Britain’s economy ran the largest quarterly current account deficit ever in the fourth quarter of last year. Last week, I showed you that the Q4 current account deficit of £32.7 billion was 7% of GDP. The £92.6 billion annual deficit for 2015, at 5.2% of GDP, was also a record.
But here’s a question: does it matter?
Around 80% of the deficit can be attributed to the fall in net foreign direct investment earnings, according to the Office for National Statistics (ONS). It’s a commodity story, in other words. And you can trace it back to the earnings decline in about 25 companies, mostly those heavily invested in oil, gas, metals and bulk commodities.
The ONS data sheds a revealing light on the deficit story. It means British multinationals have been absolutely caned by the fall in commodity prices. This is no surprise to shareholders in Anglo-American, Glencore, BP, BHP Billiton, and Royal Dutch Shell. But what does it mean for the rest of the economy?
That’s a story for the macro gurus (Tim Price and Charlie Morris) and the commodity guru (Alex Williams) to work out. I’ll ask them. But in the meantime, a few speculations. First, a commodity recovery ought to boost earnings by the 25 largest deficit makers, leading to a flow of money back into Britain. That would reduce the current account deficit.
For all of that to happen, you have to presume a situation where a) the US dollar crashes or b) commodities recover. Of the two options, a dollar crash (for whatever reason) seems a lot more likely than a commodities recovery driven by organic global growth – although “helicopter money” could boost commodity prices.
The second speculation is that no matter how you slice it, the pound is going to be volatile this year. If you strip out the part of the current account deficit attributable to lower commodity prices, you still have a deficit. Britain still relies on foreign direct investment to prevent weaker currency. And now, it’s not so clear that weaker currency benefits a great deal of British exporters.
All of it points to an even larger issue. Technology and globalisation have turned the global economy upside down over the last 40 years. Some people – perhaps the people named in the Panama Papers – have benefitted enormously from this redistribution of global manufacturing. Others – mostly those employed in manufacturing industries in the West – have not.
And now the pace of change is accelerating. The Saudis see it. The world’s rich and powerful see it. You see it. But what are you doing about it?
Category: Economics