Uk Balance of Payment Report Finalizaed

8/12/2019 Uk Balance of Payment Report Finalizaed

http://slidepdf.com/reader/full/uk-balance-of-payment-report-finalizaed 1/13

ContentsIntroduction .................................................................................................................................................. 2

What is the Balance of Payments? ........................................................................................................... 2

UK Balance of Payments ........................................................................................................................... 2

UK Current Account .................................................................................................................................. 2

Explains the UK’s Persistent Current Account deficit? ................................................................................. 5

Measuring the current account ................................................................................................................ 7

What are the main causes of a current account deficit? .............................................................................. 8

Does a Current Account Deficit Matter for U.K? .......................................................................................... 9

How does a Government Reduce a Current Account Deficit? ...................................................................... 9

Policies to improve competitiveness ...................................................................................................... 11

Policies to Reduce a Current Account Deficit ............................................................................................. 12

Statistics ...................................................................................................................................................... 12



Applied Macroeconomics

2

Introduction

What is the Balance of Payments?

The balance of payments (BOP) records financial transactions made between consumers,

businesses and the government in one country with others

The BOP figures tell us about how much is being spent by consumers and firms on imported

goods and services, and how successful firms have been in exporting to other countries.

UK Balance of Payments

The Balance of Payments is the record of a country’s transactions / trade with the rest of the

world.

The balance of payments consists of:

1. Current Account (trade in goods, services + investment incomes + transfers)

2. Capital Account / Financial Account (capital and financial flows, net investment,

portfolio investment)

3. Errors and omissions. It is hard to collect all data so some is missed out.

In theory there should be a balancing between capital and current / financial account. If there is a

current account deficit, there should be a surplus on the capital / financial account.

UK Current Account

The UK current account deficit was £13.0 billion in Q2 2013 (3.2% of GDP) at current market

prices, down from 5.5% in Q1 2013. ( Page updated 2nd October, 2013)

In 2012, the UK’s current account deficit was £59.8 billion.

In 2012, the UK was a net borrower of £56.1 billion, up from £18.5 billion in 2011. This was

mainly a result of the income account switching from surplus to deficit, combined with increased

deficits in trade and current transfers.




3

The income surplus of £22.5 billion in 2011 switched to a deficit of £2.2 billion in 2012. This

was mainly due to a decrease in the direct investment income surplus, as income receipts

(credits) were lower in 2012 compared with 2011 while income payments (debits) remained

almost unchanged.

Receipts were lower primarily due to a decrease in the earnings from private non-financial

Corporations. The deficit on trade increased from £23.3 billion in 2011 to £34.6 billion in 2012.

This was due to the trade in goods deficit increasing £8.6 billion to £108.7 billion and the trade

in services surplus decreasing £2.8 billion to £74.1 billion. In 2012, the current account deficit

equated to 3.8% of GDP at current market prices, compared with 1.5% in 2011. The deficit in

trade in goods and services was equivalent to 2.2% of GDP in 2012 compared with 1.5% in

2011, and the income deficit equated to 0.1% of GDP in 2012 compared with a surplus in 2011,

which equated to 1.5%. Direct investment in the UK decreased by £3.3 billion over the same

period. Partially offsetting this was a widening of the deficit for portfolio investment by £1.4

billion to £6.8 billion. Foreign earnings on portfolio investment in the UK increased by £2.3

billion while UK earnings on portfolio investment abroad increased by £0.9 billion. The other

investment income deficit increased by £0.1 billion.

