Balance of Payments, UK: Quarter 3 (July to Sept) 2015

• The United Kingdom’s (UK) current account deficit was £17.5 billion in Quarter 3 (July to September) 2015, unchanged from a revised deficit of £17.5 billion in Quarter 2 (April to June) 2015. The deficit in Quarter 3 (July to September) 2015 equated to 3.7% of gross domestic product (GDP) at current market prices, down from 3.8% in Quarter 2 (April to June) 2015

• While the total current account balance remained unchanged in Quarter 3 (July to September) 2015 there were equal and offsetting movements in the components

• The total trade deficit widened to £8.7 billion in Quarter 3 (July to September) 2015, from £4.7 billion in Quarter 2 (April to June) 2015. This was primarily due to a £5.4 billion widening in the trade in goods deficit partially offset by a £1.4 billion widening in the trade in services surplus

• The primary income deficit narrowed to £3.3 billion in Quarter 3 (July to September) 2015, from £6.6 billion in Quarter 2 (April to June) 2015. This was due in most part to a decrease in direct investment and portfolio investment payments

• The deficit on secondary income narrowed by £0.8 billion, from £6.2 billion in Quarter 2 (April to June) 2015 to £5.5 billion in Quarter 3 (July to September) 2015. This was primarily due to a decrease in payments

• The financial account recorded a net inflow of £26.9 billion during Quarter 3 (July to September) 2015

• The international investment position recorded UK net liabilities of £348.8 billion at the end of Quarter 3 (July to September) 2015

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 3 2015 overview

In Quarter 3 2015, the UK was a net borrower of £17.7 billion, down from £18.0 billion in Quarter 2 2015. This was due to the narrowing in the capital account deficit of £0.3 billion as the changes in the current account components virtually offset each other.

The £4.0 billion widening in the total trade deficit was due to a widening of £5.4 billion in the trade in goods deficit, partially offset by a widening of £1.4 billion in the trade in services surplus. The widening in the trade in goods deficit was due to exports falling by £4.2 billion and imports rising by £1.1 billion. The widening in the trade in services surplus was due to exports rising by £1.4 billion, while there was virtually no change in imports.

The £3.3 billion narrowing in the total primary income deficit was primarily due to the narrowing of the deficit on investment income, from £6.2 billion in Quarter 2 2015 to £3.1 billion in Quarter 3 2015.

The £0.8 billion narrowing in the secondary income deficit in Quarter 3 2015 was due to a narrowing in the deficits on general government income and other sectors income of £0.5 billion and £0.3 billion respectively.

Notes for summary

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 3.7% of gross domestic product (GDP) at current market prices in Quarter 3 2015, compared with 3.8% in Quarter 2 2015. The deficit on trade in goods and services was equivalent to 1.9% of GDP in Quarter 3 2015, compared with 1.0% in Quarter 2 2015. The deficit on primary income equated to 0.7% of GDP in Quarter 3 2015, compared with a deficit equivalent to 1.4% in Quarter 2 2015. The deficit on secondary income equated to 1.2% of GDP in Quarter 3 2015, compared with 1.3% in Quarter 2 2015.

Notes for current account balances as percentage of GDP

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 deficit of £23.3 billion was recorded with the EU in Quarter 3 2015, compared with a deficit of £26.2 billion in Quarter 2 2015. This narrowing was mainly due to a narrowing in the deficit on primary income, additionally, to a lesser extent there was also a narrowing in the deficits on the secondary income and total trade balances. The current account surplus with non-EU countries in Quarter 2 2015 of £8.7 billion narrowed to £5.9 billion in Quarter 3 2015. The narrowing was mainly due to the total trade balance surplus narrowing from £11.9 billion in Quarter 2 2015 to £7.7 billion in Quarter 3 2015. Partially offsetting this, the surplus on the total primary income balance widened from a surplus of £0.2 billion in Quarter 2 2015 to a surplus of £1.3 billion in Quarter 3 2015. Additionally, there was a slight narrowing in the deficit on the secondary income balance of £0.2 billion from, £3.4 billion in Quarter 2 2015 to £3.2 billion in Quarter 3 2015.

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

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.

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 3 2015 was £32.0 billion, compared with £26.6 billion in Quarter 2 2015. The widening in the deficit in Quarter 3 2015 was due to exports falling by £4.2 billion and imports rising by £1.1 billion.

