Sunday, 6 July 2008

The UK economy - pensioned off

The external sector - it is the Achilles heel of the UK economy. Last year, the UK accumulated a massive but barely noticed current account deficit. It amounted to 4.5 percent of GDP; the second highest in 50 years.

The size of this deficit is a worry, but the structure is even more alarming. The UK no longer has a significant manufacturing sector, and exports very little in terms of physical manufactured goods.

Manufactured goods have not gone out of fashion on the import side; last year we imported ₤385 billion worth of goods, giving a trade deficit of ₤164 billion. Overall, the UK imports 75 percent more goods than it exports. These are big ugly numbers.

The UK makes up this deficit in a number of ways; providing services such as insurance (the services balance); receiving net income from investments abroad (the income balance); by selling UK assets for overseas residents, or borrowing abroad.

Last year, the UK earned about ₤38 billion from services and about ₤6 billion from net investments. However, it was left with an overall current account deficit of about ₤59 billion, and this remaining balance was funded either by asset sales or borrowing.

The dependence on investment income has to be the main worry. Last year, the UK earned ₤284 billion on assets overseas (investment credits in the above chart) held and paid out ₤278 billion. (investment debits).

This dependence becomes even more apparent when UK investment income is compared to export income. Last year, the UK earned ₤64 billion on its investments. However, the credit crunch is disrupting investment income streams all over the world. Should our investment income fall, then the UK external accounts could be in for trouble.

The external accounts suggests that the UK economy is rather like a semi retired old man, relying largely on assets accumulated in earlier better times. The UK dabbles in the world of trade, but it is the steady investment income that maintains our living standards. However, investment income is always vulnerable to shifting vagaries of asset returns. The UK's easy-going retirement could be in for a nasty shock.


Anonymous said...

the uk - a pensioned off economy, so sad but also right.

Anonymous said...

Sorry to be pedantic about your otherwise excellent blog but the first thing that struck when looking at the graph was a lack of time-frame. Also, investment debits show £278b on the graph but £274 in the article.


Alice Cook said...

chefdave, I will correct. Although, I try to catch the typos, it isn't always possible.

Thanks for the comment.


Anonymous said...

To what extent is the current account deficit exacerbated by flows of government money abroad? I'm thinking of the net amount paid into the EU, foreign aid, money paid to the UN and World Bank etc. If the government were prohibited from sending any of our money abroad what effect would this have on the figures?

But the figures are scarey anyway. It just goes to show how far we are living beyond our means. Your analogy of a pensioner living by selling old assets is very apt. Individually we can do this as we will all die eventually. Collectively we cannot. At some stage we will be reduced to penury.

My solution - we either relax the current restrictions on business (health'n'safety, employee rights, taxation, environmental regulations etc etc) so we can afford to make things again in this country, or we restrict any imported good that are produced under conditions that we do not allow in the UK. One or the other. We cannot afford as a nation to continue down this post industrial path. That way lies ruin.

Electro-Kevin said...

Alice - most of our people thoroughly deserve what's coming to them.

Including the decent, hard working people who didn't have the guts to get off their arses and demonstrate against Nu Labour.

Sackerson said...

EK: I have absolutely no chance of changing my MP, and demonstrations and protests are highly controlled where not illegal, and the politicos just turn up the radio to drown out the noise. We have had a coup, that used weaknesses in our electoral system. Previous generations of politicians must have been restrained by some form of ideals or a sense of social obligation, this lot are feral. Don't blame the people. A revolution would be more of the same, plus a lot of bloodshed and suffering first.

Anonymous said...

UK is leading investment destination for companies relocating and developing their global business..its growing..
recent business times statistics states that FOREIGN investment in the UK from the Asia-Pacific grew 25 per cent year on year in 2007-08 - more than double the global rate.

Anonymous said...

Sounds like the US. Is the pound going to follow the dollar? Growth is down, inflations is up all over the world. I did a chart of inflation rates @

Electro-Kevin said...
This comment has been removed by the author.
Electro-Kevin said...

"A revolution would be more of the same, plus a lot of bloodshed and suffering first."

Hi, Sackerson,

Well sadly a revolution is where it's looking to be headed, though that's not what I'd had in mind.

I'm dissappointed, frankly, that there were a lot of good ideas people in the press (polemicists) who could easily have drummed up support for effective campaigns.

Resistance against council tax, speeding fines and BBC licence fees would - and still COULD - be useful, peaceful, and measured responses to what is going on.

After all, we know that the rank and file police and military are equally, if not more, irked than ordinary citizens and that our prisons are full.

It wouldn't need to come to a bloody revolution. But even if it did ... don't you think that's what it takes sometimes ?

powerman said...

An unnecesarily dramatic reponse I think.

If we're lucky, we'rejust going to see a democratic shift away from centralised, expensive forms of socialism until people forget how bad it was and start complaining about some people being richer than them, or demanding that the government create another bureacracy to protect them again.

Electro-Kevin said...

Perhaps you're right, Powerman,

But I don't think so. And the raison detre' of this blog is to point out to us - in terms no less 'dramatic' than my own - that we're up the Swanny because we have no democracy.

I'm glad that we seem to agree that socialism has a grip on our Nation. This is a concept which I find impossible to relay to my co-workers who still bang on about "Thatcher !".

It would be very interesting to know your status.

If we were to wind the clock back say fifteen years and then impose all of the demographic, legal, educational, European and ideological changes which have been imposed upon us so insidiously - and then if we were to introduce them more speedily over a space of say TWO years ...

This would be the stuff of mass revolt, don't you agree ?

Sackerson is absolutely right - there has been a coup and there would, without a shred of doubt, have been outright rejection of it by the general populace (doubtless to the point of violence) had it not been so stealthily cleverly undertaken.

As it is, our way of life has been patiently and systematically salami-sliced away, so that even if one did object one was labelled a 'nutter' or an extremist (as I suspect you may have been alluding to in your comment)

Mass refusal to pay certain charges on pain of imprisonment by a disenfranchised populace which is totally ignored on a myriad of issues such as Europe, beat policing, crime and punishment, pensions, immigration ... seems like a perfectly measured, intelligent and reasonable response to me.

The level of 'drama' would then be determined by how Westminster responds to us. Anything too dramatic on their part might indicate that, actually, we weren't nearly strident enough.

What does it take to get our major parties to do simply what we want them to ? Just to listen to us ?

You'll be telling me that I have a vote next.

Now that WOULD be unnecessary and dramatic.

Electro-Kevin said...

Interesting that Gordon Brown's email account is suspended (probably in meltdown) but his site is still broadcasting.

They can send you messages, but you can't tell them anything. A metaphor for the bigger picture...