The UK current account deficit widened by £0.7 billion to £23.7 billion in Quarter 4 (Oct to Dec) 2018, or 4.4% of gross domestic product (GDP), the largest deficit recorded since Quarter 3 (July to Sept) 2016 in both value and percentage of GDP terms.
Annually, the UK current account deficit widened to 3.9% of GDP in 2018, compared with 3.3% in 2017.
The UK total trade deficit widened by £0.6 billion to £9.4 billion, due to a widening of the trade in goods deficit, partially offset by an improving trade in services surplus.
The primary income deficit worsened by £1.1 billion to £8.4 billion in Quarter 4 2018.
The financial account recorded a net inflow into the UK of £35.8 billion in Quarter 4 2018, an increase from an inflow of £18.0 billion in Quarter 3 2018.
The UK mainly financed its current account deficit through portfolio investment, where UK investors disinvested in foreign equity and debt securities, while overseas investors increased their holdings of UK debt securities.
UK investors have disinvested in overseas equity securities in the portfolio account throughout 2018, resulting in an overall disinvestment of £174.2 billion in 2018 – the largest on record.
The value of the UK’s net liabilities was £142.8 billion at the end of Quarter 4 2018, with both the value of UK liabilities and assets recording an increase.
In accordance with the National Accounts Revisions Policy, the revision period for this release is open from Quarter 1 (Jan to Mar) 2018.
A brief introduction to the UK Balance of Payments (PDF, 92KB) and glossary (PDF, 123KB) provides an overview of the concepts and coverage of the UK Balance of Payments using the Balance of Payments Manual sixth edition.
Further information on the methods are available in the Balance of payments (BoP) Quality and Methodology Information (QMI) report.
Also available is an overview of how movements in foreign exchange rates can impact the balance of payments and international investment position.
Estimates derived from the International Passenger Survey (IPS) are used to help measure exports and imports of travel services. The IPS has recently transferred data collection from paper forms to tablet computers. Analysis of IPS data has detected no discontinuities as a result of the change in data collection mode, therefore we have replaced forecasts used in recent periods with IPS data within headline trade estimates. Please see our Travel and Tourism release for more information about IPS.
Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December.Back to table of contents
The UK’s current account deficit – a measure of the country’s balance of payments with the rest of the world in trade, primary income, and secondary income – widened by £0.7 billion to £23.7 billion in Quarter 4 (Oct to Dec) 2018, or 4.4% of GDP, the largest deficit recorded since Quarter 3 (July to Sept) 2016.
The widening current account deficit in Quarter 4 2018 was due to worsening deficits on the primary income account balance, which widened by £1.1 billion, and the trade account balance, which widened by £0.6 billion. Slightly offsetting these was a £0.9 billion narrowing to the deficit on the secondary income account balance.
The UK’s trade deficit widened in Quarter 4 2018 due to falling goods exports and rising imports
The UK’s trade deficit widened to £9.4 billion in Quarter 4 (Oct to Dec) 2018 from a deficit of £8.9 billion in Quarter 3 (July to Sept) 2018 – marking the fourth consecutive deterioration. The widening to the deficit was due to a worsening trade in goods deficit, which was slightly offset by an improving trade in services surplus.
The trade in goods deficit in Quarter 4 2018 (£36.9 billion) was the largest deficit recorded since Quarter 3 2016 (£38.5 billion) and was due to an increase in imports and falling exports.
The value of goods imports increased by £1.7 billion in Quarter 4 2018. The largest increases were finished manufactured goods (up £2.0 billion), particularly cars, and semi-manufactured goods (up £1.3 billion), with rises in the import of chemicals such as medicinal and pharmaceutical products. Partially offsetting the increases were falling imports of unspecified goods and oil products – the latter largely explained by falling oil prices.
Trade in goods exports decreased by £0.4 billion in Quarter 4 2018, with decreases recorded in nearly all commodities apart from exports of food, beverages and tobacco, semi-manufactured goods and unspecified goods, which all saw slight increases on the quarter. The largest decreases were recorded in exports of oil (down £0.7 billion), attributable to falling oil prices, and finished manufactured goods (down £0.6 billion), particularly cars and clothing.
The trade in services surplus increased by £1.5 billion to £27.5 billion in Quarter 4 2018 with exports recording an increase of £3.4 billion to £73.6 billion; the largest increase on the quarter since Quarter 4 2016. This was partially offset by an increase in the imports of services of £1.9 billion.
Within exports of services, the largest increases were recorded in other business services (up £0.8 billion), financial services (up £0.6 billion), intellectual property (up £0.6 billion), and travel services (up £0.5 billion), along with smaller increases elsewhere.
