Balance of payments, UK: October to December 2019

• The UK current account deficit narrowed substantially to £5.6 billion in Quarter 4 (Oct to Dec) 2019, or 1.0% of gross domestic product (GDP); this is the lowest since Quarter 2 (Apr to June) 2011 when it was £2.3 billion, or 0.6% of GDP.

• The underlying UK current account deficit excluding non-monetary gold and other precious metals narrowed slightly to £17.1 billion in Quarter 4 2019, or 3.1% of GDP; this was mostly because of a narrowing in the primary income deficit.

• The primary income deficit narrowed by £2.6 billion to £7.1 billion, or 1.3% of GDP, in Quarter 4 2019; this was because of a decrease in payments to foreign investors on their UK investments, while UK earnings on foreign investments were flat.

• The financial account recorded a net inflow of £15.0 billion in Quarter 4 2019, down from an inflow of £42.2 billion in Quarter 3 (July to Sept) 2019, reflecting the narrowing flows recorded in the current account.

• The value of the UK's net liability position widened slightly to £558.1 billion in Quarter 4 2019, from £544.3 billion in Quarter 3 2019.

• On an annual basis, the intra-2019 volatility in the trade of non-monetary gold and other precious metals is not evident, with the current account deficit for 2019 recording a slight widening of £0.9 billion to £83.8 billion, or 3.8% of GDP.

The UK's current account deficit is a measure of the country's balance of payments with the rest of the world in trade, primary income and secondary income.

In Quarter 4 (Oct to Dec) 2019, the UK's current account balance narrowed substantially from a deficit of £19.9 billion in Quarter 3 (July to Sept) 2019 to a deficit of £5.6 billion in Quarter 4 2019, or 1.0% of gross domestic product (GDP). This was mostly because of exports of non-monetary gold and other precious metals. Also causing the narrowing of the current account deficit, although to a lesser extent, was a narrowing to the deficit on primary income, which was mostly because of a decrease in the UK's payments to foreign investors.

There were erratic movements in the trading of precious metals in 2019, especially non-monetary gold. To understand the underlying level of the UK's current account, we have estimated the current account balance excluding trade in precious metals (Figure 1).

On the basis of excluding non-monetary gold and other precious metals, the UK's underlying current account balance narrowed slightly to a deficit of £17.1 billion in Quarter 4 2019, or 3.1% of GDP. In this instance, the improvement was mostly because of a narrowing in the primary income deficit while total trade would have a small negative impact.

Total trade

The total trade balance has been more volatile over the course of 2019 than usual. In Quarter 1 (Jan to Mar) 2019, the UK recorded substantial imports of non-monetary gold leading to a sharp deterioration in the balance. However, in Quarter 4 2019, the UK recorded the unwinding of these imports leading to a positive impact on the trade and current account balances.

On an annual basis, the total trade deficit narrowed from £29.8 billion in 2018 to £25.9 billion in 2019. This was mostly because of the trade in goods deficit narrowing from £139.4 billion in 2018 to £129.7 billion in 2019. Partially offsetting this was a narrowing in the trade in services surplus from £109.6 billion to £103.8 billion in 2019.

Trade in goods

Figure 3 shows the contributors by commodity type to the quarterly change in the trade in goods balance in Quarter 4 2019. The main impacts were the unspecified goods deficit of £1.0 billion switched to a surplus of £11.6 billion, mostly because of exports of precious metals; see the UK trade: January 2020 release for more details and the finished manufactured goods deficit narrowed by £3.1 billion to £12.0 billion, because of decreased imports of machinery and transport equipment.

Partially offsetting these were oil, where the deficit widened by £1.0 billion to £2.8 billion, and other fuels, where the deficit widened by £0.8 billion to £1.4 billion.

Trade in services

Figure 4 shows the contributors by service type to the quarterly change in the trade in services balance in Quarter 4 2019. The main impact was other business services, where the surplus narrowed by £4.5 billion to £4.2 billion.

The movement in other business services was mostly because of the impact of GDP balancing adjustments that are applied to component series (which includes trade) to improve the GDP alignment position across the three measures of GDP. The adjustments applied to Quarter 4 2019 caused a narrowing in the trade in services surplus.

