Balance of Payments, UK: Quarter 4 (Oct to Dec) and annual 2015

The United Kingdom’s (UK) current account deficit was £32.7 billion in Quarter 4 (October to December) 2015, up from a revised deficit of £20.1 billion in Quarter 3 (July to September) 2015. The deficit in Quarter 4 (October to December) 2015 equated to 7.0% of gross domestic product (GDP) at current market prices, the largest proportion since quarterly records began in 1955, up from 4.3% in Quarter 3 (July to September) 2015.

The widening in the current account deficit was due to a widening in the deficits on primary income, total trade and secondary income.

The total trade deficit widened to £12.2 billion in Quarter 4 (October to December) 2015, from £8.9 billion in Quarter 3 (July to September) 2015. This was due to exports decreasing (goods by £0.9 billion and services by £0.5 billion) and imports increasing (goods by £0.6 billion and services by £1.3 billion).

The primary income deficit widened to £13.1 billion in Quarter 4 (October to December) 2015, from £5.8 billion in Quarter 3 (July to September) 2015. This was due in most part to a decrease in receipts from direct investment and portfolio investment abroad. Additionally, there was an increase in payments to foreign direct investors. An article analysing the recent movements in direct investment earnings has also been published today to accompany this bulletin.

The deficit on secondary income widened by £2.0 billion, from £5.4 billion in Quarter 3 (July to September) 2015 to £7.4 billion in Quarter 4 (October to December) 2015. This was due to payments increasing more than receipts.

The financial account recorded a net inflow of £22.3 billion during Quarter 4 (October to December) 2015.

The international investment position recorded UK net liabilities of £65.9 billion at the end of Quarter 4 (October to December) 2015.

In 2015, the UK’s current account deficit was £96.2 billion, up from a deficit of £92.5 billion in 2014. The deficit in 2015 equated to 5.2% of GDP at current market prices. This was the largest annual deficit as a percentage of GDP at current market prices since annual records began in 1948.

The balance of payments summarises the economic transactions of the UK with the rest of the world. These transactions can be broken down into 3 main accounts: the current account, the capital account and the financial account.

The current account comprises the trade in goods and services account, the primary income account and secondary income account. The difference in the monetary value of these accounts is known as the current account balance. A current account balance is in surplus if overall credits exceed debits, and in deficit if overall debits exceed credits.

The sum of the current and capital account balances are equal to the balance of the financial account. As the capital account is relatively small in comparison, the current account and financial account can be said to be counterparts.

The current account balance plus the capital account balance measures the extent to which the UK is a net lender (that is, in surplus) or net borrower (that is, in deficit). The UK has run a combined current and capital account deficit in every year since 1983, and every quarter since Quarter 3 1998.

Quarter 4 2015 overview

In Quarter 4 2015, the UK was a net borrower of £33.0 billion, up from £20.5 billion in Quarter 3 2015. This was due to the widening in the current account deficit of £12.6 billion partially offset by a £0.1 billion narrowing in the capital account deficit.

The £3.3 billion widening in the total trade deficit was due to a narrowing of £1.8 billion in the trade in services surplus, additionally there was a widening of £1.5 billion in the trade in goods deficit. The narrowing in the trade in services surplus was due to imports rising by £1.3 billion and exports falling by £0.5 billion. The widening in the trade in goods deficit was due to exports falling by £0.9 billion and imports rising by £0.6 billion.

The £7.3 billion widening in the total primary income deficit was mainly due to the switching of the £0.5 billion surplus on direct investment income in Quarter 3 2015 to a deficit of £5.0 billion in Quarter 4 2015. Additionally, the deficit on portfolio investment widened from £3.5 billion in Quarter 3 2015 to £5.2 billion in Quarter 4 2015.

The £2.0 billion widening in the secondary income deficit in Quarter 4 2015 to £7.4 billion was mainly due to a widening in the deficit on general government.

Annual 2015 overview

In 2015, the UK was a net borrower of £97.3 billion, up from £92.9 billion in 2014. The £4.4 billion increase in net borrowing in 2015 was due to the total trade deficit widening by £2.3 billion and the primary income deficit widening by £1.9 billion.

The widening in the total trade deficit in 2015 was due to exports falling £1.9 billion from 2014 and imports rising slightly (£0.4 billion). The widening in the primary income account deficit in 2015 was due to receipts decreasing by £10.8 billion from 2014, while payments only decreased £8.9 billion from 2014. These decreases were mainly due to decreases in the earnings of UK direct investors abroad and foreign direct investors in the UK.

