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It’s not only debt deficit that’s unsustainable, it’s trade deficit too

The latest balance of payments figures recently published passed with scarcely a murmur. Yet the message about the trade deficit is as disturbing, if not even more so, than the budget deficit. Both are meant to be reducing, yet both are increasing quite sharply. The budget deficit, the reduction of which is the single central objective of the coalition, has risen by 22% over this last year. The trade deficit, which is supposed to be declining as the economy rebalances towards manufacturing, is doing the opposite: the deficit in traded goods has just hit the highest level ever. It seems likely to reach £105-110bn this year, over 7% of GDP. That level is unsustainable.

There was a time when politicians and media pored over the balance of payments figures, and a small unexpected glitch could swing elections, as in 1970 when bringing forward the import of two jumbo jets was widely perceived to have just tipped the election against Labour. But the obsession with the import-exports balance faded when in 1971 Nixon suspended the convertibility of the dollar and the era of floating exchange rates took off. Nor did it seem of much concern when in the ensuing decade the slowly growing traded goods deficit was largely covered by the surplus on services, notably from banking, insurance and consultancy.

This changed when from around 1987 these services increasingly failed to cover the manufacturing deficit, until by 2010 they compensated for only half the industrial deficit. By that stage the shortfall in the export of goods relative to imports had reached £99bn, 6.8% of GDP, largely as the result of Thatcher’s decimation of UK industry in the 1980s and Blair’s continued de-industrialisation of Britain in the 2000s. This was historically the highest level ever and breached the maxim that any trading deficit over 5% represented a red flashing light.

The only way that countries can continue to run high current account deficits is if their creditors are willing to accept Treasury bonds and/or purchases of property or other assets in exchange for the imbalance in trade. Experience suggests they will for quite some time in the hope that the value of their purchases will grow, or at least hold up. But a point is reached in the de-industrialisation of a country when creditors come to believe that the value of their store of investments is on a slide from which it will not recover any time soon. At that point they begin steadily to withdraw, and the country with a large, persisting and growing trade deficit rapidly approached a cliff edge leading to a dramaticfall in living standards. The rise in the traded goods deficit from £80bn in 2009 to some £105bn this year suggests that Britain is now precisely in that position.

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