The UK Balance of Payments RGS Newcastle Economics Department

The Balance of Payments BOP records all financial transactions between the UK & the Rest of the World The UK is an open economy which –trades both goods and services –is open to inflows and outflows of financial capital and fixed capital investment BOP measures the extent to which the UK is “paying its way” with other countries

Trade in goods (visible trade) Consumer durables Capital goods / techology /software Commodities (including mineral fuels) Components & basic raw materials Foodstuffs and Beverages Semi-finished manufactured products

International Trade in Services Tourism Travel / Civil Aviation Insurance Consultancy Banking services Accountancy services Data processing Information services Music & Entertainment Shipping Educational services

UK Balance of Payments Small deficits from A small surplus is forecast for 1997 with a deterioration in the trade balance in 1998

Current account as a % of GDP Historically high balance of payments deficits in thelate 1980s but now the situation is much improved. A paradigm change?

Trade with the European Union Structural trade deficit with the European Union but trade within the Union remains very important for the UK

UK International Trade in Services Very strong financial services (examples?) but can you account for the long-term deficit in tnet trade in tourism, civil aviation and sea transport?

UK Balance of Payments 1996

UK Balance of Payments 1997

Composition of UK exports of goods Note the importance of exporting finished manufacturing goods and the impact of north sea oil from the mid 1970s

Composition of UK imports of goods Very large increase in the proportion of imported finished manufactured goods. Why has import penetration grown so rapidly?

Import Penetration into UK Manufacturing

Import Penetration ratios

Export market shares

Causes of a BOP deficit Important to distinguish between –cyclical factors affecting import & export demand –structural factors (see later) –impact of “external shocks” (e.g. Asian Flu or the OPEC oil crises) Could also take a –short/medium term –long term approach

Short-medium term factors behind a payments deficit Deficit normally emerges because of –fast growth of domestic demand –high MPM / Yed for imports –capacity constraints in domestic economy –decisions by the private sector to move into financial deficit –changes in the exchange rate –impact of external shocks for open economies

Long-run explanations Structural weaknesses in the traded goods sector of the economy –insufficient productive capacity –lack of cost and & price competitiveness –inadequate non-price competitiveness Changing comparative advantage in the global economy (increasing competition) Overvalued exchange rates not reflecting price differentials? Long run decline in certain key sectors

Policies to correct a BOP deficit Cyclical deficit tends to be self-correcting Lower exchange rate will also help to improve the trade balance Policies focus either on –expenditure-reduction –expenditure-switching Structural trade deficits may take many years to eliminate Focus in long run needed on improving the supply-side performance of the economy

Summary of policies Expenditure reduction deflationary fiscal policies tightening of domestic monetary policy Structural change supply-side reforms export promotion Expenditure switching devaluation / depreciation of exchange rate tariffs and other import controls achieving period of low relative inflation

Export optimism for UK manufacturing firms

Exchange rate and trade balances