Balance of payments, UK: October to December 2020

A measure of cross-border transactions between the UK and rest of the world. Includes trade, income, capital transfers and foreign assets and liabilities.

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Contact:
Email Jamie Pritchard

Release date:
31 March 2021

Next release:
30 June 2021

1. Main points

  • The underlying UK current account deficit excluding non-monetary gold and other precious metals widened to £22.8 billion, or 4.2% of gross domestic product (GDP) in Quarter 4 (Oct to Dec) 2020; the UK current account deficit including non-monetary gold and other precious metals widened to £26.3 billion in Quarter 4 2020, or 4.8% of GDP.

  • In Quarter 4 2020, the total trade deficit widened as demand for goods imports continued to recover at a faster rate than exports following their sharp contraction in Quarter 2 (Apr to June) 2020 when global trade stalled under government restrictions to combat the global coronavirus (COVID-19) pandemic; trade in services exports and imports continue to be impacted, specifically in transport and travel services.

  • The primary income deficit narrowed slightly to £5.0 billion or 0.9% of GDP in Quarter 4 2020 from £5.3 billion in Quarter 3 (July to Sept); this was because of a slightly larger recovery in UK earnings on foreign investments than the recovery in payments to foreign investors on their UK investments.

  • Financial flows increased in Quarter 4 2020 with a net inflow to the UK of £38.7 billion, as non-residents increased their cash deposits at UK deposit-taking corporations by £142.1 billion; partially offset by UK residents increasing their cash deposits abroad by £59.0 billion and investment in foreign debt securities by £29.3 billion.

  • The UK's net international investment position (IIP) net liability position widened by £116.7 billion to £639.2 billion as non-residents deposited a large amount of foreign currency at UK deposit-taking corporations.

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2. Current account

The UK's current account balance is a measure of the country's balance of payments with the rest of the world in trade, primary income and secondary income.

In Quarter 4 (Oct to Dec) 2020, the UK's current account balance excluding non-monetary gold and other precious metals widened substantially from a deficit of £13.8 billion in Quarter 3 (July to Sept) 2020 to a deficit of £22.8 billion in Quarter 4 2020 or 4.2% of gross domestic product (GDP). The current account deficit including non-monetary gold and other precious metals widened further from £14.3 billion in Quarter 3 2020 to £26.3 billion or 4.8% of GDP.

Both measures reflect the recovery in the import of goods as global trade started to recover from the lows of early 2020 and there was continuing evidence of stockpiling in preparation for EU exit after the end of the transition period on 31 December 2020. The increase of £16.7 billion in goods imports in Quarter 4 2020 was driven by machinery and transport equipment, chemicals and miscellaneous manufactures.

The current account deficit including precious metals is further impacted as UK residents imported more precious metals (£3.2 billion). Further detail on the recovery of trade can be found in the December 2020 UK trade release.

On an annual basis the current account deficit widened to £73.9 billion in 2020 from £68.6 billion in 2019. This was mainly caused by the primary income deficit widening to £38.2 billion as credits fell more sharply than debits as earnings on investments abroad were more impacted by economic uncertainty because of the coronavirus (COVID-19) pandemic. Additionally, payments to EU institutions increased as the UK reached the final year of the Multiannual Financial Framework (MFF) and to support the EU’s coronavirus response increasing the secondary income deficit to £28.2 billion in 2020. The overall trade balance reduced its contribution to the current account deficit by narrowing to £7.6 billion in 2020 from £27.5 billion in the previous year as demand for imports fell more sharply than exports.

The primary income balance deficit - which records income the UK receives and pays on financial and other assets, along with compensation of employees - narrowed by £0.3 billion to £5.0 billion in Quarter 4 2020. Total credits increased by £1.2 billion in Quarter 4 2020 to £34.0 billion, while total debits increased by just £0.9 billion to £39.0 billion. Both credits and debits remain well below pre-pandemic (Quarter 4 2019) levels.

