A Financial Perspective on the UK Current Account Deficit

Lane, Philip R.

doi:10.1177/002795011523400114

Cited by 18 publications

(21 citation statements)

References 8 publications

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“…27 Office for National Statistics (2016). See Lane (2016) for a discussion of the challenges in interpreting the UK's recent current account figures.…”

Section: Resultsmentioning

confidence: 99%

The long-term economic impact of leaving the EU

Baker

Carreras

Ebell

et al. 2016

Natl. Inst. econ. rev.

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The aim of this paper is to analyse the long-term implications of leaving the EU for the UK economy. To do this, we consider three main channels by which the UK economy could be affected in the long run: 1) Reductions in trade with EU countries and a modest increase in tariff barriers.2) A reduction in foreign direct investment (FDI), particularly affecting services FDI.3) A reduction in the UK's net fiscal contribution to the EU.We input these effects of leaving the EU into NiGEM, the National Institute Global Econometric Model, a multicountry economic forecasting model. NiGEM has been developed at NIESR over the past three decades and is funded by subscriptions from international institutions, central banks and finance ministries from around the world, as well as some private sector institutions. Both the OECD and HM Treasury have also chosen to use NiGEM to conduct their analysis of the economic impact of leaving the EU. This is not surprising, as NiGEM's explicit trade linkages make it particularly well-suited to modelling the impact on the UK economy of shifts in trade policy.This article presents our estimates of the long-run impact of leaving the EU over the next fifteen years, not only on GDP, but on consumption, real wages, unemployment, and a range of other (endogenously determined) variables. We find that by 2030, GDP is projected to be between 1.5 per cent and 3.7 per cent lower than in the baseline forecast in which the UK remains in the EU. Real wages fall somewhat more, by between 2.2 per cent and 6.3 per cent. Consumption is also hit somewhat harder than GDP, falling by between 2.4 and 5.4 per cent. Real wages and consumption decline more than GDP in the long term due to a long-term deterioration in the terms of trade, coupled with a shift towards savings. Table 14 compares our estimated long-run reductions in GDP to those of three other prominent studies published by the OECD, the Centre for Economic Performance (CEP) at the LSE and HM Treasury. While the studies assume broadly similar reductions in trade and FDI, as well as similar reductions in the UK's net contributions to the EU, the range of estimated impacts on GDP relative to the 2030 baseline is considerably larger. We summarise these results by reporting the estimated reduction in GDP for each percentage point reduction in total trade. In the CEP analysis, GDP is reduced by 0.5 per cent to 0.75 per cent for each 1 per cent reduction in total trade, while in the OECD and HM Treasury studies, the reduction is about 0.3 per cent to 0.4 per cent of GDP for each 1 per cent decrease in total trade. In our analysis, GDP is reduced by 0.1 per cent for each 1 per cent reduction in trade, so that our estimates can be seen as more conservative.Our modelling strategy is to focus on a small number of the clearest and most well-understood potential impacts on the EU economy of leaving the EU in our core scenarios. As a result, it is not surprising that our estimated reductions in GDP are smaller than those of by guest on June 4, 2016 ner.sagepub.com D...

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“…27 Office for National Statistics (2016). See Lane (2016) for a discussion of the challenges in interpreting the UK's recent current account figures.…”

Section: Resultsmentioning

confidence: 99%

The long-term economic impact of leaving the EU

Baker

Carreras

Ebell

et al. 2016

Natl. Inst. econ. rev.

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“…While the above discussion focuses on flow-side developments involving UK's Balance of Payments, it is also worth considering stock-side changes involving UK's external assets and liabilities, and its net international investment position [14]. From the intertemporal approaches discussed in the previous section (see Equations (22)- (24)), it should be clear that any analysis of current account deficit sustainability requires an examination of the net international investment position.…”

Section: Contributions To the Deterioration Of Uk Current Account Balmentioning

confidence: 99%

UK Current Account Sustainability in the Post-Brexit Era: Insights from an Intertemporal Current Account Framework

Jayakumar¹

2017

TEL

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British voters decided in a June 2016 referendum that they wanted the UK to leave the European Union (EU). The Brexit referendum result represents a critical turning point for the UK and the EU alike, and the decision to exit the bloc is bound to have far-reaching consequences. UK's persistent current account deficits and its outsized external assets and external liabilities reflect Britain's deep economic and financial integration with the European Single Market System, and highlight London's central role as Europe's financial capital. Unraveling of the symbiotic relationship between the UK and the EU will profoundly impact Britain's ability to entice foreign investors to fund its current account deficits. Using a rich intertemporal current account framework that incorporates valuation effects, this study examines the potential impact of Brexit on UK's current account sustainability and on UK's net foreign debt position. It argues that a "hard Brexit" outcome would imperil UK's ability to sustain current account deficits. UK's role as a gateway for non-EU states looking to invest inside EU, and the benefits enjoyed by UK-based financial institutions from the European "financial passport" system would both be endangered if UK is shutout of the European Single Market system. UK is bound to become far less attractive to foreign investors in such a scenario, and a rapid and painful current account deficit reduction is probable. On the other hand, the study shows that a "soft Brexit" outcome in conjunction with a sustained and orderly depreciation of the pound would actually improve UK's current account balance and its net foreign debt position.

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“…Lane (2015) suggests this could be a consequence of financial engineering, where UK firms relocate their headquarters to a foreign country. If this hypothesis is correct, it poses less of a concern for the recent deterioration in the current account as it flags up the inability of the framework for balance of payment statistics to cope with how modern economies operate.…”

Section: Saving and Investmentmentioning

confidence: 99%