The UK, COVID And The C/A Deficit
(3 min read)
Fiscal expansion in response to COVID and the forthcoming spike in debt have dominated investor concerns in recent months. But these significantly larger fiscal deficits will also have implications for external balances as the gap between government savings and investment shifts. For the UK, where the current account (C/A) has been in deficit for almost four decades and which heading into the current crisis was one of the largest globally, this is worrying. A wider deficit from here could raise significant concerns over financing, particularly with the future relationship with the EU remaining uncertain.
UK Continues to Run One of the Largest C/A Deficits Globally
Recessions typically see imports collapse in response to weaker demand and C/A deficits naturally corrected. The UK has not, however, followed this pattern during the past several decades. A C/A deficit of 4.2% of GDP in 2008 gradually narrowed in the years following the global financial crisis. But this trend ended in 2011, with subsequent years witnessing a sharp worsening in the deficit to a record high of 5.2% in 2016. This was partially corrected in 2017 with the deficit narrowing to 3.3%, but the past two years have been stuck just below 4% (Chart 1). Apart from a handful of emerging market economies who run bigger deficits, this leaves the UK with one of the largest C/A deficits globally, albeit with the US not too far behind.
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