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Current-account deficit hits highest level in 25 years

Britain’s current account balloons to its highest level since 1989 as income earned on foreign investments slumps

Britain’s current account ballooned to its highest level since 1989 last year as the income earned on foreign investments slumped, official figures showed yesterday.

The Office for National Statistics (ONS) reported that the current account deficit in the final quarter came in at 5.4 per cent of GDP. That was down slightly from the 5.6 per cent record high in the third quarter but it was still higher than analysts had expected and it took the deficit for 2013 to £71.1bn. That equates to 4.4 per cent of GDP and is the largest gap since the Lawson boom of the late 1980s. Philip Shaw of Investec said the widening deficit figures “sit uncomfortably with hopes of an external rebalancing in the economy”.

The ONS’s breakdown of the balance of payments showed that the trade deficit actually contracted in the last quarter, but this was offset by a fall in income earned on investments abroad relative to the returns paid on overseas investments in Britain. Over 2013 as a whole, the investment income deficit jumped to £17bn, from £3.7bn the previous year.

The ONS also said that the household saving ratio dipped sharply in the final quarter to  5 per cent, from 5.6 per cent in the previous three months.

Analysts said that economic growth in 2013, which the  ONS revised down from 1.8 to 1.7 per cent, had been financed by households saving less of their disposable income.

However, analysts also predicted that falling inflation and rising pay should bring improvement this year. “With real wage growth returning ... as early as April, the foundations underpinning the consumer recovery should be more solid,” said John Bulford at Oxford Economics.

Others said there were tentative signs of a rebalancing away from consumption towards business investment and exports. Michael Saunders at Citi pointed out that the ONS had revised up export growth in the final three months to 2.8 per cent, from 0.4 per cent previously. “These revisions suggest that growth is more broad-based and balanced than previously shown.”