Thursday, 21 February 2008

Spending our way into a hole

We just can't help it; we are addicted to spending. According to the ONS, we spent 3.6 more in 2007 than we did in 2006. In fact, retail sales grow significantly faster than GDP.

Who were the beneficiaries of all this extra expenditure? A fair chunk of it went overseas. In the third quarter of 2007, the UK current account deficit was a staggering £20 billion. On an annualized basis, that amounts to something close to 6 percent of GDP.

There is a dangerous chain of misjudgement at work here. UK consumers think they are richer because their houses are worth more. On the basis of all this newly found wealth, they borrow more. This credit is used to buy imports. In return, the UK gets cheap tat from abroad, a mountain of debt, and a massive current account deficit.

However, it is all about to unwind. House prices are falling, while credit availability is tightening up. That current account deficit is about to get a lot smaller.

1 comment:

Anonymous said...

I *wish* I shared your confidence about our balance of payments. While consumer spending on foreign products will surely fall sharply, that is not the only factor affecting the current account.

I envision that our government will permit - maybe even encourage - overseas "investment" in the UK... in a desperate attempt to keep the circus going. This will lead to further current account deficits as the scant profits that could otherwise be made by British endeavours are pocketed by foreign investors.