Balance of payments, UK: January to March 2020

A measure of cross-border transactions between the UK and rest of the world. Includes trade, income, capital transfers and foreign assets and liabilities.

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Contact:
Email Jamie Pritchard

Release date:
30 June 2020

Next release:
30 September 2020

1. Main points

  • The UK current account deficit widened to £21.1 billion in Quarter 1 (Jan to Mar) 2020, or 3.8% of gross domestic product (GDP); the underlying UK current account deficit excluding non-monetary gold and other precious metals narrowed slightly, by £1.3 billion, to £19.9 billion, or 3.6% of GDP in Quarter 1 2020.

  • In Quarter 1 2020, total trade exports (£159.5 billion) decreased to their lowest levels since Quarter 1 2018 and imports (£160.7 billion) decreased to their lowest level since Quarter 4 (Oct to Dec) 2016 as the global coronavirus (COVID-19) pandemic took hold and countries introduced lockdowns; this significantly impacted trade in finished manufactured goods and the provision of travel services.

  • The primary income deficit widened by £2.4 billion to £13.6 billion, or 2.5% of GDP, in Quarter 1 2020; this was because of a larger fall in UK earnings on foreign investments than the fall in payments to foreign investors on their UK investments as other countries entered lockdowns earlier and businesses aimed to maintain cash buffers by reducing or cancelling dividend payments.

  • The UK financial account recorded net outflows of £5.3 billion in Quarter 1 2020, the largest net outflow since Quarter 3 (July to Sept) 2002.

  • The increased uncertainty and volatility within financial markets saw investors move away from equities while UK banks saw record increases in deposits placed with them as investors switched to safer investments; net acquisition of foreign assets was a record £439.1 billion while net incurrence of liabilities was £433.9 billion, the highest since Quarter 1 2007 (£452.5 billion).

  • The value of the UK's net liability position narrowed to £386.9 billion in Quarter 1 2020, from £559.6 billion in Quarter 4 2019, as UK residents benefited from the devaluation of the British pound inflating the value of their assets when converted from foreign currency.

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UK balance of payments and international investment position estimates for Quarter 1 (Jan to Mar) 2020 are subject to more uncertainty than usual because of data collection challenges during the coronavirus (COVID-19) lockdown; Coronavirus and the effects on the UK Balance of Payments outlines these challenges further.

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2. The UK’s current account deficit

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 1 (Jan to Mar) 2020, the UK’s current account balance widened substantially from a deficit of £9.2 billion in Quarter 4 (Oct to Dec) 2019 to a deficit of £21.1 billion in Quarter 1 2020, or 3.8% of gross domestic product (GDP). This was mostly because of erratic movements in the trading of precious metals, especially non-monetary gold, in the final quarter of 2019 and more subdued trading in Quarter 1 2020.

In addition, there was a widening to the deficit on primary income, which was mostly because of a decrease in the UK’s earnings on foreign investments as other countries locked down sooner than the UK.

Trade in goods

The trade in goods balance was more volatile over the course of 2019 than usual. Despite financial market volatility as the coronavirus (COVID-19) spread around the world and non-monetary gold being viewed as a store of wealth during uncertain times, trade in non-monetary gold was more subdued in Quarter 1 2020.

In Quarter 1 2020, there is evidence of COVID-19 starting to impact on global supply chains, with many businesses reporting notable falls during March 2020. This disruption can be seen in the decreases in gross exports to £82.3 billion, the lowest since Quarter 1 2017 (£82.1 billion), and gross imports to £111.6 billion, the lowest since Quarter 2 (July to Sept) 2016 (£104.6 billion).

Both exports and imports recorded decreases in:

  • finished manufactured goods, exports by £6.8 billion and imports by £5.5 billion
  • semi-manufactured goods, exports by £1.2 billion and imports by £1.8 billion
  • oil, exports by £1.1 billion and imports by £1.7 billion

Trade in services

Figure 2 shows that the trade in services surplus widened in Quarter 1 2020 by £4.3 billion to £28.1 billion, as the import of other business services decreased by £5.8 billion. Overall, the importing of services decreased by £11.1 billion to £49.2 billion, the lowest since Quarter 2 2018 (£48.1 billion); while the export of services only decreased by £6.8 billion to £77.3 billion, the lowest since Quarter 3 2018 when exports were also £77.3 billion.

In addition to the decline in the import of other business services, both imports and exports reflect large decreases in travel services as governments around the world introduced travel bans to stem the spread of the coronavirus (COVID-19).

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 - widened by £2.4 billion to £13.6 billion in Quarter 1 2020. Total credits decreased by £6.9 billion in Quarter 1 2020 to £39.9 billion, while total debits decreased by £4.5 billion to £53.5 billion.

The UK's credits declined more than debits as other countries locked down sooner than the UK, with anecdotal evidence highlighting that businesses distributed less earnings to preserve cash buffers through the pandemic.

As shown in Figure 3, the main factor in the widening of the primary income deficit was a switch from a surplus of £4.2 billion in Quarter 4 2019 on foreign direct investment (FDI), to a deficit of £2.2 billion in Quarter 1 2020. This was the first deficit since Quarter 2 2016, when it was £2.3 billion, and mainly because of the value of credits decreasing by £5.6 billion to £14.4 billion in Quarter 1 2020, while debits increased by £0.9 billion to £16.6 billion.

Partly offsetting the deterioration in FDI earnings was a £3.9 billion narrowing to the deficit on portfolio investment to £8.4 billion. This was mostly because of decreased dividend payments to the rest of the world, as UK businesses scaled back or cancelled dividend payments to maintain their cash buffers through the enforced government lockdown.

