ONS data raises hopes that sharp decline in pound since Brexit vote could make economy less reliant on domestic spending

Britain’s trading position with the rest of the world improved markedly in the final three months of 2016, boosting hopes that the pound’s sharp fall since the Brexit vote can help the economy become less reliant on domestic spending.



As sterling’s fall made UK goods more competitive on overseas markets and boosted exports, there was a significant narrowing in the UK’s current account deficit, the latest ONS growth figures showed. Economists said the rebalancing towards more exports would offset some but not all of the slowdown in consumer spending expected this year as incomes are squeezed.

“While the drop in the pound is clearly boosting inflation, it is also having some offsetting positive impacts through bringing about a long-awaited rebalancing of the economy towards the external sector,” said Paul Hollingsworth at the consultancy Capital Economics.

The current account deficit reflects Britain’s trade gap with the rest of the world and the shortfall between money paid out by the UK and money coming in. In the fourth quarter of 2016 it more than halved to £12bn from £25.7bn in the third. It equated to 2.4% of GDP, the lowest level since the second quarter of 2011.



ONS (@ONS) Current account deficit fell to 2.4% of #GDP in Q4, mainly due to increased exports and earnings from FDI https://t.co/qHuKDoSKcr

The ONS said the improvement was mainly due to the sharp narrowing of the trade deficit, or the gap between exports and imports, which in turn was boosted by the fall in the pound since the EU referendum.

Before last year’s referendum on EU membership, the Bank of England had highlighted Britain’s record current account gap and noted that the UK relies on foreign investors to fund the shortfall. The Bank’s governor, Mark Carney, expressed concern that in the event of a vote to leave the EU, foreign investors would become more nervous about buying or holding UK assets.



Economists said those fears had not gone away with the latest figures and the pound remained vulnerable to news of another widening in the current account.

“The stock of overseas’ investors assets in the UK equates to a massive 547% of annual GDP. Sterling would depreciate further if only a small proportion of these investors took flight,” said Samuel Tombs at the consultancy Pantheon Macroeconomics. “Signs that the UK is heading for a hard Brexit could be a trigger for such a fire sale.”

Howard Archer, an economist at consultancy IHS Markit, said the narrower deficit was welcome news for the UK economy. He too was cautious about the country’s future trade performance and ability to attract overseas investors but said the current account deficit should be lower over the coming quarters.

“Sterling’s marked weakening appears to be increasingly feeding through to lift exports, helped by current decent global demand. Additionally, the trade deficit should be limited by softening domestic demand limiting imports,” said Archer.