UK’s huge current account deficit set to stay larger for longer

25 Nov, 2017 1:05 pm

LONDON (Reuters) – Britain’s current account deficit, the largest of the world’s major economies, is no longer on course to narrow significantly over the next five years, putting sterling at risk of a further big fall, according to government experts.

Bank of England Governor Mark Carney warned last year that Britain’s dependence on around 100 billion pounds a year of foreign financing left it reliant “on the kindness of strangers”.

That risk seemed to diminish when sterling fell more than 10 percent after the Brexit vote in 2016.

While the decision to leave the European Union raised big questions about Britain’s economy, the weaker pound led many economists, including the government’s Office for Budget Responsibility, to predict the current account gap would narrow sharply.

The fall in sterling would reduce the imbalance between returns on British investments held abroad and those held in Britain by foreign investors, a big contributor to the deficit, they said.

This week, the budget office changed its mind.

In its twice-yearly forecast of the public finances, the OBR predicted the current account deficit would total 101 billion pounds in 2021, or 4.4 percent of GDP, rather than fall to 47 billion pounds or 2.0 percent of GDP as it thought in March.

This year, the deficit is expected to be about 4.6 percent of GDP, having hit a record 5.9 percent in 2016, when the only European countries with a bigger deficit than Britain’s were Albania and Montenegro, according to World Bank data.

The OBR told chancellor Philip Hammond that Britain needed to guard against losing foreign investors’ confidence, for example through a “disorderly” Brexit process.

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