The widening in the trade in goods deficit was mainly due to the £1.2 billion surplus on unspecified goods in Quarter 2 2015 switching to a deficit of £1.5 billion in Quarter 3 2015. Additionally, the deficit on finished manufactured goods widened by £1.5 billion from £15.5 billion in Quarter 2 2015 to £17.0 billion in Quarter 3 2015.

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 £23.3 billion in Quarter 3 2015, an increase of £1.4 billion from Quarter 2 2015.

Exports were £1.4 billion higher than Quarter 2 2015, at £57.4 billion, with increases mainly in the other business services, financial services, and intellectual property services of £1.6 billion, £0.5 billion and £0.2 billion respectively. Partially offsetting these was a decrease in the travel services of £1.0 billion.

Imports were £34.1 billion in Quarter 3 2015, virtually unchanged from Quarter 2 2015. However, there were movements within the components, with increases mainly in the financial services and travel services of £1.2 billion and £0.7 billion respectively in Quarter 3 2015. Partially, offsetting these was a decrease in other business services of £1.6 billion from £9.1 billion in Quarter 2 2015 to £7.5 billion in Quarter 3 2015.

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 narrowed from £6.6 billion in Quarter 2 2015, to £3.3 billion in Quarter 3 2015. In terms of functional categories, the decrease was due to the deficit on portfolio investment narrowing, from £6.0 billion in Quarter 2 2015 to £3.4 billion in Quarter 3 2015. Additionally, there was a widening in the direct investment surplus of £1.1 billion, from £1.8 billion in Quarter 2 2015 to £2.9 billion in Quarter 3 2015.

The deficit on compensation of employees narrowed in Quarter 3 2015 to £30 million, from £110 million in Quarter 2 2015.

The surplus on direct investment income widened from £1.8 billion in Quarter 2 2015, to £2.9 million in Quarter 3 2015. The widening was due to payments falling more than receipts. Payments were £12.9 billion in Quarter 3 2015, £1.8 billion lower than in Quarter 2 2015. The fall was mainly due to the following sectors recording decreases:

• foreign-owned UK private non-financial corporations recorded a decrease in profits of £1.3 billion, from £10.6 billion in Quarter 2 2015 to £9.2 billion in Quarter 3 2015

• foreign-owned UK other financial intermediaries recorded a decrease in profits of £0.3 billion, from £2.4 billion in Quarter 2 2015 to £2.1 billion in Quarter 3 2015

Receipts were £15.8 billion in Quarter 3 2015, £0.7 billion lower than in Quarter 2 2015. The fall was due to:

• UK private non-financial corporations recorded a decrease in profits of £0.8 billion, from £10.6 billion in Quarter 2 2015 to £9.9 billion in Quarter 3 2015

• UK monetary financial institutions recorded a decrease in profits of £0.5 billion, from £1.2 billion in Quarter 2 2015 to £0.7 billion in Quarter 3 2015

Partially offsetting these:

• UK insurance companies recorded an increase in profits of £0.3 billion, from £1.5 billion in Quarter 2 2015 to £1.8 billion in Quarter 3 2015

• UK other financial intermediaries recorded an increase in profits of £0.2 billion, from £2.9 billion in Quarter 2 2015 to £3.1 billion in Quarter 3 2015

For 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 narrowed between Quarter 2 2015 and Quarter 3 2015, from £6.0 billion to £3.4 billion. This was due to a narrowing in the deficit in both equity securities and debt securities of £2.2 billion and £0.4 billion respectively. UK earnings on portfolio investment abroad increased by £0.9 billion, this was due to increases in both the earnings of equity securities and debt securities of £0.8 billion and £0.1 billion respectively. Foreign earnings on portfolio investment in the UK decreased by £1.7 billion, this was due to a fall of £1.4 billion and £0.3 billion in foreign earnings on UK equity securities and UK debt securities respectively.

The deficit on earnings from other investment widened by £0.5 billion to £2.7 billion in Quarter 3 2015. UK earnings from other investment abroad decreased by £0.5 billion to £4.9 billion, while foreign earnings on other investment in the UK increased slightly to £7.6 billion.

