some events are more likely because that have not happened.
I intend to apply such logic today to the UK balance of payments which is an issue that is an example of something being hidden in plain sight. On Tuesday I quoted from the latest copy of the UK’s Pink Book from the Office for National Statistics.
The United Kingdom’s (UK) current account deficit was £59.2 billion in 2012, up from a deficit of £22.5 billion in 2011. The deficit in 2012 equated to 3.8% of GDP at current market prices, the highest since 1989 (4.6%)
If we look at this there are a myriad of issues. Firstly there is the increase in the size of the UK current account deficit which more than doubled. This happened without the UK economy growing much at all which is troubling as usually we at least manage some decent economic growth before we let our current account deficit rip! Secondly this is part of a long series of current account deficits for the UK. This has occurred in spite of the fact that for quite a long period we had considerable assistance from nature.
Exports of oil consistently exceeded imports of oil in each year between 1980 and 2004.
There is still some assistance from that source but at a declining level and in 2012 we imported some £15.4 billion more than we exported. However if we look at the pattern for the UK we find something that is troubling on two counts. The first is based on the song by Ace “How long has this been going on” and the second is the way that perhaps in a version of the Dutch Disease the exploitation of North Sea Oil contributed to our problems more than it helped them. The UK headed into current account deficit territory in the late 1980s and whilst correlation does not prove causation it does make you wonder.
How is the problem broken down?
Those of a nervous disposition might like to look away now as I illustrate the UK balance of trade position.
In 2012, the deficit on trade in goods increased by £7.8 billion to £107.9 billion
So the UK is a “good” world citizen as we do our best to help the economy in the rest of the world! I find this a counterpoint to the debate over overseas aid, but of course it is relevant and so rarely gets aired. Also we are strong exporters (£229.5 billion in 2012) but we have an apparent lust for imports of goods which way exceeds it (£407.4 billion). This situation has in fact coincided with our imperial decline.
Historically, the balance on trade in goods has shown a deficit in all but six years since 1900. The last surplus on trade in goods was recorded for 1982.
For younger readers the UK was in a recession in 1982 which presumably explains what took place then. Indeed in another contrast with today the official UK base rate started the year at just over 14% compared to the present 0.5%. There was also a considerable amount of volatility in that year as opposed to the stability promise of Mark Carney on Wednesday.
Here comes the cavalry
If that was the only influence then the UK economy, the value of the pound would have completely collapsed long ago and the cavalry attempting to ride to the rescue is the UK services sector.
In 2012 there was a surplus of £74.0 billion, a decrease of £2.8 billion (3.7%) from £76.8 billion in 2011.
The services sector must often feel like General Custer at Little Big Horn as it struggles to offset our trade deficit. The decrease in its surplus was mostly driven by a decline in the financial services category which is hardly a surprise.
This category comprises the following
Credits are the earnings of UK residents from their investments abroad and other foreign assets. Debits are the earnings of foreign residents from their investments in the UK and other UK liabilities
This is a traditional area of strength.
The balance on income had been in surplus for all years since 2000. The income surplus peaked with a record £32.5 billion in 2008.
But from the use of the past tense in the above sentence you might already be expecting this next bit.
In 2012, the balance on income switched to a deficit of £2.3 billion, compared with a surplus of £22.5 billion in 2011.
No not Gareth Bale (he would be in another category anyway..), and this looks an arcane category as Mark Knopfler of Dire Straits would have categorised it as “Money for Nothing”. Let me help out by itemising its major component.
The deficit on general government transfers is £16.4 billion in 2012
This comprises our net contribution to the European Union and our overseas aid budget amongst other things.
This reminds me again that the UK is a really good member of the European Union as it imports around £30 billion a year more from it than it exports and it is also a net contributor to it. Somewhere we have made a bad policy mistake ending up in us being regarded as “bad boys(girls)” when in fact we pour money and funds into the project.
But returning to the current account this source gives us another substantial deficit and also a clear trend.
For 2012 there is a deficit for current transfers of £23.1 billion, the highest on record. The deficit has increased each year since 2001.
Monthly trade figures are very unreliable so let us take a look at the numbers overall for 2013 so far.
The deficit on trade in goods reduced to £24.9 billion in Q2 2013 from £26.5 billion in Q1 2013
So the drumbeat remains with the hope of a little improvement. Tucked away in it was another hopeful sign .
For countries outside the EU, exports of goods in Q2 2013 increased by 7.5% to over £40 billion for the first time.
I bet you did not expect this part of it.
Historically, the UK has a trade in goods surplus with the USA and in Q2 2013 this surplus has reached a record high as exports increased 3.3% and imports decreased 1.3%
But then we hit a fundamental issue and it relates to our best performing sector.
In Q2 2013, the estimated surplus on trade in services was £18.9 billion
Seeing as all the trade figures are estimates (which are often heavily revised) then we now have an estimate of an estimate or a type of mathematical second derivative.
We get 23 pages of detail on the trade in goods and one on services. As the services numbers are collected quarterly you may wonder how they have the cheek to provide monthly numbers at all…
The issue of the UK Balance of Payments and the problems it is signalling is something that has suffered from a virtual news blackout. This was not always true as I recall both UK and US balance of payments numbers being considered as not only vital numbers but in fact the most important ones. If we go much further back into history then in medieval times “Mercantilism” was based on trade and the accumulation of silver and gold from it.
The UK has had a long standing problem which has been ignored. Part of the reason for this is that it does not appear to have had much of an impact but of course there is a long list of things which have been like that such as zeroes and sub-prime mortgage lending. Also after the drop of 20/25% in 2007/08 the value of the pound on the foreign exchanges has been a lot more stable. After the expanded deficit for 2012 you might have expected falls in its value when in fact the trade weighted index (monthly average) rose by 3%.
If we now bring into the equation, UK monetary policy we see that it involves holding official interest-rates at 0.5% for as long as possible and also subsidising mortgage lending via the Funding for Lending Scheme. To this the government has added Help to Buy. So the plan is for a housing boom which presumably is hoped to stimulate consumption. Run me by again what usually happens to the UK balance of payments in such circumstances?