UK current account deficit fails to narrow as expected in first quarter

By David Milliken and Andy Bruce

LONDON (Reuters) – Britain’s current account deficit remained near an all-time high in early 2016, official data showed on Thursday, highlighting its reliance on foreign financing and the risk of more pressure on its currency after it voted to leave the European Union.

The deficit edged down to 32.6 billion pounds ($43.86 billion) in the first quarter from 34.0 billion pounds in the last three months of 2015. Economists polled by Reuters had forecast the deficit would drop to 27.1 billion pounds.

“It’s an amber warning light,” Scotiabank European fixed income strategist Alan Clarke said.

“It still seems to be the investment income balance, but it’s not getting any worse … It’s partly because we’ve been growing faster than our overseas partners,” he said.

Bank of England Governor Mark Carney said before the EU vote that leaving the bloc would test the “kindness of strangers” who cover Britain’s balance of payments shortfall. He is due to give a speech in London later on Thursday.

Earlier this week sterling fell to its lowest against the dollar since 1985 in response to the referendum result – something that may help narrow the deficit as it makes British exports cheaper and increases the value of foreign currency returns from Britain’s overseas investments.

As a percentage of GDP, the first-quarter deficit was 6.9 percent, only just off a record of 7.2 percent set in the fourth quarter, which was the highest since three-monthly records started in 1955 and far more than in other advanced economies.

For 2015 as a whole, the deficit was revised up to 5.4 percent of GDP, the highest for a full year since annual records began in 1948.

RECESSION FEARS

The data also confirmed Britain’s economy relied heavily on spending by households and services, while foreign trade, investment and manufacturing all dragged on growth.

A survey published earlier on Thursday gave a first glimpse of how the shock referendum result has affected households, with confidence falling sharply after the EU vote.

The economy grew by 0.4 percent in the first three months of 2016, in line with forecasts, and was 2.0 percent larger than a year earlier, the Office for National Statistics said.

The growth figures were viewed as moot by financial markets after Britain’s decision to leave the EU, which has raised fears the country could fall into recession, and there was no reaction on currency or bond markets to the figures.

“In some sense the GDP data is ancient history … though the services data points to relatively decent momentum going into Q2, so perhaps the UK fundamentals are holding out,” Investec economist Chris Hare said.

Britain’s dominant services sector saw output rise in April at its fastest pace in just over a year.

However, the effect of the vote to leave the EU will be a far bigger factor, Hare said.

“We think at least we’ll get some picture in the next month or two but it will take some time to get a full idea.”

The ONS figures showed business investment in the first three months of 2016 was 0.8 percent down on a year ago, the first fall since Q1 2010. Ratings agency Fitch forecast on Wednesday that investment would fall by 5 percent next year due to uncertainty after the Brexit vote.

But there was better news for households, whose combined real disposable income in the three months to March rose at its fastest rate in 15 years, up 5.4 percent on the year.

This reflected very low inflation, as well as higher social security payments by employers.

(Editing by Gareth Jones)