In 2015, the current account deficit equated to 5.2% of GDP at current market prices, compared with 5.1% in 2014. The deficit in trade in goods and services was equivalent to 2.0% of GDP in 2015, compared with 1.9% in 2014. The primary income deficit equated to 1.9% of GDP in 2015, compared with 1.8% in 2014, and the secondary income deficit equated to 1.3% of GDP in 2015, compared with 1.4% in 2014.

Notes for Summary

1. 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.

The current account deficit equated to 7.0% of gross domestic product (GDP) at current market prices in Quarter 4 2015, compared with 4.3% in Quarter 3 2015. The deficit on trade in goods and services was equivalent to 2.6% of GDP in Quarter 4 2015, compared with 1.9% in Quarter 3 2015. The deficit on primary income equated to 2.8% of GDP in Quarter 4 2015, compared with a deficit equivalent to 1.2% in Quarter 3 2015. The deficit on secondary income equated to 1.6% of GDP in Quarter 4 2015, compared with 1.2% in Quarter 3 2015.

Notes for Current account balances as percentage of GDP

1. 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.

A current account deficit of £28.5 billion was recorded with the EU in Quarter 4 2015, compared with a deficit of £25.2 billion in Quarter 3 2015. This was mainly due to the deficit on total trade widening from £16.3 billion in Quarter 3 2015 to £18.0 billion in Quarter 4 2015. Additionally, the deficit on secondary income widened from £2.1 billion in Quarter 3 2015 to £3.7 billion in Quarter 4 2015.

The current account with non-EU countries switched from a surplus of £5.1 billion in Quarter 3 2015 to a deficit of £4.1 billion in Quarter 4 2015. This was mainly due to primary income switching from a surplus of £1.0 billion in Quarter 3 2015 to a deficit of £6.3 billion in Quarter 4 2015. Additionally, the surplus on total trade narrowed from £7.4 billion in Quarter 3 2015 to £5.8 billion in Quarter 4 2015.

Notes for Current account with EU and non-EU countries (Table C)

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.

Trade in goods covers transactions in general merchandise for which changes of ownership occur between UK residents and the rest of the world. General merchandise (with some exceptions) refers to moveable goods.

The trade in goods deficit in Quarter 4 2015 was £33.3 billion, compared with £31.8 billion in Quarter 3 2015. The widening in the deficit in Quarter 4 2015 was due to exports falling by £0.9 billion and imports rising by £0.6 billion.

The fall in exports was mainly attributed to a £0.9 billion fall in semi manufactures; specifically chemicals (down £0.9 billion), and a £0.8 billion fall in fuels; specifically oil. These falls were partially offset by a £0.7 billion increase in exports of finished manufactures (mainly machinery and transport equipment).

The increase in imports was primarily due to a £1.1 billion rise in machinery and transport equipment and a £0.6 billion rise in chemicals. These increases were partially offset by falls in imports of fuels (oil) and unspecified goods (nonmonetary gold) of £0.7 billion and £0.5 billion respectively.

Trade in services covers the provision of services by UK residents to non-residents and vice versa. It also covers transactions in goods which are not freighted out of the country in which transactions take place, for example, purchases for local use by foreign forces in the UK, or by UK forces abroad and purchases by tourists. Transactions in goods which are freighted into or out of the UK are included under trade in goods.

The trade in services surplus was £21.1 billion in Quarter 4 2015, a decrease of £1.8 billion from Quarter 3 2015. Exports fell by £0.5 billion from Quarter 3 2015, to £56.6 billion, with imports rising by £1.3 billion from Quarter 3 2015, to £35.5 billion.

The fall in exports was mainly due to a fall in the export of other business services and travel services of £1.3 billion and £0.4 billion respectively. Partially offsetting these was a rise in the exports of insurance and pension services of £1.1 billion.

The rise in imports was mainly due to a rise in the import of other business services of £0.5 billion and travel services of £0.5 billion.

Notes for Trade in goods (Table E) and services (Table F)

1. 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.

The primary income account is comprised of compensation of employees, investment income and other primary income.

Compensation of employees presents remuneration in return for the labour input into the production process contributed by an individual. In the international accounts, compensation of employees is recorded when the employer (the producing unit) and the employee are resident in different economies.

Investment income covers earnings (for example, profits, dividends and interest payments and receipts) arising from foreign investment in financial assets and liabilities. Credits are the earnings of UK residents from their investments abroad and other foreign assets. Debits are the earnings of foreign residents from their investments in the UK and other UK liabilities. The flow of investment in the financial account is recorded separately from earnings, although reinvested earnings of companies with foreign affiliates are a component of both. The total value of UK assets and liabilities held at any time is also recorded separately under the international investment position.