The value of foreign direct investment (FDI) credits increased for the second consecutive quarter from £15.7 billion in Quarter 3 2020 to £17.2 billion in Quarter 4 2020 (by £1.5 billion). Meanwhile, FDI debits decreased from £9.1 billion to £8.8 billion over the same period (a decrease of £0.3 billion). This left FDI debits at their lowest value since Quarter 2 (Apr to June) 2005 (£6.1 billion).

The increase in the value of credits combined with a small decrease in debits means that the UK's surplus on FDI increased by £1.8 billion, from £6.6 billion to £8.4 billion.

More about economy, business and jobs

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3. Financial account

A current account deficit places the UK as a net borrower with the rest of the world, indicating that overall expenditure in the UK exceeds national income. The UK must attract net financial inflows to finance its current (and capital) account deficit, which can be achieved through either disposing of overseas assets to overseas investors or accruing liabilities with the rest of the world.

The financial account recorded an increased net inflow of £38.7 billion in Quarter 4 (Oct to Dec) 2020, from a net inflow of £25.0 billion recorded in Quarter 3 (July to Sept) 2020. The increase in the net inflow was because of foreign investors in the UK increasing their assets by £166.8 billion while UK residents increased their foreign assets by just £128.1 billion.

The majority of these financial flows were investors depositing currency at deposit-taking corporations (banks). There was also evidence of investors continuing to return to equity markets as global markets recovered from the uncertainties experienced at the beginning of 2020.

Part of the inflow was because of numerous UK foreign direct investors (FDI) reducing their overseas equity holdings leading to a net inflow of £13.1 billion in Quarter 4 2020. This effectively reduces the value of UK FDI stock abroad and impacts the international investment position. Further details on Quarter 4 2020 transactions can be found in the Mergers and acquisitions Quarter 4 2020 bulletin released on 9 March 2021.

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4. International investment position

The international investment position (IIP) examines the UK’s balance sheet with the rest of the world, measuring the difference between the net stock of assets and liabilities. In Quarter 4 (Oct to Dec) 2020, the IIP recorded an increase in the value of its net liability position to £639.2 billion from £522.5 billion in Quarter 3 (July to Sept) 2020.

In Quarter 4 2020, the net liability position widened by £116.7 billion as the IIP recorded a greater increase in the value of UK liabilities than the increase in UK overseas assets. Excluding financial derivatives and reserve assets, UK assets increased by £136.1 billion while UK liabilities increased by £247.8 billion. The difference in these movements are influenced by the appreciation of the British pound against other major currencies. As liabilities are comprised of a lower proportion of foreign currency, they have a smaller negative impact on the UK's foreign-owned liabilities (currency revaluation: negative £196.0 billion) relative to UK-owned foreign assets (currency revaluation: negative £247.5 billion).

These large negative currency impacts partially offset the positive price effects and flows, as there was an increase in the value of major share indices and investors increased holdings in equity markets. Price changes increased the value of the UK's total assets overseas by £220.6 billion, whilst flows increased this figure by £127.2 billion. Both effects also positively increased the value of the UK's total liabilities, with price effects increasing this figure by £195.1 billion and flows by £166.8 billion.

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5. Balance of payments data

Balance of payments
Dataset | Released 31 March 2021
Quarterly summary of balance of payments accounts including the current account, capital transfers, transactions, and levels of UK external assets and liabilities.

Balance of payments time series
Dataset | Released 31 March 2021
Quarterly summary of balance of payments accounts including the current account, capital transfers, transactions and levels of UK external assets and liabilities.

Balance of payments - revision triangles
Dataset | Released 31 March 2021
Quarterly summary information on the size and direction of the revisions made to the data covering a five-year period, UK.