The deficit on other primary income was £0.2 billion in Quarter 3 2015, virtually unchanged from Quarter 2 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 narrowed by £0.8 billion, from £6.2 billion in Quarter 2 2015 to £5.5 billion in Quarter 3 2015. This was primarily due to a decrease in payments partially offset by a small decrease 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.

Notes for secondary income account (Table H)

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 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 3 (July to September) 2015, a narrowing from a deficit of £0.5 billion in Quarter 2 (April to June) 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 financial account showed a net inflow (that is, more money flowing into the UK) of £26.9 billion in Quarter 3 2015, compared with a net inflow of £10.0 billion in Quarter 2 2015. UK investment abroad switched from net disinvestment (net selling of assets abroad) of £147.1 billion in Quarter 2 2015 to net investment (net buying of assets abroad) of £43.9 billion in Quarter 3 2015. Investment in the UK switched from net disinvestment (net selling of UK assets) of £137.1 billion in Quarter 2 2015 to net investment (net buying of UK assets) of £70.8 billion in Quarter 3 2015.

Direct investment recorded a net inflow (that is, more money flowing into the UK) of £23.2 billion in Quarter 3 2015, compared with a net outflow (that is, more money flowing out of the UK) of £21.0 billion in Quarter 2 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.

Direct investment abroad decreased from net disinvestment of £5.9 billion in Quarter 2 2015 to net disinvestment of £0.9 billion in Quarter 3 2015. This was due to decreased net disinvestment in debt instruments, from net disinvestment of £10.3 billion in Quarter 2 2015 to net disinvestment of £3.5 billion in Quarter 3 2015. Additionally, there was a switch in reinvestment of earnings, from net disinvestment of £1.7 billion in Quarter 2 2015 to net investment of £4.0 billion in Quarter 3 2015. Partially offsetting these was a switch in the equity capital other than reinvestment of earnings, from net investment of £6.1 billion in Quarter 2 2015 to net disinvestment of £1.4 billion in Quarter 3 2015.

On a sector basis, the decrease was due to the following:

• UK private non-financial corporations recording decreased net disinvestment, from £12.0 billion in Quarter 2 2015 to net disinvestment of £3.2 billion in Quarter 3 2015

• UK other financial intermediaries recording increasing net investment from £1.0 billion in Quarter 2 2015 to net investment of £2.3 billion in Quarter 3 2015

Partially offsetting these were:

• UK insurance companies recording a decrease in net investment, from £5.5 billion in Quarter 2 2015 to net investment of £2.1 billion in Quarter 3 2015

• UK monetary financial institutions recording an increase in net disinvestment, from £0.8 billion in Quarter 2 2015 to net disinvestment of £2.7 billion in Quarter 3 2015

Direct investment in the UK switched in Quarter 3 2015 to net investment of £22.4 billion, from net disinvestment of £26.9 billion in Quarter 2 2015. The switch was due to a switch in debt instruments, from net disinvestment of £38.0 billion in Quarter 2 2015 to net investment of £10.1 billion in Quarter 3 2015. Slightly offsetting this were increases in net investment in equity capital other than reinvestment of earnings and reinvestment of earnings of £0.9 billion and £0.3 billion in Quarter 3 2015 respectively.

On a sector basis, the switch was due to the following:

• foreign-owned UK private non-financial corporations recording a switch from net disinvestment of £30.4 billion in Quarter 2 2015 to net investment of £16.8 billion in Quarter 3 2015

• foreign-owned UK other financial intermediaries increasing from net investment of £1.3 billion in Quarter 2 2015 to net investment of £3.0 billion in Quarter 3 2015

• foreign-owned UK monetary financial institutions recording an increase in net disinvestment, from £1.7 billion in Quarter 2 2015 to net investment of £2.7 billion in Quarter 3 2015

Partially offsetting these was:

• foreign-owned UK insurance companies recording a switch from net investment of £0.5 billion in Quarter 2 2015 to net disinvestment of £0.2 billion in Quarter 3 2015

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 outflow (that is, more money flowing from the UK) of £9.4 billion in Quarter 3 2015, a switch from a net inflow (that is, more money flowing into the UK) of £125.6 billion in Quarter 2 2015. The switch in portfolio investment was mainly due to UK residents switching from net disinvestment in Quarter 2 2015 to net investment abroad in Quarter 3 2015.

