Friday, May 11, 2007

Reasons for the UK Current Account Deficit

A current account deficit means the value of imports of goods and services is greater than the value of exports.

The UK has a growing current account deficit. It is currently stands at 3.5% of GDP.

Reasons for this deficit include:

1. Growth in Consumer Spending.

Due to 14 consecutive years of economic growth, a falling savings ratio, rising house prices, and low interest rates, consumer spending in the UK has been increasing. A significant percentage of this consumer spending is on imports (often on luxury manufactured goods). Part of the deficit is called cyclical.

2. Strong Exchange Rate.

Sterling has appreciated against other countries, especially the dollar. The strength of the £ makes exports less competitive and imports cheaper. Demand for exports is less elastic than it used to be, nevertheless a higher value of the exchange rate still reduces the total value of exports.

3. Structural Weaknesses in manufacturing.

Our export manufacturing sector has struggled to compete with low wage countries like China. The process of globalisation has hastened the relative demise of the UK's exporting sector. The deficit on the goods component of the current account is bigger than the overall current account deficit.

4. Deficit is Being Financed

the UK has been able to attract capital flows from abroad. This has financed the current account deficit.


1 comment:

Anonymous said...

My view is that this current account deficit which has been recurring over many years will contribute to impoverishing our children. I've set out my arguments why at