The increase in the value of services imports were mainly due to financial services (up £0.7 billion), other business services (up £0.4 billion) and travel services (up £0.4 billion).
Notes for Trade
- Users of the balance of payments and international investment position should be aware that the data in this release is all in current prices, over time price inflation will naturally lead to an increase in values.
Earnings by overseas investors on their UK direct investment and portfolio investment reached a record high over the whole of 2018
The primary income balance deficit – which records income the UK receives and pays on financial and other assets, along with compensation of employees – widened by £1.1 billion to £8.4 billion in Quarter 4 (Oct to Dec) 2018, the largest deficit recorded since Quarter 4 2016 (£9.9 billion). All components of the UK’s primary income balance except reserve assets saw a decline in Quarter 4 2018.
The foreign direct investment (FDI) earnings surplus fell by £0.4 billion to £2.9 billion in Quarter 4 2018, the smallest surplus since Quarter 4 2016 (£2.7 billion). Both earnings by UK investors on their FDI abroad (credits) and earnings generated by overseas residents on their UK FDI (debits) saw falls, however, a larger decline in credits resulted in the overall balance worsening. The main industry seeing falls in earnings generated by UK investors overseas was mining and quarrying, which coincided with falling oil prices. Falls in earnings generated by overseas investors in the UK were mainly due to falling profits generated on investments in UK financial services other than banks, wholesale, trade and transport, and professional and support industries.
While UK FDI earnings fell in the latest quarter, initial estimates for 2018 show earnings by UK investors on their overseas FDI (credits) increasing to £100.0 billion – their highest level since 2011 (£104.6 billion). This partly reverses the large downward trend recorded between 2011 and 2016. Earnings by overseas investors on their UK FDI (debits) also increased in 2018, reaching a record £80.3 billion, continuing the upward trend seen since 2015 (£53.2 billion).
The portfolio investment earnings balance deficit widened by £0.4 billion to £10.1 billion in Quarter 4 2018 as the increase in dividends and interest payments to foreign investors exceeded those received by UK investors. UK earnings on portfolio investments abroad (credits) increased by £1.6 billion to £17.2 billion – the highest level since Quarter 4 2008. In contrast, payments to foreign investors on their portfolio investment in the UK (debits) increased by £2.0 billion to a record high of £27.2 billion.
Initial annual estimates show that UK investors earnings on portfolio investment abroad reached £63.4 billion in 2018, the highest recorded since 2008 (£69.0 billion), while earnings by foreign investors on their UK portfolio investment reached £103.5 billion – the highest on record.
The deficit on “other investment” earnings widened by £0.2 billion to £1.2 billion in Quarter 4 2018 as UK payments to foreign investors (debits) increased by £0.7 billion, which was only partially offset by a £0.5 billion rise in UK receipts on earnings from other investment abroad (credits). Both the rise in credits and debits reflected increased earnings on foreign currency deposits by UK investors overseas and overseas investors in the UK. As reported in the previous bulletin, the rise in earnings on foreign currency deposits has followed a broadly upward trend since late 2015, which is in part linked to a steady rise in interest rates by the Federal Reserve in the United States.Back to table of contents
The UK has run a current account deficit in each quarter since Quarter 3 (July to Sept) 1998, or 1983 when considering annual totals. 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 total financial account showed a larger net inflow (that is, more money flowing into the UK) of £35.8 billion in Quarter 4 (Oct to Dec) 2018; an increase from net inflows of £18.0 billion in Quarter 3 2018. The net inflow in the latest quarter reflected larger investment by overseas investors in UK based assets than that of UK residents investment in overseas assets.
UK investors reduced their holdings of equity and debt securities in the portfolio investment account in Quarter 4 2018
Within the financial account, portfolio investment recorded the largest net inflow (that is, overseas investment into the UK exceeded UK overseas investment) in Quarter 4 2018, with a net inflow of £60.6 billion. This was mainly due to overseas investors increasing their holdings of UK debt securities (£34.1 billion), which was partially offset by the reduction of UK equity security liabilities by £21.3 billion. In addition, UK residents reduced their exposure to foreign equities and debt securities by £47.8 billion. This is the sixth consecutive disinvestment recorded in UK portfolio investment assets since Quarter 3 2017.
UK investors’ holdings of foreign portfolio equities have seen a sharp reduction throughout 2018, with a disinvestment of £174.2 billion in the year overall – the largest disinvestment ever recorded. These trends may indicate that institutional investors are moving away from volatile markets – particularly in the first and last quarters of 2018, when global stock markets experienced a relatively poor performance against a backdrop of trade tensions and political uncertainty.