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6. Measuring the data

Data sources

Balance of payments statistics are compiled from a variety of sources, produced in the national accounts Sector and Financial Accounts (SFA) framework. Some of the main sources used in the compilation include:

  • Overseas Trade Statistics (HM Revenue and Customs (HMRC))

  • International Trade in Services Survey (Office for National Statistics (ONS))

  • International Passenger Survey (ONS) - this was suspended from 16 March 2020

  • Foreign Direct Investment Survey (ONS and Bank of England (BoE))

  • Various financial inquiries (ONS and BoE)

  • Ownership of UK Quoted Shares Survey (ONS)

Trade is measured through both exports and imports of goods and services. Data are supplied by over 30 sources including several administrative sources, HMRC being the largest for trade in goods. The International Trade in Services Survey (ITIS), conducted by the ONS, is the largest single data source for trade in services.

The main source of information for UK foreign direct investment (FDI) statistics is the Annual FDI Survey; separate surveys are used to collect data on inward and outward FDI. This is combined with data from the BoE for all monetary financial institutions -- such as banks -- and other sources for property and public corporations in FDI. The statistics in this bulletin are compiled using the asset and liability measurement principle, which uses residency as the main distinction between outward and inward investments. It measures the direct investments of UK-resident companies -- both UK parent companies and foreign-owned UK affiliates -- with the rest of the world relative to the direct investments of non-UK resident companies held in the UK.

Impact of coronavirus on data quality

Since the start of the coronavirus (COVID-19) pandemic and various lockdown restrictions we have faced numerous challenges in producing the UK balance of payments estimates, including lower than usual response to surveys that feed into the estimates.

Given the uncertainties in estimating the impact of the pandemic on the accounts, users should be aware of potentially larger revisions than usual. UK balance of payments data and international investment position (IIP) estimates since Quarter 1 (Jan to Mar) 2020 are therefore subject to more uncertainty than usual because of these data collection challenges. More information on the challenges faced is available in Coronavirus and the effects on the UK Balance of Payments.

Impact on response rates

Quality and methodology

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Balance of payments QMI.

The balance of payments estimates includes data on the trade in precious metals. In recent periods the trade in precious metals, notably non-monetary gold, has been more volatile than usual. To address this, we have developed estimates that exclude trade in precious metals (Table BX) so the underlying trends in the current account balance are clearer.

End of EU exit transition period

As the UK enters into a new Trade and Cooperation Agreement with the EU, the UK statistical system will continue to produce and publish our wide range of economic and social statistics and analysis. We are committed to continued alignment with the highest international statistical standards, enabling comparability both over time and internationally, and ensuring the general public, statistical users and decision makers have the data they need to be informed.

Additionally, the Withdrawal Agreement outlines a need for UK gross national income (a fundamental component of the national accounts, which includes GDP) statistics to remain in line with those of other EU countries until EU budget contributions are finalised for the years in which we were a member, and making budget contributions during the transition period. To ensure this comparability during this period, the national accounts will continue to be produced according to European System of Accounts (ESA) 2010 definitions and standards until at least 2024.

As the shape of the UK's future statistical relationship with the EU becomes clearer over the coming period, the ONS is making preparations to assume responsibilities that as part of our membership of the EU, and during the transition period, were delegated to the statistical office of the EU, Eurostat. This includes responsibilities relating to international comparability of economic statistics, deciding what international statistical guidance to apply in the UK context and to provide further scrutiny of our statistics and sector classification decisions.

In applying international statistical standards and best practice to UK economic statistics, we will draw on the technical advice of experts in the UK and internationally, and our work will be underpinned by the UK's well-established and robust framework for independent official statistics, set out in the Statistics and Registration Service Act 2007. Further information on our proposals will be made available later this year.

We will continue to produce our UK Balance of Payments statistics in line with the UK Statistics Authority's Code of Practice for Statistics and in accordance with internationally agreed statistical guidance and standards. This is based on the International Monetary Fund's (IMF's) Balance of Payments Manual sixth edition (BPM6) (PDF, 3.0MB), until those standards are updated.

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7. Strengths and limitations

More detailed information on the strengths and limitations of the UK balance of payments data is available in the Balance of payments QMI.

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Contact details for this Statistical bulletin

Jamie Pritchard
bop@ons.gov.uk
Telephone: +44 (0)1633 456106