Other primary income covers earnings from rent and taxes, and subsidies on production and on the import of goods. Under the Balance of Payments Manual fifth edition, taxes and subsidies on production and on the import of goods were classified to secondary income (previously titled current transfers). The recording of rent was previously classified to other investment income.

The primary income deficit widened from £5.8 billion in Quarter 3 2015, to £13.1 billion in Quarter 4 2015.

Compensation of employees switched from a surplus in Quarter 3 2015 of £28 million, to a deficit of £84 million in Quarter 4 2015.

Income on direct investment switched from a surplus of £0.5 billion in Quarter 3 2015, to a deficit of £5.0 million in Quarter 4 2015. The switch was due to receipts falling £3.0 billion from Quarter 3 2015 to £11.0 billion in Quarter 4 2015. Additionally, payments rose £2.5 billion from Quarter 3 2015 to £16.0 billion in Quarter 4 2015.

The fall in UK receipts from direct investment abroad was seen in most sectors during Quarter 4 2015, particularly private non-financial corporations (£1.8 billion) and insurance companies (£0.9 billion). Most UK sectors recorded increased payments to their foreign direct investors in Quarter 4 2015, notably other financial corporations (£1.3 billion) and insurance companies (£0.5 billion). For further information on recent movements in direct investment earnings, an article has been published to accompany this bulletin.

Further information on the impact of foreign direct investment annual benchmark data, please see background notes, “What’s new? This quarter”.

The portfolio investment income deficit widened between Quarter 3 2015 and Quarter 4 2015, from £3.5 billion to £5.2 billion. This was due to a widening in the deficit in both equity securities and debt securities of £1.2 billion and £0.4 billion respectively.

The deficit on earnings from other investment was virtually unchanged at £2.8 billion in Quarter 4 2015.

The deficit on other primary income was £0.2 billion in Quarter 4 2015, unchanged from Quarter 3 2015.

Notes for Primary income account (Table G)

1. 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.

Secondary income represents the provision (or receipt) of an economic value by one party without directly receiving (or providing) a counterpart item of economic value. In plain terms, this is a transaction representing “something for nothing” or without a quid pro quo. Transfers can be in the form of money or of goods or services provided without the expectation of payment. General government transfers include receipts, contributions and subscriptions from or to European Union (EU) institutions and other international bodies, bilateral aid and military grants.

The deficit on secondary income widened from £5.4 billion in Quarter 3 2015 to £7.4 billion in Quarter 4 2015. This was primarily due to a £2.5 billion increase in payments by general government, partially offset by a small increase in receipts.

It should be noted that the quarterly path of net contributions to EU institutions can be erratic due to the timing of payments. Payments by general government in 2014 and 2015 was virtually unchanged at £25.9 billion.

Notes for Secondary income account (Table H)

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.

The capital account comprises 2 components: capital transfers and the acquisition or disposal of non-produced, non-financial assets.

Under BPM6, there is no longer a requirement to record migrant transfers. The manual clarifies that the change in the residence does not involve a transaction between 2 entities but a change in status.

Capital transfers are those involving transfers of ownership of fixed assets, transfers of funds associated with the acquisition or disposal of fixed assets, and cancellation of liabilities by creditors without any counterparts being received in return. As with current transfers, they can be subdivided into general government transfers and other sectors transfers. The main sources of information are government departments (Department for International Development and HM Treasury) and the Bank of England. Compensation payments from the EU are also included here, for example, payments related to the destruction of animals to combat BSE and foot and mouth disease.

The sale or purchase of non-produced, non-financial assets covers intangibles such as patents, copyrights, franchises, leases and other transferable contracts, and goodwill. It also covers transactions involving tangible assets that may be used or needed for the production of goods and services but have not themselves been produced, such as land and sub-soil assets. The use of such assets is recorded under trade in services as royalties and license fees; only the outright purchase or sale of such assets is recorded in the capital account.

The capital account recorded a deficit of £0.3 billion in Quarter 4 (October to December) 2015, a narrowing from a deficit of £0.4 billion in Quarter 3 (July to September) 2015.

The financial account covers transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents, for example, the acquisitions and disposals of foreign shares by UK residents.

The total financial account showed a net inflow (that is, more money flowing into the UK) of £22.3 billion in Quarter 4 2015, compared with a net inflow of £25.5 billion in Quarter 3 2015.