Summary of statistics for the 1st quarter 2013 billion

Latest Record since Record Record

quarter highest lowest

Current account (net)

Trade in goods -£26.5 Largest deficit since 2012 Q4 £1.7 -£28.0

(1981

Q1)

(2012

Q4)

Trade in services £20.4 Largest surplus since 2011 Q1 £21.4 £0.0

(2011Q1)

(1965Q3)

Income -£2.1 Largest deficit since 2012 Q3 £14.0 -£2.4

(2008Q1)

(2012Q3)

Transfers -£6.2 Largest deficit since 2012 Q4 £0.3 -£6.4

(1982Q1)

(2012Q4)




4

Current balance -£14.5 Largest deficit since 2012 Q3 £2.8 -£17.8

(1981Q1)

(2012Q2)

Capital account (net)Capital balance £0.6 Largest surplus since 2012 Q4 £1.3 -£0.7

(2011Q3)

(2006Q2)

Financial account (net)

Direct Investment £31.1 Largest inflow since 2005 Q3 £61.0 -£98.4

(2005Q3)

(2000Q1)

Portfolio investment £50.8 Largest inflow since 2008 Q4 £125.8 -£140.4

(2008

Q4)

(2012

Q3)

Financialderivatives -£28.0 Largest net settlement receipts £34.2 -£63.3

since 2008 Q4(2012Q1)

(2008Q1)

Other investment -£42.2 Largest outflow since 2010 Q1 £173.9 -£66.8

(2012Q3)

(2006Q3)

Reserve assets -£1.5 Largest investment since 2012 Q4 £2.6 -£6.8

(2001Q1)

(2009Q3)

International investment position

(net)

Direct investment £266.7

Largest net asset position since 2012

Q4 £408.4 -£4.0

(2008Q4)

(1990Q3)

Portfolio investment -£161.8 Largest net liability position £162.9 -£648.3

since 2012 Q4 (1993Q4) (2010Q3)

Financial

derivatives £55.8 Largest net asset position £138.1 -£37.6

since 2011 Q4

(2009

Q1)

(2007

Q1)

Other investment -£221.4 Largest net liability position £15.1 -£392.2




5

since 2012 Q4

(2010

Q3)

(2002

Q2)

Reserve assets £66.4 Largest net asset position £66.4 £1.1

ever recorded

(2013

Q1)

(1970

Q3)

Explains the UK’s Persistent Current Account deficit?

1. Deficit in Goods. Since the process of de-industrialization accelerated in the early 1980s, the

UK has had a large deficit in goods. The UK still manufacturer’s goods, but we have become a

net importer – especially of manufactured goods (e.g. clothes, computers, cars). The graph below

shows the sectors with the biggest deficit.

For example, this shows the UK had a deficit of £12.56 bn for finished manufactured goods in

Q2 of 2012. The UK is also a net importer of oil and food.




6

This deficit in goods is partly offset by a surplus in services (e.g. insurance and finance) but, it is

not sufficient to overcome the trade deficit.

2. Financial flows. The UK has been able to attract sufficient financial flows, e.g. portfolio

flows to finance the UK’s current account deficit.

3. Relatively Low Saving Rate

The UK has had a relatively low saving rate compared to some of our competitors. Though

r ecent increases in the saving rate haven’t prevented a fall in the current account.




7

Measuring the current account

The current account of the balance of payments comprises the balance of trade in goods

and services plus net investment incomes from overseas assets and net transfers

Net investment income comes from interest payments, profits and dividends from

external assets located outside the country.

Transfers into and out of a country include foreign aid payments. For the UK the net

transfers figure is negative each year, mainly due to the UK being a net contributor to the

budget of the European Union. As a rich nation, the UK makes sizeable foreign aid

payments to many other countries.

In 2012, the UK was a net borrower of £56.1 billion, up from £18.5 billion in 2011. This

was mainly a result of the income account switching from surplus to deficit, combined

with increased deficits in trade and current transfers.

The income surplus of £22.5 billion in 2011 switched to a deficit of £2.2 billion in 2012.

This was mainly due to a decrease in the direct investment income surplus, as income

receipts (credits) were lower in 2012 compared with 2011 while income payments

(debits) remained almost unchanged.

