September 30, 2015 / 8:40 AM / 2 years ago

UK current account deficit narrows sharply, living standards pick up

City workers are reflected in a window as they pass near the Tower of London in London, Britain April 28, 2015.Neil Hall

LONDON (Reuters) - Britain's hefty current account deficit with the rest of the world narrowed much more sharply than expected after a surge in exports in the three months to June, but a slowing global economy may make this hard to sustain.

Living standards also picked up, as companies' spending on wages rose at the fastest rate since before the financial crisis, suggesting that the benefits of faster growth may be starting to be felt more widely.

The current account deficit - a recent source of concern for the Bank of England - fell to a two-year low of 3.6 percent of gross domestic product, after the country's trade deficit shrank to its smallest since 1998.

Net exports were the biggest driver of overall GDP growth of 0.7 percent in the second quarter of the year, the Office for National Statistics said, in contrast to previous quarters where the country's recovery relied on domestic consumers.

Wednesday's figures mark a sharp turnaround from 2014, when Britain recorded its largest current account deficit on record at 5.1 percent of GDP despite being the fastest-growing country in the Group of Seven rich nations for a second year in a row.

Sterling gained against the dollar after the balance of payments data, which showed a smaller deficit than all economists' forecasts in a Reuters poll.

But slower growth in emerging markets, sterling strength and signs of falling exports in more recent monthly trade data and industry surveys raise concerns that the fall in the current account deficit may prove temporary.

"The UK recovery is progressing, but the economy remains unbalanced and our external position remains precarious," David Kern, chief economist at the British Chambers of Commerce, said.

Other economists were less downbeat, saying Britain should benefit from recovery in the United States and euro zone, and was less exposed than many countries to emerging markets.

Britain achieved solid growth of 2.2 percent in 2013 and 2.9 percent in 2014, helping Prime Minister David Cameron's Conservatives win re-election in May.

But Britain's recovery has still been slow by historic standards, with less of the catch-up that economists typically expect after a steep slump. Output is only 5.9 percent above its previous peak in early 2008, and adjusted for a growing population, it is just 0.6 percent higher.

New Labour leader Jeremy Corbyn attacked the Conservatives' record on living standards in a speech to his party's annual conference on Tuesday, but Wednesday's data showed some signs that things are starting to turn around.

Real household disposable income, a measure of inflation-adjusted after-tax wages and welfare benefits, increased by 3.7 percent on the year, the biggest increase in five years.

Companies' wage bills rose by an annual 4.7 percent in real terms, the biggest rise since late 2007, though this partly reflects more staff working longer hours, and extra pension payments, not just higher hourly wages.

The ONS scaled back earlier estimates of investment growth in the second quarter and revised up construction output.

Overall, economists said the figures were likely to reinforce the BoE's view that Britain's economy was likely to be ready for a first rise in interest rates in nearly a decade at some point next year.

"(These data) result in limited implications for its view of the degree of spare capacity, and hence inflationary pressure, in the economy," Investec economist Chris Hare said. "Our view is still that the BoE will begin its 'gradual and limited' course of rate rises in Q1 next year."

Editing by Andrew Roche

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below