Record deficit adds to fears for UK economy

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The UK's current account deficit leapt by almost 50 per cent in the third quarter, hitting a record 20bn and raising fresh concerns about the stability of the country's economy.

The deficit was almost twice as large as expected, as the strong pound saw the level of imports far exceed exports, and the levels of investment fell.

Public sector borrowing also hit a new high of 11.2bn last month, up from 9.1bn at the same time last year, while gross mortgage lending fell by 7.7 per cent during the month, confirming the slowdown in the housing market.

Jonathan Loynes of Capital Economics said the data showed the UK economy to be "dangerously unbalanced". "This morning's flurry of UK data paints a worrying picture of a dangerously unbalanced economy," he said. "The UK's external position now looks pretty much as bad as that in the US, suggesting the pound needs to fall sharply like the US dollar."

Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, added: "What is really shocking about these figures is that they reveal that the Exchequer was running a large current deficit before the credit crisis hit home, when the economy was doing very well and it should have been showing a large current surplus.

"Now, the economy is slowing sharply and the public finances will deteriorate equally rapidly. The first hit will come in February when the January tax receipts will be published. These will be well down on last January's figure, which was of course swollen by huge City bonuses and profits last year. We have revised our forecast of this year's current deficit up to 16bn, twice the Treasury pre-Budget report forecast of 8bn. As if the Chancellor had not got enough problems on his plate already."

The pound has already been falling in recent days, as investors have speculated that there will be further interest rate cuts in the new year. This week, the Bank of England revealed that its Monetary Policy Committee had voted 9-0 in favour of its 0.25 percentage point cut this month.

One piece of positive data to emerge yesterday was an upwards revision in the annual rate of GDP growth, to 3.3 per cent, as well as the revelation that consumer spending continued to rise strongly in the third quarter. However, Howard Archer, the chief UK economist at Global Insight, said that other evidence had demonstrated that the economy has been slowing rapidly during the final quarter of the year.

"We expect growth to have slowed significantly in the fourth quarter and anticipate that it will lose further momentum in 2008 in the face of major headwinds," he said. "In particular, consumer spending seems certain to moderate as a consequence of tighter lending practices, muted real disposable income growth, increased debt levels, a slowing housing market and the still marked overall rise in interest rates since August 2006."

Mr Archer said there was now a real possibility that the MPC would consider cutting rates again as soon as January.