Bad News for British Finance

The UK government lauds the fact that recent measures of changes in economic output have a plus sign in front of them, rather than a minus. Yes, UK GDP is +1.3% y/y in the second quarter of 2013, though do not mention the fact that the level of GDP is still lower than it was five years earlier in 2008. However, something else is going on that is far more significant.

No, not the fact that to keep the lights on the government has given a huge subsidy to a French-Chinese nuclear power plant that the Brits could neither construct nor finance. It is a development clear only to those who delve deep into the pages of international finance statistics, thus evident to almost nobody. For the first time in more than a decade, Britain is making less on its international assets than foreign capitalists earn on assets in Britain - and the deficit is getting worse.

Personally, I find this annoying because it complicates a point I could otherwise easily make before. My previous point was that one of British imperialism's privileges was shown by the fact that, despite having a net deficit in its international investment position, it managed to earn more from its foreign assets than it paid on its foreign liabilities. The difference in returns is still true, but it does not generate the same results. Previously, high earnings on foreign direct investment, especially investments in low wage countries and in rent-rich investments in oil, gas and minerals overseas managed to offset the other net payments on the portfolio accounts (bonds and equities) and on bank borrowing. No longer. Although I thought that at some point this privilege would be undermined by the trend of a growing net deficit, on the data for 2012-13 it seems that this has happened already.

The latest annual data show that in 2012 the UK had a net deficit on its income payments on foreign investment of £2bn. Not much in the context of a big GDP, but much less than the +£22.7bn in 2011 and the first deficit since 1999. Data so far for the first half of 2013 show a worsening trend: an income deficit of £9.4bn in six months! The significance of this goes beyond me losing an easy sound bite. The main reason behind the drop is a decline in net earnings on foreign direct investment, but there is also a bigger net deficit on portfolio investment income. At the same time, the net surplus earnings of the financial services sector are flattening out and the UK current account deficit has widened to over 4% of GDP at present - the highest since 1989 - from just 1.5% in 2011. To cap a list of alarm signals, the visible trade deficit reached an all-time record of 7.0% of GDP in 2012.

British imperialism cannot pay its way in the world and the former means of relying on revenues from foreign investment and financial services, very effective in the 2000s boom period, is no longer working. A huge volume of short-term borrowing in 2012 funded these record deficits - and other outflows on the direct investment and portfolio accounts. This is all fine … until you have to pay the money back. Do not expect an end to austerity, despite any pick up in the UK GDP figures.

Tony Norfield, 22 October 2013