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.