Direct investment recorded a net outflow (that is, more money flowing out of the UK) of £10.0 billion in Quarter 4 2015, compared with a net inflow (that is, more money flowing into the UK) of £29.5 billion in Quarter 3 2015.

For further information on the impact of foreign direct investment acquisitions and disposals, please see background notes, section 3, part 2 interpreting the data.

For further information on the impact of foreign direct investment annual benchmark data, please see background notes, “What’s new? This quarter”.

Portfolio investment recorded a net inflow (that is, more money flowing into the UK) of £72.6 billion in Quarter 4 2015, an increase from a net inflow of £23.0 billion in Quarter 3 2015. The increased inflow in portfolio investment was mainly due to non-residents increasing their net investment in UK long-term debt. Additionally, UK residents switched to net disinvestment in foreign long-term debt.

Financial derivatives and employee stock options showed net settlement payments of £2.8 billion in Quarter 4 2015, following net settlement receipts of £19.0 billion in Quarter 3 2015.

Other investment in Quarter 4 2015 recorded a net outflow (that is, more money flowing from the UK) of £40.9 billion, compared with a net outflow of £2.6 billion in Quarter 3 2015.

Reserve assets showed net investment of £2.1 billion in Quarter 4 2015, compared with net investment of £5.3 billion in Quarter 3 2015.

The international investment position brings together the available estimates of the levels of identified UK external assets (foreign assets owned by UK residents) and identified UK external liabilities (UK assets owned by foreign residents) at the end of each calendar period.

As previously announced on 29 February 2016, an error has been identified in the estimate of holdings of property for both UK assets (direct investment abroad) and UK liabilities (direct investment in the UK). Data from 1999 to 2014 are affected, impacting series CGMO and HBUY within table K. Higher level aggregates within the international investment position, including the net, are also affected. Users are advised that this only impacts the international investment position.

In this publication ONS has corrected the data for 2015. Revised figures for earlier periods will be published within the Quarterly National Accounts and the Balance of Payments on 30 June 2016 when the revisions window allows.

The international investment position showed net external liabilities (that is, liabilities exceed assets) of £65.9 billion at the end of Quarter 4 2015, compared with net external liabilities of £185.5 billion at the end of Quarter 3 2015.

UK external assets abroad decreased by £72.9 billion from the end of Quarter 3 2015, to a level of £9,910.4 billion at the end of Quarter 4 2015. The decrease in the stock of UK external assets in Quarter 4 2015 was mainly due to a decrease in the stock of financial derivatives and employee stock options, partially offset by an increase in the stock of equity and investment fund shares.

UK external liabilities decreased by £192.4 billion in Quarter 4 2015, to a level of £9,976.3 billion. The decrease in UK external liabilities in Quarter 4 2015 was mainly due to a decrease in the stock of financial derivatives and employee stock options and other investment in the UK. Partially offsetting these was an increase in the stock of debt securities and equity and investment fund shares.

Notes for International investment position (Table K)

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.

Data in this release have been revised from Quarter 1 (Jan to Mar) 2015. Revisions tables are included in the balance of payments reference tables (Tables R1, R2 and R3). Revisions are due to:

Trade in goods – Revisions from Quarter 1 (Jan to Mar) 2015 reflect revised data from HM Revenue & Customs and other data suppliers, revised estimates of trading associated with VAT Missing Trader Intra-Community (MTIC) fraud, revised survey data on trade prices and a reassessment of seasonal factors. Further information on trade is available in the January 2016 statistical bulletin.

Trade in services – Revisions from Quarter 1 (Jan to Mar) 2015 are due to late and revised survey information, updated administrative and regulatory sources and a reassessment of seasonal factors.

Secondary income account – Revisions to the secondary income account are due to revised source data for transfers involving the UK government, the use of the latest data for various ONS surveys and a reassessment of seasonal factors.

Capital account – Revisions to the capital account are attributable to revised source data from HM Treasury and the ONS International Trade in Services survey.

Primary income, financial account and international investment position – Revisions from Quarter 1 (Jan to Mar) 2015 reflect new and revised survey data, a reassessment of coverage adjustments to data from the Bank for International Settlements and a reassessment of seasonal factors. Revisions also reflect new estimates from the Bank for International Settlements.

Quarterly revisions to the current account balance as a percentage of GDP
Revisions to the current account balance as a percentage of GDP in this release may be due to revisions to the current account detailed above and / or changes to nominal GDP.

Table 1 provides revisions to the current account balance as a percentage of GDP between Quarter 1 2015 to Quarter 3 2015.