In terms of direct investment flows, net inflows of £3.8 billion were recorded in Quarter 4 2018. UK investors’ foreign direct investment (FDI) flows abroad reached £12.2 billion in the latest quarter, while inward flows reached £15.9 billion. Both outward and inward FDI flows were influenced by large mergers and acquisitions transactions, as documented in the recent Mergers and Acquisitions Quarter 4 2018 release.
In addition, financial derivatives and employee stock options showed net settlement payments of £10.3 billion in Quarter 4 2018, following net settlement receipts of £13.4 billion in Quarter 3 2018.
Partially offsetting these net inflows were net outflows in other investment (£25.8 billion) and government foreign currency reserves (£13.1 billion) in Quarter 4 2018. Within other investment there were large but mostly offsetting flows between UK monetary financial institutions as they increased their assets by £154.8 billion and liabilities by £122.2 billion with the rest of the world. These flows are reflected within the movement of the international investment position.
Surveys conducted by the Office for National Statistics (ONS) to produce estimates for the UK’s financial account position do not systematically collect information on the reasons for various investment decisions made by UK companies and funds. Nevertheless, during routine survey checks, a small number of respondents to our surveys have cited uncertainty over the UK’s exit from the European Union as the reason for restructuring their holdings of overseas portfolio equity and debt securities and inward FDI investment in Quarter 4 2018. There are, however, a range of other factors also affecting headline estimates in the latest quarter including falling global equity markets, heightened trade tensions, and longer-term mergers and acquisitions decisions by large multinational enterprises. These factors have also occurred alongside a recent trend where UK investors appear to have been reducing their exposure to overseas equity securities in favour of overseas long-term debt securities throughout 2018.Back to table of contents
The international investment position (IIP) – which measures the UK’s international balance sheet with the rest of the world – recorded increases in the value of both UK overseas assets and liabilities. The UK’s stock of overseas assets was valued at £11.0 trillion at the end of Quarter 4 (Oct to Dec) 2018 (up £90.7 billion), while UK liabilities to overseas residents were valued at £11.2 trillion (up £87.0 billion). The marginally larger increase in the value of assets compared with liabilities resulted in the UK’s net external liabilities (that is, liabilities exceeding assets) narrowing to £142.8 billion at the end of Quarter 4 2018, from net liabilities of £146.5 billion at the end of Quarter 3 (July to Sept) 2018.
The increase in the value of UK assets reflected mainly an increase in the value of other investment (up £186.8 billion), due to UK monetary financial institutions extending short-term loans to non-residents and placing deposits overseas. In addition, there were increases in the value of financial derivatives (£95.5 billion) and reserve assets (£17.3 billion). Partially offsetting these increases was a fall in the value of overseas portfolio investment, which was partly due to UK residents continuing to disinvest from foreign equities but was also attributable to a fall in the value of overseas stock prices.
Similar to assets, the rise in the value of UK liabilities was also attributable to other investment (up £157.3 billion) and financial derivatives (up £105.7 billion) – with the former mainly reflecting overseas residents placing deposits in UK monetary financial institutions. Partially offsetting these falls was a fall in the value of portfolio investment, as UK stock values decreased over Quarter 4 2018.
Decline in global stock markets subdue the value of UK foreign assets
Changes in the value of UK overseas asset positions can be influenced by a number of factors, including investment flows, currency movements, and price revaluations (such as stock market movements). Figure 7 presents estimates of changes in the value of UK overseas assets broken down by these different factors (excluding financial derivatives and reserves).
Despite positive outflows recorded by UK investors in Quarter 4 2018, the value of the UK’s stock of financial assets fell for the first time since Quarter 1 (Jan to Mar) 2018. The fall in value is mainly due to price revaluations (negative £209.1 billion), attributable to the decline in global stock markets seen towards the end of 2018 – the Dow Jones and Nikkei fell by 12% and 17% quarter-on-quarter respectively. A further £20.6 billion negative contribution to the value of assets came from “other changes”, a residual of movements unexplained by the model.
Partially offsetting the declines in the value of UK overseas asset were positive outflows (£114.5 billion) and exchange rate movements – the latter due to depreciations in sterling inflating the value of UK foreign currency denominated assets.
Back to table of contents
The Balance of payments (BoP) Quality and Methodology Information report contains important information on:
the strengths and limitations of the data and how it compares with related data
uses and users of the data
how the output was created
the quality of the output including the accuracy of the data
Contact details for this Statistical bulletin
Telephone: +44 (0)1633 456106
- Business investment in the UK : analysis by asset
- Business investment in the UK : October to December 2018 revised results
- GDP quarterly national accounts, UK : October to December 2018
- Quarterly economic commentary : October to December 2018
- Business investment in the UK : October to December 2018 revised results
- Quarterly sector accounts, UK : October to December 2018
- Consumer trends, UK : October to December 2018