Britain's current account plunges further into the red

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Economics Editor

Britain's current account plunged deeper into the red in the second quarter with the deficit of pounds 3.7bn in the first half of 1995 already more than double that for the whole of 1994. Other official figures revealed that the non-oil economy grew rather more than had first been estimated in the second quarter while GDP in the first quarter was again revised down.

The deterioration in the current account was greeted with relative equanimity by currency markets as they remained focused on the continuing fall-out among European currencies and the lurch in the dollar against the yen. However, City analysts now say that an annual deficit of at least pounds 5bn seems inevitable. Simon Briscoe, UK economist at Nikko Europe, warned that the pound faced pressure from the trade picture for the first time in two years.

The worsening current account can be traced to the failure of invisible earnings - which include services, transfers and investment income - to sparkle in the way they did in 1994 when they contributed a surplus of pounds 9bn. By contrast, the invisibles balance in the first six months of 1995 has provided a surplus of only pounds 1.6bn.

Coincidentally, that was the initial estimate of the invisibles balance in the first quarter of the year. However, the Central Statistical Office has now revised this down by pounds 0.9bn, mainly because investment income turned out to be lower than had been thought, with higher losses from the collapse of Barings an important factor.

Investment income bounced back in the second quarter but the improvement in the invisibles balance was reduced by a pounds 1.7bn deficit on transfers, the highest ever recorded. This was principally because of record transfers to EC institutions.

With the balance on investment income in the first half of 1995 running at a quarter of the pounds 10.5bn surplus chalked up in 1994, the prospects for a repeat performance now look remote. While earnings on direct investment abroad are holding up, domestic subsidiaries are remitting more to their overseas parents than they did in 1994. And financial institutions are no longer pitching in with the big contribution they made in interest rate swaps in 1994.

The CSO also revealed that the economy grew by only 0.6 per cent in the first quarter of the year, compared with the initial flash estimate of 0.8 per cent and a subsequent revision to 0.7 per cent. New calculations for output from service industries were responsible.

However, the non-oil economy in the second quarter grew by 0.7 per cent compared with the initial estimate of 0.6 per cent, mainly because services performed more strongly and construction output fell by less than had first been thought.

The latest statistics revealed that consumers dipped into savings in the second quarter in order to push up their spending. The savings ratio fell to 9.3 per cent from a revised 10.2 per cent in the first quarter.