Growing imbalances cast cloud over recovery

While the latest National Accounts showed that the pace of the economic recovery was stronger in Q4 than previously estimated, it highlighted that the economy’s imbalances remain large and have grown worse. Admittedly, the drag on GDP from net trade diminished considerably compared to Q3. But the overall current account deficit widened from 4.3% of GDP in Q3 to a whopping 7%, the largest on record. And the big picture is that the recovery is still being driven almost entirely by household spending. What’s more, this spending has relied on unsustainable sources – in particular a fall in the household saving ratio to a record low of 3.8%. On the face of it, these two factors sound some alarm bells. But a continued pick-up in real incomes should make spending growth more sustainable. And our expectation of a further fall in sterling (whether the UK remains in the EU or not) should help to narrow the current account deficit somewhat.