Britains commercial deficit will be the highest in a quarter century next year, a sign that recovery is badly out of kilter and that the country is still living far beyond its means. The European Commission forecasts that Britains current account deficit -- covering both trade in goods and services -- will rise to 4.4pc of GDP in the 2014, with little improvement after that. This is the highest deficit of any major industrial country, and far worse than the US as it moves towards energy independence. It is also the highest since the Lawson boom in 1989. The Commission said in its Autumn Report that Britain will have the fastest-growing economy for the next two years among the major European countries.. However, the mini-boom is being driven by a steady fall in the household savings rate, down to 6.2pc this year from 7.3pc in 2010. The Commission said it expects UK consumers to dip into their savings to cover spending. The debt burden of households remains a distinct risk to private consumption. Britain has not run a current account deficit of this magnitude since the Second World War. It raises concerns that the recovery is being fed by a premature return to bad habits of house price inflation and credit-driven spending rather than a revival of manufacturing and productive investment. The 20pc devaluation of sterling after 2007 has had remarkably little effect on the trade balance. Simon Ward from Henderson Global Investors said the UK is structurally unbalanced, relying heavily on imports to meet demand as confidence returns. The supply-side of the economy is performing very poorly. The Bank of England claims there is massive overcapacity in the economy but we dont think that is correct, and the current account deficit is the evidence. A lot of the output before the recession was phantom. It has gone forever, and that means our capacity to produce and export is less than we thought, he said. Mr Ward said his gauge of money supply growth -- six-month real M1 -- is surging at double-digit rates. This is a level that usually triggers inflationary booms. This time a large part of this stimulus is leaking into imports, at least so far. The Commission said Britain still has a structural budget deficit of 5.7pc of GDP even after years of austerity, showing the sheer scale of Britains rebalancing task. This compares to minus 1.5pc in the eurozone, minus 0.8pc in Italy, and a surplus of 0.5pc in Germany. It warned in an earlier report on imbalances that Britains income from foreign investment has been falling since 2008 and turned negative in 2012, adding to the long-term risks. The United Kingdom is experiencing macroeconomic imbalances, which deserve monitoring and policy action. In particular, macroeconomic developments in the areas of household debt, linked to the high levels of mortgage debt and the characteristics of the housing market, as well as unfavourable developments in external competitiveness, especially as regards goods exports and weak productivity growth, continue to deserve attention, it said.
Posted on: Wed, 06 Nov 2013 11:45:44 +0000