Portfolio investment abroad switched in Quarter 3 2015 to net investment of £42.4 billion, from net disinvestment of £63.5 billion in Quarter 2 2015. The switch was mainly due to investment in debt securities switching from net disinvestment of £46.8 billion in Quarter 2 2015 to net investment of £49.6 billion in Quarter 3 2015. Additionally, investment in equity and investment fund shares showed a decrease in net disinvestment of £9.5 billion, from net disinvestment of £16.7 billion in Quarter 2 2015 to net disinvestment of £7.2 billion in Quarter 3 2015.

Portfolio investment in the UK showed net investment of £33.0 billion in Quarter 3 2015, a decrease from net investment of £62.1 billion in Quarter 2 2015. This was mainly due to decreased net investment in equity and investment fund shares, from net investment of £32.7 billion in Quarter 2 2015 to net investment of £5.2 billion in Quarter 3 2015.

Financial derivatives and employee stock options showed net settlement receipts of £15.1 billion in Quarter 3 2015, following net settlement payments of £5.1 billion in Quarter 2 2015.

Other investment in Quarter 3 2015 recorded a net inflow (that is, more money flowing into the UK) of £33.4 billion, compared with a net outflow (that is, more money flowing from the UK) of £98.7 billion in Quarter 2 2015.

Other investment abroad showed a decrease in net disinvestment, from net disinvestment of £73.7 billion in Quarter 2 2015 to net disinvestment of £18.0 billion in Quarter 3 2015. The decrease was mainly due to a switch in short-term loans by UK monetary financial institutions, from net repayments of £41.0 billion in Quarter 2 2015 to net advances of £17.3 billion in Quarter 3 2015. Partially offsetting this was a slight increase in the net withdrawal of deposits from abroad by UK residents, from net withdrawal of deposits of £33.2 billion in Quarter 2 2015 to net withdrawal of deposits abroad of £35.8 billion in Quarter 3 2015.

Other investment in the UK showed a switch from net disinvestment of £172.4 billion in Quarter 2 2015 to net investment of £15.4 billion in Quarter 3 2015. The switch was mainly due to a switch in short-term loans to UK other financial corporations, from net repayments of £61.1 billion in Quarter 2 2015 to net advances of £24.7 billion in Quarter 3 2015. Partially offsetting this was a decrease in non-resident net withdrawal of deposits with UK monetary financial institutions, from making net withdrawals of £111.3 billion in Quarter 2 2015, to making net withdrawals of deposits of £14.1 billion in Quarter 3 2015.

Reserve assets showed net investment of £5.3 billion in Quarter 3 2015, compared with net investment of £1.1 billion in Quarter 2 2015.

Notes for financial account (Table J)

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 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.

The international investment position showed net external liabilities (that is, liabilities exceed assets) of £348.8 billion at the end of Quarter 3 2015, compared with net external liabilities of £270.0 billion at the end of Quarter 2 2015. UK external assets abroad increased by £263.9 billion from the end of Quarter 2 2015, to a level of £9,677.5 billion at the end of Quarter 3 2015. The increase in the stock of UK external assets in Quarter 3 2015 was mainly due to an increase in the stock of financial derivatives and employee stock options. UK external liabilities increased by £342.7 billion in Quarter 3 2015, to a level of £10,026.3 billion. The increase in UK external liabilities in Quarter 3 2015 was mainly due to an increase in the stock of financial derivatives and employee stock options and other investment in the UK.

Notes for international investment position (Table K)

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.

Data in this release have been revised from Quarter 1 (Jan to Mar) 2014. 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) 2014 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 UK Trade October 2015 statistical bulletin.

Trade in services – Revisions from Quarter 1 (Jan to Mar) 2014 are due to updated transport survey information and administrative and regulatory sources and a reassessment of seasonal factors. Additionally, it has been possible to incorporate annual survey data into the estimates for 2014. The 2013 annual data will be incorporated in the Quarter 1 (Jan to Mar) 2016 dataset when the revisions window is opened further.

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) 2014 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. Similar to the trade in services estimates it has been possible to incorporate 2014 annual benchmark data in this release. The 2013 annual data will be incorporated in the Quarter 1 (Jan to Mar) 2016 dataset when the revisions window is opened further.

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 annually for 2014 and quarterly between Quarter 1 2014 to Quarter 2 2015.