Economic Growth and Current Account

Last week, we looked at factors that affect the current account deficit. The below diagram shows the balance of trade in goods and services as a % of GDP.

There is a rough relationship. For example, the late 1980s boom led to a deterioration in the balance of trade in goods and services.  The recession of 1991, led to an improvement in the balance of trade in goods and services.

economic growth

 

The recent recession of 2009, led to a small improvement in the current account, but we might have expected a bigger improvement. The depth of the recession was also combined with a strong deterioration in the value of the pound. But, the fall in consumer spending and depreciation in the value of sterling had done little to reduce the deficit.

There was a time when the size of the trade deficit was a big issue in UK politics. These days it hardly gets a mention amidst the concerns over inflation and optimal interest rate.

This shows a graph stretching further back.

econ growth current

Note: When you look at current account as a % of GDP, it does not look as drastic as simple monetary value (graph). But, this does  show the UK’s  long term deterioration in trade in goods and services.

Note: These figures show the balance of trade in goods and services. This comprises the vast majority of the current account. Though the current account also takes into account transfers and net investment incomes.

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