Receipts were lower primarily due to a decrease in the earnings from private non-

financial Corporations. The deficit on trade increased from £23.3 billion in 2011 to £34.6

billion in 2012. This was due to the trade in goods deficit increasing £8.6 billion to

£108.7 billion and the trade in services surplus decreasing £2.8 billion to £74.1 billion. In

2012, the current account deficit equated to 3.8% of GDP at current market prices,

compared with 1.5% in 2011. The deficit in trade in goods and services was equivalent to

2.2% of GDP in 2012 compared with 1.5% in 2011, and the income deficit equated to

0.1% of GDP in 2012 compared with a surplus in 2011, which equated to 1.5%. Directinvestment in the UK decreased by £3.3 billion over the same period. Partially offsetting

this was a widening of the deficit for portfolio investment by £1.4 billion to £6.8 billion.

Foreign earnings on portfolio investment in the UK increased by £2.3 billion while UK

earnings on portfolio investment abroad increased by £0.9 billion. The other investment

income deficit increased by £0.1 billion.




8

What are the main causes of a current account deficit?

1. Overvalued exchange rates. Countries in the Eurozone which became uncompetitive

(e.g. Greece, Portugal and Spain) experienced large current account deficits. This is

because an overvalued exchange rates means exports are more expensive, but imports are

cheaper. This encourages domestic consumers to buy imports. It also makes it hard for

exporters because they are relatively uncompetitive.

2. High Consumer Spending. If there is rapid growth in consumer spending, then there

tends to be an increase in imports causing fall in the current account. For example, in the

1980s boom, we saw a fall in the savings rate and a rise in UK consumer spending; this

caused a record current account deficit. The recession of 1991 caused an improvement in

the current account as import spending fell.

3. Unbalanced Economy. An economy focused on consumer spending rather than

investment and exports will tend to have a bigger current account deficit.

4. Competitiveness. Related to the exchange rate is the general competitiveness of firms.

If there is a decline in relative competitiveness, e.g. raising wage costs, industrial unrest,

poor quality goods – then it is harder to export causing drop in the current account.

High income elasticity of demand for imports – when consumer spending is strong, the

volume of imports grows quickly

Long-term decline in the capacity of manufacturing industry because of de-

industrialization. There has been a shift of manufacturing to lower-cost emerging market

countries who then export products back into the UK. Many UK businesses have out-

sourced assembly of goods to other countries whilst retaining other aspects of the supply

chain such as marketing and research within the UK

The UK is a net importer of foodstuffs and beverages and has also seen a sharp rise in

spending on imports of oil and gas as our North Sea oil and gas production is long past its peak levels

The trade balance is vulnerable to shifts in world commodity prices and exchange rates.

The UK imports a large volume of raw materials, component parts and pieces of capital

equipment.




9

Does a Current Account Deficit Matter for U.K?

Should we worry if the UK has a current account deficit?

No, we shouldn’t be concerned

The UK has had a persistent deficit since the mid-1980s. Countries with large current

account surplus have not necessarily done better, e.g. Japan had a long period of

stagnation.

In era of globalization, financial flows are easier to attract and therefore the deficit is

financed by these capital inflows.

If the current account was too large, there should be depreciation in the exchange rate to

restore the balance. A current account deficit is a bigger concern in a fixed exchange rate

(like Euro) because there is no option of depreciation.

How does a Government Reduce a Current Account Deficit?

Expenditure switching and expenditure reducing policies

Before we get started, it should be noted that the current government, and recent governments, in

the UK do not actually care about the current account deficit. They believe that it will be

financed more or less indefinitely. They are much more concerned about the control of inflation.

Examiners are keen that you understand how deficits can be reduced, but the following policy

measures are not at the forefront of the Chancellors mind at the moment!

These polices were relevant in the 50s and 60s, especially when the UK was part of the Bretton

Fixed exchange rate system. They are also relevant to any country that cannot finance current

account deficits over the long run as easily as the UK seems to be able to do.

Expenditure switching policies

These are policies that a government may use to switch consumers' expenditure away from

imports and towards home produced goods. There are two main types - using import controls

like tariffs and devaluing the exchange rate. Let's look at these two in turn.




10

Import controls

Of course, this policy is not as relevant as it was in the past. Nowadays, the World Trade

Organization (WTO) would not let a country get away with tariffs just because it wasn't very

happy with its current account deficit.

