There are many possible causes for such a large current account deficit. The first being an unbalanced economy where there is higher focus on consumer spending rather than investment in firms that export goods and services. In addition, During economic booms there is a high marginal propensity to Import as economic growth tends to lead to higher incomes. However, as we have been in a recession over the past few years , this cannot be the main cause as imports are relatively price elastic, apart from commodities such as oil of which we have become a net importer of. Another large factor affecting our trade balance is our competitiveness, or lack of it should I say. Rising raw material costs coupled with wage rises mean that the price of goods also increase as firms pass on these costs. This means that our goods are more expensive when compared with other fast developing economics. Furthermore , recently the pound has begun to strengthen again meaning that exports are again going to decrease while imports increase, making the trade gap even larger. Although does a current account deficit really matter?
Yes and No is the answer. Some argue that a current account deficit highlights uncompetitiveness and potrays the UK as a weak and unstable economy. It shows the structural weaknesses in the economy, with particular emphasis on the loss of a manufacturing industry and the lack of investment within the economy. However, globalisation has meant that a trade deficit is often offset by financial flows from outward investment , providing a long term source of income. The financial sector in the UK has also seen large amounts of financial capital flowing into it meaning that the trade deficit has become more affordable. Moreover , the current account makes up a relatively small percentage of GDP (<5%) which is quite insignificant remaining that the economy continues to grow.
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