UK: Whiff of balance of payments danger – SocGen

Kit Juckes, Research Analyst at Societe Generale, notes that the UK's current account deficit 'shrank' to ₤32.6bn, or 6.9% of GDP, in 1Q16 from a record 7.2% in 4Q15.

Key Quotes

“The trade balance deficit widened marginally to ₤12.0bn, but the 'problem' is that the primary income deficit only narrowed to ₤14.9bn from ₤15.1bn in the previous quarter. The jump in the primary income deficit in the fourth quarter now looks less like a blip, though it is still fair to hope that higher commodity prices will boost UK-based multinationals' income.

The positive news is that the financial account overall saw a net inflow of ₤33.9bn, with direct investment inflows at ₤61.0bn and portfolio investment inflows totalling ₤33.4bn. The ₤94.4bn long-term capital inflow easily covered the current account deficit several times over, but the portfolio flows showed net disinvestment by foreigners of ₤11.9bn, after purchases of ₤77.2bn in Q4, while UK residents sold ₤45.4bn in foreign assets.

A financial account balance that relies on UK investors selling foreign assets even faster than foreigners sell UK ones doesn't comfort me much. The danger posed by the possibility of that foreign investors will be reluctant to buy UK debt is clear, and I doubt UK investors’ repatriation of foreign holdings is a sustainable offset, unless sterling falls (even) further.”