Brexit

Reality Check: How important is foreign investment?

Chart showing UK current account deficit

There is no sign of anybody triggering Article 50 to begin the UK's process of leaving the European Union.

There are political reasons for that, but there is concern that the delays will hit foreign investment, which is a problem for the current account.

It's not very fashionable to care about the current account, but there are particular reasons to be looking at it now.

The current account is worked out by adding up the goods and services a country exports and the income earned for the UK by overseas investments (that's things like profits, dividends and interest payments).

Then you subtract the goods and services the UK imports, income paid overseas for investments in the UK and payment of things like international aid.

The figure you get is the current account, and if the answer is negative then you have a current account deficit. The UK has had a continuous current account deficit since 1984. Since 2011, it has widened considerably. In the first three months of 2016, it was 6.9% of national income or £32.6bn.

A current account deficit means a country depends on being able to borrow money overseas and on foreign companies wanting to invest in the UK.

That hasn't been a huge problem so far. In 2014, there was £27.8bn of foreign direct investment in the UK, according to the Office for National Statistics, which was mentioned during the referendum campaign as about £880 a second.

About 18 months ago, former BBC economics editor Robert Peston warned that the current account deficit was "the UK's Achilles heel", but added that the silver lining was "that the latest figures show a big increase in the profits of foreign-owned UK companies".

Sushil Wadhwani said when he was a member of the Bank of England's rate-setting Monetary Policy Committee that current account deficits "appear not to matter until, well, they suddenly do".

And what would make them suddenly matter would be something that happened that made overseas companies think twice about investing in the UK.

Or if there were a reduction in other countries' confidence in the pound - confidence is important if you are running a big current account deficit.

If you try to run a current account deficit without confidence then you get a sterling crisis and the value of the pound falls further.

The good news is that a weaker pound makes imports more expensive and exports cheaper, which should narrow the deficit, but you wouldn't want it to fall too far.

Chancellor George Osborne has spoken about the economy being in a good state to cope with the challenges ahead because the budget deficit has been falling.

But the current account deficit has been growing, and on Monday, Mr Osborne said: "It is already evident that as a result of Thursday's decision, some firms are continuing to pause their decisions to invest or to hire people."

He blamed the uncertainty about the UK's future relationship with the European Union for those delays.

In the context of the current account, some certainty sooner rather than later would be desirable.


Read more: The facts behind claims about our relationship with the EU


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