July 3, 2015

Currently, there is an interesting picture in the UK Current Account Statistics and one which explains the comparatively better UK growth profile

The Current Account Balance = Government Balance + Private Sector Balance (where Private Sector Balance = Household Sector Balance + Business Sector Balance). The Current Account Balance measures the difference between Gross Investment and Gross Savings in the economy (and that difference can be allocated between sectors).

The 4-Quarter Moving Average of the UK Current Account Balance as a % of GDP is at its worst ever – a deficit of 6.2% of GDP. The UK has a Current Account Deficit on an alarming scale. The deficit says that the UK needs to attract a capital inflow, from foreigners, of just over £110 billion.

Large current account deficits have been shown, repeatedly, to lie at the heart of many a financial crisis. With a large, external financing requirement, you are very vulnerable to rising risk premia and sharply diminishing market sentiment. (Many excuses can be wheeled out including incorrect accounting for foreign property investment, poor returns on UK overseas assets, etc. The simple fact is, the UK is accumulating Net Foreign Liabilities at an alarming rate).

2015.03.07.CurrentAccount

If we break the Current Account Deficit down and look at the Private Sector Balance (as a % of GDP), the Private Sector in the UK is back to accumulating Net Liabilities (Debt) – a deficit of 1.5% of GDP.

The late 1980s boom and the late 1990s boom were the last time we saw this (we skirted the deficit line in the 2006/7 period). No wonder the UK is doing comparatively well, the growth is underpinned by Private Sector liability accumulation and a record current account deficit – not a good structural sign.

The other side of the sharp deterioration in the UK deficit is the sharp improvement in the Eurozone deficit.

2015.03.07.PrivateSector

In conclusion, currently we have a record current account deficit and a private sector deficit again (alongside a sizeable public sector deficit). The UK does it again – builds a recovery on debt and asset inflation and not productivity.

MONOGRAM CAPITAL MANAGEMENT