Britain’s current account deficit is the worst ever recorded in peace-time since the Bank of England started collecting records in 1772 under the reign of George III.
Even during the grimmest moments of the First World War it only slightly exceeded the eye-watering figure of 7pc of GDP racked up in the fourth quarter of last year. No other country in the OECD club is close to this. It has been getting worse for the last four years in a row.
Excuses are running thin. The Government can no longer blame the double-dip recession in the eurozone, our biggest export market. Europe has been recovering for three years and is currently enjoying as much growth as it is ever likely to see.
The UK deficit is prima facie evidence of a nation living beyond its means, reliant on foreign capital to fund consumption. Global investors have so far chosen to overlook this chronic deterioration, accepting the stock assurance from London that it is a temporary blip caused by declines in investment income.
This may change as the vote on Brexit draws near and the polls tighten. Most investors in Asia, the US, and the Middle East have treated the referendum as political pantomime, taking it for granted that British voters would (as the world sees it) make the “rational” choice.
“Very few people have been focusing on the current account. Brexit is now bringing it firmly into focus. We are getting a lot more questions about this from clients in Europe,” said David Owen from Jefferies.
The dawning realization that Britain might indeed opt for secession has clearly begun to rattle markets. Sterling has fallen 9pc against a trade-weighted basis since November. The spread between Gilts and German Bunds has been creeping up, an early warning sign of trouble.
The Bank of England’s Financial Policy Committee noted signs of stress in the sterling options market in a statement this week, and warned that it may become harder to the inflows of capital needed to cover the external deficit.
Lena Komileva from G+Economics said the current account deficit is now so large that it leaves the country vulnerable to external shocks, amplifying the potential impact of Brexit. Britain’s credit-driven consumer credit is “plainly unsustainable”.
The UK savings ratio has fallen to a record low of 3.8pc. Consumer credit has risen by 44pc over the last year to £1.3bn. “We are not very different from the structural fragility of the economy that we had prior to the 2007 global crash,” she said.
The Office for Budget Responsibility warned earlier this month that households are running an “unprecedented” deficit of 3pc of GDP – worse than the pre-Lehman peak – with no improvement expected through to the early 2020s.
People are running through savings and taking on debt to fund their lifestyles and buy new cars. They are expected to spend £58bn more they earn this year, rising to £68bn by the end of the decade.
This roughly mirrors what was happening just before the 2007 financial crisis when people were treating their homes as a cash machine, drawing down £50bn a year in home equity. Events were to showed brutally that this was not benign.
The household deficit is offset by the surplus of the corporate sector, but this mix is evidence of a deformed economic system and tax structure that is geared to consumption at the expense of long-term investment.
We are not yet in a late-cycle credit blow-off like the Barber boom of the 1970s, or the Lawson boom for the late 1980s, or the Brown boom in the 2000s. The ratio of household gross debt to income has dropped to 145pc from 168pc in early 2008, but the OBR expects it to rise again on a steep trajectory.
The Office for National Statistics issued a long note today explaining why the current account deficit went so badly wrong last year. It said 80pc of the latest deterioration was due to falling earnings on foreign direct investment (FDI). These earnings have switched to deficit from a surplus of 3.3pc of GDP as recently as 2011.
A big chunk of this was due to the commodity slump as UK-based energy and mining companies repatriated fewer profits. You can make a case that this will correct naturally as the commodity cycle turns, but that depends on the production policies of OPEC, and the growth trajectory of the China’s ‘old’ economy.
In a sense, Britain is like a giant hedge fund. Its financial players borrow short and lend long on a huge scale across the world, earning a fat spread in good times. This income stream has shriveled up in our new era of secular stagnation, negative rates, and a global savings glut.
Yields have fallen to historic lows. The Government is betting that the current account deficit will fall again automatically as the world economy returns to normal and yields rise again, and therefore that Britain will be let off the hook. This may be wishful thinking. Low returns may now be a permanent way of life.
Chronic deficits are corrosive. Britain’s net international investment position (NIIP) has reached minus 25.3pc of GDP, though it is hard to measure.
The International Monetary Fund predicts that it will worsen to minus 45pc by 2020, far beyond the safe limit deemed of around 3opc .
Britain is sinking deeper into the red. There will be no sovereign debt crisis because we borrow in our own currency. Instead we will let the exchange rate take the strain if need be, devaluing our way out of immediate trouble with the usual insouciance.
This has its own risks. What we have to worry about is a ‘disorderly’ fall in the pound that slips control, forcing the Bank of England to raise rates to prevent a dangerous overshoot. It is curse the emerging economies to lose their freedom of action in this way, and Britain is not entirely immune.
The moral of the story is that if you want to call to a referendum on such a neuralgic issue as EU membership, don’t do it when you are running the worst current account deficit in 244 years of recorded history.