It was another set of disturbing trade figures, with the traded goods deficit in November reaching £6bn, the largest ever.
We have become accustomed to running a current account deficit and by US standards ours is quite modest: about 2.5 per cent of GDP. In one sense, too, the current account deficit is a necessary mathematical counter to a capital account surplus, which in turn is the result of money flowing in from other countries to invest in the UK.
Nevertheless, given the slower growth over the past year it is worrying that the deterioration is showing no sign of any tapering off and actually is heading in the other direction. Insofar as the problem is strong consumer demand sucking in imports, you would imagine that as demand eased so too would imports. That doesn't seem to have happened. Further, the November figures were coupled with some revisions for previous months, which also showed a wider deficit. So this is a worrying trend.
There are two different approaches to the analysis of trade figures. One is to take the current account numbers to bits and see what is happening in detail. The other is to focus more on the capital account and on the terms of trade and to try to make an intuitive judgement as to whether the trend is acceptable against the broad background of the changing world economy. Here is a quick stab at both approaches.
You can see on the top graph the deteriorating trade position, while on the bottom one is one of the reasons for that deterioration, the switch from being an oil exporter to an oil importer. For the past five months we have been a net importer and while it is conceivable that we could nudge back into surplus from time to time, the more likely prospect is a steady move towards a greater deficit on the oil account.
On the non-oil trade account, the main pattern has been a widening deficit on trade with non-EU countries. That has risen from £1.5bn in June to £3bn in November; by contrast our deficit with the rest of the EU has been stable at about £3bn a month. Within those totals, our exports to the EU have not been too bad and we have been selling well in the US and Canada. But we clearly have not been as effective as we should have been in building markets in the "new" giant countries that are increasingly participating in the global economy, most notably China and India. That bodes ill for the future: you want to be selling to fast-growing markets, not slow-growing ones.
Now, of course, this deficit on goods is partly covered by a surplus on private-sector invisible exports - though it is increased by a deficit on the public sector's account. All our payments to the EU, plus much of the cost of the Iraq war, plus foreign aid, combine to cut the overall invisible surplus. While most chunks of the private sector's balance sheet are in the black, one particular one, travel, is firmly in the red. The terrorist attacks on London have cut the number of foreign visitors, while our propensity to have foreign holidays as we become richer does not help either.
The better news is that not only are the earnings of the financial services industry still strong and solid (there was a bite from insurance payouts on Katrina but you would expect that) but that the base of such earnings is widening. It is not just banking, insurance and securities business. These have been joined by fund management, legal services and other professional services, all of which have grown in relative terms and which give a more secure flow of overseas earnings. The problem is that these are not big enough to cover our apparently insatiable appetite for foreign goods.
If, looking ahead, the detailed reasons for the deterioration are somewhat worrying, from a strategic viewpoint they seem to me to be equally disturbing. There are too many adverse features coming together: the move to deficit on oil (and gas) account; the growing public sector payments to the EU; and our weakness in some of the fastest-growing developing markets and our dependence on slow-growing Europe. Bring all this together and you are asking a lot from the areas of undoubted excellence in the UK economy to keep the deficit around about its present level.
Strategically, where are the vulnerabilities? I would not worry particularly about energy or public spending. Yes, the bonanza is over but even as oil and gas production declines, we will be in a better position than most other developed countries. The propensity of the public sector to spend money overseas is a weakness and needs to be watched. Government policy on both oil investment and its own spending have not been as robust as they should have been but these are not catastrophes.
I am more worried about our ability to go on growing market share in financial and other services, and our ability to charge yet more for those services. One of the reasons why the invisible surplus has been so strong has been the improvement in the country's terms of trade. Put simply, our lawyers and financiers have been able to whack up their fees, while our retailers have been able to crunch down their payments for all the goods they bring in from abroad. That is fine: buy cheap and sell dear. But London and the South-east have become very expensive areas in which to operate and these businesses could in theory migrate or they could find somewhere else to operate from.
Another worry on invisible account is the reliance on investment income from abroad. Again, put simply, we borrow money from other countries at one rate and make a profit by investing it overseas at a higher rate. So despite the fact that the country now has a net deficit on the stock of assets overseas (ie foreigners own more assets in Britain than the British own abroad), our income is still not only positive but growing.
To get this into some proportion, every country has points on its trade position where it appears vulnerable. Even Germany, the world's largest goods exporter, has its problems because it is in danger of being undercut by Asian competition. Japan is great at hardware but not too good at software - the UK, taking invisible exports and visible ones together, exports more than Japan.
In some ways, a dominant position in industries that rely principally on human capital - such as finance or entertainment - is more secure than those that rely on physical and other forms of capital, such as mass manufacturing. It is harder for China to reverse-engineer a fund management group than it is to reverse-engineer a Volkswagen.
Moreover, a deficit of a bit more than 2 per cent of GDP seems reasonably easy to finance as long as the country in question remains an attractive place for global investment. As for the US, well, it seems to have managed so far to cover a deficit of 6 per cent of GDP, though that I am sure is quite unsustainable.
So this is not at all the time to panic. A collapse of sterling is not around the corner. But the Treasury and the Bank do need to realise that the country is nudging the limits of the acceptable. The Bank, I am sure, accepts that; not so sure about the Treasury. The lights are still blinking amber but they could swiftly switch to red.Reuse content