A more detailed explanation is available in the Measuring the data section of the latest UK trade bulletin.

There were comparatively small offsetting impacts from:

• transport services (surplus widened by £0.7 billion to £1.7 billion)

• intellectual property (surplus widened by £0.6 billion to £2.0 billion)

• travel services (deficit narrowed by £0.5 billion to £3.7 billion, mainly because of an increase in the export of services to foreign students in the UK)

Primary income

The primary income balance deficit – which records income the UK receives and pays on financial and other assets, along with compensation of employees – narrowed by £2.6 billion to £7.1 billion in Quarter 4 2019. Total credits were virtually unchanged in Quarter 4 2019 at £53.3 billion, while total debits decreased in Quarter 4 2019 by £2.7 billion from £63.1 billion to £60.4 billion.

The main factor in the narrowing of the primary income deficit was a widening to the surplus on foreign direct investment (FDI). This was mainly because of the value of FDI credits, which increased by £2.5 billion to £25.2 billion in Quarter 42019. Meanwhile, FDI debits only increased £0.2 billion to £17.6 billion. Because of the relatively larger increase in credits compared with debits, the surplus on FDI earnings widened by £2.2 billion (from £5.4 billion to £7.6 billion).

In addition to the impact of FDI, there was also a slight narrowing in the deficit on portfolio investment deficit as debits to the rest of the world decreased (£0.9 billion) more than receipts from the rest of the world (£0.2 billion).

Notes for: The UK's current account deficit

1. Users of the balance of payments and international investment position should be aware that the data in this release are all in current prices, over time price inflation will naturally lead to an increase in values.

The UK has run a current account deficit in each quarter since Quarter 3 (July to Sept) 1998, or 1983 when considering annual totals. A current account deficit places the UK as a net borrower with the rest of the world, indicating that overall expenditure in the UK exceeds national income. The UK must attract net financial inflows to finance its current (and capital) account deficit, which can be achieved through either disposing of overseas assets to overseas investors or accruing liabilities with the rest of the world.

The financial account net inflows reflected the sharp narrowing in the current account deficit. Total inflows decreased to £15.0 billion in Quarter 4 (Oct to Dec) 2019 from £42.2 billion in Quarter 3 2019. This is the smallest net inflow since Quarter 1 (Jan to Mar) 2017, when it was £3.9 billion. The decrease was caused by UK investors reducing their investments in financial derivatives by a net value of £21.6 billion over the quarter. To a lesser extent, the UK increased its portfolio investment liabilities by £15.7 billion as non-residents increased their investment in UK debt securities; this was mostly government-issued debt.

The international investment position (IIP) – which measures the UK's international balance sheet with the rest of the world – recorded decreases in the value of both UK overseas assets and liabilities.

In Quarter 4 (Oct to Dec) 2019, the UK IIP recorded significant decreases in the stock of foreign assets (down by £844.9 billion to £11.3 trillion) and liabilities (down by £831.1 billion to £11.8 trillion). The similar falls in value of both assets and liabilities meant that the net liability position only widened by £13.8 billion to £558.1 billion.

The significant decreases in UK financial assets and liabilities were mostly because of financial derivatives, with assets decreasing by £533.1 billion and liabilities decreasing by £513.5 billion. This was because of a combination of investor sentiment to movements in yields and changes in revaluations as the British pound appreciated against major currencies over the quarter.

To further illustrate the impact of these exchange rate movements at the end of Quarter 4 2019, Figure 9 shows the British pound appreciated by:

• 7.2% against the American dollar from Quarter 3 (July to Sept) 2019, to the highest level since the end of Quarter 1 (Jan to Mar) 2018

• 4.1% against the euro from Quarter 3 2019, to the highest level since the end of Quarter 2 (Apr to June) 2016

• 7.7% against the yen from Quarter 3 2019, to the highest level since the end of Quarter 1 2019

This impact is also seen across other assets and liabilities, where the financial instrument is denominated in a foreign currency.

