Record UK deficit heads wave of bad data By Chris Giles and Delphine Strauss
Financial Times Published: December 20 2007 22:03
A wave of bad economic news hit the government on Thursday, a day after the prime minister and the chancellor insisted the economy was fundamentally strong and would ?weather? global financial storms.
The credit squeeze has contributed to the worst public finance deficit ever in the first eight months of the financial year and an annual drop in new mortgage lending. It has also choked off growth in money deposited in banks.
The biggest surprise was the Office for National Statistics? revelation that the current account deficit widened from a revised £13.7bn to a record £20bn in the third quarter, equivalent to 5.7 per cent of gross domestic product, giving Britain the unenviable record of the largest current account deficit in the group of seven leading countries.
The most worrying figure for the government is the sudden and deep deterioration in the public finances, caused in the main by a shortfall of tax revenues. Analysts said the data presented an ?ugly picture? of an unbalanced economy that could be one of the most vulnerable in the G7 to the effects of the credit squeeze.
?It is worrying to think the new chancellor has no room for manoeuvre and will have to tighten fiscal policy when the economy is in a tail spin,? said Peter Spencer, chief economic advisor to the Ernst?&?Young ITEM Club.
Kevin Daly, of Goldman Sachs, said the figures made ?bleak reading? and ?are especially negative for sterling?. The pound fell against almost all other leading currencies. It was down 0.9 per cent on a trade-weighted index by the close.
The news brought a short hiatus to Thursday?s morning?s rise in gilt prices, which was driven by investors concerned about continued problems in the credit markets.
However, the opening of the US Treasuries market and more bad news from Bear Stearns, a US investment bank that is suffering large losses from mortgage-related business, helped to send UK gilt prices still higher in the afternoon.
The explosion in the current account deficit was due largely to big revisions to foreign investment income. Such a wide gap between the amount Britain spends and what it produces has never been sustainable in the past, leading either to a falling currency to boost exports or a sharp slowing in spending to curtail imports.
Economists at the Royal Bank of Scotland said the risk of a slide in sterling presented ?a further hurdle? to the cuts in interest rates markets now expect.
Nor was there any let-up in the bad news from the housing market. The Council for Mortgage Lenders said gross mortgage lending last month was 8 per cent lower than in November 2006 ? the first annual decline in more than two years ? and said the trend was ?primarily a result of lack of available funding?.
The Bank of England?s provisional money supply figures showed M4 money ? balances in bank accounts, and notes and coins in circulation ? grew only
0.1 per cent in November.The ONS left its estimate of third-quarter growth unchanged at 0.7 per cent, and revised the annual rate up from 3.2 per cent to 3.3 per cent after changes in 2006 data. But its breakdown suggested solid growth was aided by consumers spending borrowed money.
Additional reporting by Paul J Davies