The history of the balance of payments in the United Kingdom - Business Environment

Table gives a summary of the balance of payments in the United Kingdom over the last ten years. The table shows that the current account was in deficit for the whole period. The weaknesses on the current account pre-date this and are somewhat hidden in the overall figures. The current account deficits started in 1987, the visible balance has been in deficit since 1983 (and still is) and within this the non-oil balance has been in deficit since 1982. This did not show in the overall current account figures until 1987 because of the offsetting effect of invisibles and oil. The United Kingdom’s underlying weaknesses on the current account come from several sources:

  1. Exports have risen but imports have risen faster. In the United Kingdom there is a high propensity to import goods.
  2. The collapse of oil prices during the 1990s reduced the value of the United Kingdom’s oil exports.
  3. The recession of the early 1980s left the UK manufacturing base in an extremely weak position. This means that it is difficult to produce enough goods for export or even to meet domestic demand, so the balance of payments has been hit from both directions. The changes in the structure of industry in the United Kingdom described in Chapter have implications for the balance of payments, as services are less exportable than goods.
  4. The consumer booms that occurred in the late 1980s and in the late 1990s led to increases in the level of imports.
  5. The impact of oil has been two fold. First, as the United Kingdom is now an oil exporting country it brings in revenue which will improve the balance of payments. Second, it has kept the exchange rate higher than it would have been, as will be shown in the next section, which makes UK goods less competitive in world markets and will therefore lead to a worsening of the balance of payments.
  6. The high value of the pound in the late 1990s hit the UK’s export market.
  7. The most recent deterioration is due to a fall in the level of non-European exports, especially to Asia and Russia.

UK-balance of payments

Figure shows the breakdown of the current account between visibles and invisibles and it is clear that good performance on invisibles has partly offset poor performance in visibles.

Components-of-current account

Patterns of trade
Over time, patterns of trade change, for many reasons, Table shows UK patterns of trade by destination/source and Table shows UK trade by type of good. From these tables it is possible to look at how the country’s patterns of trade have changed. The most obvious change, as can be seen in Table, is that trade with the EU has become more important over the last 30 years while trade with the rest of western Europe has declined. In 2003 58 per cent of Britain’s imports came from the EU and nearly 60 per cent of exports went to the EU. Despite this, the USA has remained important to Britain and has become more important both for imports and exports since 1990. There has been a decline in Britain’s trade with other OECD countries over the whole period, although the importance of Japan within that group has increased, particularly with respect to imports. Britain’s trade with the oil-exporting countries has declined in importance, as too has trade with the rest of the world, although this increased between 1990 and 2003. The rest of the world includes many of the old Commonwealth countries, which at one time were Britain’s biggest markets. Since 1970 the United Kingdom has been importing less food and fewer animals for consumption. The impact of oil can be seen in Table, as the quantities of oil-related products imported into the United Kingdom have fallen over the period.

Pattern-of-trade by type of good

Manufacturing is clearly the most important category of good as far as the balance of payments is concerned. Manufacturing has retained its importance for exports, accounting for 76 per cent of exports in 1970 and 67 per cent in 2003. As far as imports are concerned, the percentage has increased a great deal over the last 30 years. The United Kingdom is now a net importer of manufactured goods. In 2003 the value of imported manufactured goods was £168 810 million, whereas the value of exported manufactured goods was £125 055 million. One reason for this is the increased import penetration in the United Kingdom. Table shows import penetration in UK manufacturing for 1970, 1980, 1990, 1994, 1996 and 2003, from which it can be seen that the penetration has increased over this time period.

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