If a country levies tariffs (a tax on imports) on various imports, then their prices will rise relative

to the home produced goods and so the demand for imports should fall and switch to

domestically produced goods. This will be good for domestic producers as well as helping the

current account deficit to fall. The foreign firm could absorb the cost of the tariff, take a cut in

profits and not raise their price, but this is not a long term solution for them. Tariffs generally

cause import prices to rise.

Apart from the fact that this is difficult to implement nowadays, the resulting trade war that is

likely if a policy of import controls did get past the WTO would be disastrous.

A devaluation of the exchange rate

Of course, in a world of floating exchange rates, a currency should automatically change in

response to a current account surplus or deficit. The change should also automatically correct the

balance of payments disequilibria.

A current account deficit in the UK, for example, will mean that the demand for pounds to buy

UK exports is lower than the UK consumers' demand for foreign currency to buy imports. The

value of the pound will fall, making exports relatively cheap and imports relatively more

expensive. UK consumers will switch their purchases from imports to home produced goods, and

consumers from other countries will switch their purchases from their home produced goods to

UK exports. The UK's current account deficit should reduce back to equilibrium.

A very nice story, which should work in theory, but in the real world life is never that simple!

In the days of the Bretton Woods fixed exchange rate system, the UK would often find itself in a

deficit situation. The governments of the time tended to try all other policies to reduce the deficit.

Devaluation was the last resort. It was a sign that you had failed. When a country is a member of




11

an exchange rate system, it is the foundation stone around which the rest of government

macroeconomic policy is built.

And why do governments avoid devaluation at all costs, even though it makes industry more

competitive? The resulting higher import prices lead to higher inflation. Since the Second World

War, the inflation rate of the UK has been higher, on average, than all developed countries. It is

not a coincidence that the UK has seen the value of the pound fall dramatically over the same

period. Devaluation is the easy way out for exporters but is a poor long term option. See the topic

called ' Exchange rates' for more discussion on these issues.

Today, the UK has a floating exchange rate. In theory (as explained above) current account

deficits should automatically cause the pound to fall in value to help reduce the deficit. But the

pound has been strong for the last four years regardless of the trade position of the UK.

As we said earlier, currency transactions as a result of exports and imports account for less than

10% of daily turnover. The key to the value of the pound nowadays is speculation. The 'markets'

think the UK economy is doing pretty well, so investors buy the pound instead of other

currencies. These investors obviously don't think the current account deficits are a problem

otherwise they would take fright and sell their holdings of sterling.

So even if the government wanted to pursue the 'devaluation' policy option to reduce a current

account deficit, nowadays, it simply doesn't have the clout in the currency markets to affect the

value of the pound.

Policies to improve competitiveness

So, import controls are difficult to impose in today's world of free trade and the WTO. The value

of the pound may well fall, but only if the currency markets allow it. Deflation is completely out

of the question given the risk of recession and its political difficulties. How else can a

government try to reduce a current account deficit?

For most manufacturing firms, it seems the only way to sell more goods abroad and to persuade

UK consumers to buy more home produced goods rather than imports is to become more

competitive, particularly in terms of 'non-price' factors. In terms of the most worrying 'price'

factor, there is not much that they can do about the strong pound.




12

Governments can help in this field by providing tax relief for capital investment and for research

and development. They can provide training to improve the skills of the workforce and invest

money into education generally so that the quality of all school leavers improves.

Policies to Reduce a Current Account Deficit

To reduce a current account deficit, we need to pursue policies involving some or all of the

following:

1. Reduce consumer spending – through tight fiscal and tight monetary policy. E.g. higher

income tax will reduce disposable income and therefore reduce spending on imports

(however, it will also lead to lower economic growth)

2. Devaluation of the exchange rate. This makes exports cheaper and imports more

expensive.

Statistics




13

Uk Balance of Payment Report Finalizaed

Documents

Transcript of Uk Balance of Payment Report Finalizaed