Figure 9: The British pound appreciated against counterpart currencies in Quarter 4 2019

The British pound exchange rate with major currencies, Quarter 1 (Jan to Mar) 2015 to Quarter 4 (Oct to Dec) 2019

Notes:

1. Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept) and Q4 refers to Quarter 4 (Oct to Dec).

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Another major contributor to the decrease in value of UK foreign assets and liabilities was other investment, the most liquid form of investment, mostly made up of cash deposits and loans. UK other investment assets decreased by £305.8 billion as UK investors disinvested £108.5 billion. The remainder of the decrease is because of revaluation impact (£229.0 billion) from the impact of the British pound appreciating against major currencies.

UK other investment liabilities recorded a decrease of £281.0 billion by the end of Quarter 4 2019 as foreign investors disinvested a net £116.1 billion. With the majority of their investments being held in foreign currency deposits, the appreciation of the British pound over the quarter also led to a large revaluation impact estimated to be negative £204.4 billion at the end of the quarter.

Current account

The current account is made up of 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 it is in deficit if overall debits exceed credits.

Capital account

The capital account has two components: capital transfers and the acquisition (purchase) or disposal (sale) of non-produced, non-financial assets.

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. The sale or purchase of non-produced, non-financial assets covers intangibles such as patents, copyrights, franchises, leases and other transferable contracts, and goodwill.

Financial account

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 accounts are presented by the functional categories of direct investment, portfolio investment, other investment, financial derivatives and reserve assets.

International investment position

The international investment position (IIP) is a statement that shows at the end of the period the value and composition of UK external assets (foreign assets owned by UK residents) and identified UK external liabilities (UK assets owned by foreign residents). The framework of international accounts sets out that the IIP is also presented by functional category, consistent with primary income and the financial account.

Precious metals

In line with international standards, the Office for National Statistics' (ONS') headline trade statistics contain the UK's exports and imports of non-monetary gold. Because a significant amount of the world's trade in non-monetary gold takes place on the London markets, this trade can have a large impact on the size of and change in the UK's headline trade figures.

Further information on precious metals and their impact can be found in the UK trade release.

A more detailed glossary (PDF, 123KB) of terms used in the balance of payments is also available.

After EU withdrawal

As the UK leaves the EU, it is important that our statistics continue to be of high quality and are internationally comparable. During the transition period, those UK statistics that align with EU practice and rules will continue to do so in the same way as before 31 January 2020.

After the transition period, we will continue to produce our UK Balance of Payments statistics in line with the UK Statistics Authority's Code of Practice for Statistics and in accordance with internationally agreed statistical guidance and standards. This is based on the International Monetary Fund's (IMF's) Balance of Payments Manual sixth edition (BPM6), until those standards are updated.

Data revision policy

In accordance with National Accounts Revisions Policy, data in this release have been revised back to Quarter 1 (Jan to Mar) 2019.

Data sources

Balance of payments statistics are compiled from a variety of sources, produced in the national accounts Sector and Financial Accounts (SFA) framework. Some of the main sources used in the compilation include:

• Overseas Trade Statistics (HM Revenue and Customs (HMRC))

• International Trade in Services Survey (Office for National Statistics (ONS))

• International Passenger Survey (ONS)

• Foreign Direct Investment Survey (ONS and Bank of England (BoE))

• Various financial inquiries (ONS and BoE)

• Ownership of UK Quoted Shares Survey (ONS)

Trade is measured through both exports and imports of goods and services. Data are supplied by over 30 sources including several administrative sources, HMRC being the largest for trade in goods. The International Trade in Services Survey (ITIS) conducted by the ONS is the largest single data source for trade in services.

The main source of information for UK foreign direct investment (FDI) statistics is the Annual FDI Survey; separate surveys are used to collect data on inward and outward FDI. This is combined with data from the BoE for all monetary financial institutions – such as banks – and other sources for property and public corporations in FDI. The statistics in this bulletin are compiled using the asset and liability measurement principle, which uses residency as the main distinction between outward and inward investments. It measures the direct investments of UK-resident companies – both UK parent companies and foreign-owned UK affiliates – with the rest of the world relative to the direct investments of non-UK resident companies held in the UK.

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Balance of payments QMI.