Despite increased investment in bank deposits and loans, both credits and debits on other investment decreased as Central Banks around the world reduced interest rates as part of their monetary stimulus.

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3. Financial account

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 recorded a net outflow of £5.3 billion in Quarter 1 (Jan to Mar) 2020, from a net inflow position of £22.8 billion recorded in Quarter 4 (Oct to Dec) 2019. This is the largest net outflow since Quarter 3 2002. The change to a net outflow position was because of a rise in the net outflows of other investment to £42.1 billion. This was mostly because of a movement in other investment abroad of £500 billion; partially offset by other investment into the UK of £457.9 billion.

The unprecedented movements in both inflows and outflows of other investment partly reflects the uncertainty within financial markets and the "dash for cash", as investors moved towards short-term foreign currency loans and foreign currency deposits to protect their wealth, both into the UK and abroad. In these uncertain times, investors have become more risk adverse, choosing safer investment types rather than shares, which are vulnerable to stock market movements.

As shown in Figure 5, stock market positions have plummeted in Quarter 1 2020, specifically with a:

  • 26% fall in the UK Financial Times Stock Exchange (FTSE) All Share, the largest fall since records began in Quarter 1 1975
  • 23.2% fall in the US Dow Jones, the largest fall since records began in Quarter 1 2000
  • 21.3% fall in the EMU, the largest fall since records began in Quarter 1 2001
  • 20% fall in Japan's Nikkei 225, the largest fall since records began in Quarter 1 2001

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4. International investment position

The international investment position (IIP) examines the UK’s balance sheet with the rest of the world, measuring the difference between the net stock of assets and liabilities. In Quarter 1 (Jan to Mar) 2020, the IIP recorded an increase in the value of both UK overseas assets and liabilities. The stock of foreign assets increased by £1.7 trillion to £12.9 trillion, while liabilities increased by a lesser extent of £1.6 trillion to £13.3 trillion. Because of assets increasing more than liabilities, the net liability position contracted by £172.6 billion to £386.9 billion.

The unprecedented movements recorded in the IIP were mostly driven by financial derivatives increasing in both assets and liabilities by £1.5 trillion and £1.4 trillion respectively. These increases can be attributed to a rise in speculators entering the market to take advantage of market volatility during the uncertain times of the coronavirus (COVID-19) pandemic, leading to a rise in the trading volumes of financial derivatives. As well as, to a lesser extent, the depreciation of the British pound against other major currencies leading to revaluation impacts. 

Figure 7 shows that the British pound had, by the end of Quarter 1 2020, depreciated by:

  • 6.1% against the American dollar from the end of Quarter 4 (Oct to Dec) 2019, the largest depreciation since Quarter 2 (Apr to June) 2016
  • 3.9% against the euro from the end of Quarter 4 2019, the largest depreciation since Quarter 3 (July to Sept) 2016
  • 6.7% against the yen from the end of Quarter 4 2019, the largest depreciation since Quarter 2 2016

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

Another major contributor to the increase in the value of UK foreign assets and liabilities, but to a lesser extent, was other investment, which is mostly made up of cash deposits and loans. UK other investment assets increased by £656 billion as UK residents invested £500 billion, combined with a positive £228.9 billion revaluation effect from the depreciation of the British pound and a small negative impact from other changes in volume such as loans written off.

The majority of other investment is held in foreign currency deposits, leading to a similar pattern being experienced in liabilities. Other investment liabilities increased by £588.4 billion, £457.9 billion of which can be attributed to investment from foreign investors. Foreign currency deposits combined with the depreciation of the British pound resulted in a large revaluation effect of £207.1 billion and a small negative impact from other changes in volume by the end of Quarter 1 2020.

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5. Balance of payments data

Balance of payments
Dataset | Released 30 June 2020
Quarterly summary of balance of payments accounts including the current account, capital transfers, transactions, and levels of UK external assets and liabilities.

Balance of payments time series
Dataset | Released 30 June 2020
Quarterly summary of balance of payments accounts including the current account, capital transfers, transactions and levels of UK external assets and liabilities.

Balance of payments - revision triangles
Dataset | Released 30 June 2020
Quarterly summary information on the size and direction of the revisions made to the data covering a five-year period, UK.

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6. Glossary

Balance of Payments

The balance of payments is a statistical statement that summarises transactions between residents and non-residents during a period. It consists of the current account, the capital account, and the financial account.

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.

Net errors and omissions

Although the balance of payments accounts are, in principle, balanced, in practice imbalances between the current, capital and financial accounts arise from imperfections in source data and compilation. This imbalance, a usual feature of balance of payments data, is labelled net errors and omissions.

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

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7. Measuring the data

Coronavirus (COVID-19)

In response to the coronavirus (COVID-19) pandemic, we are working to ensure that we continue to publish economic statistics. For more information please see COVID-19 and the production of statistics.

This release captures the first direct effects of the coronavirus pandemic and the government measures taken to reduce transmission of the coronavirus. Because of the disruption to business and implementation of these government measures, which include restrictions in movement, we faced an increased number of challenges in producing the UK balance of payments in Quarter 1 (Jan to Mar) 2020. These challenges include lower than usual response to surveys that feed into this estimate. Given the uncertainties in estimating the impact of the pandemic on the accounts, users should be aware of the wider than normal statistical discrepancy between the financial and non-financial accounts.

More detailed information on the challenges and the steps taken to mitigate them can be found in Coronavirus and the effects on the UK balance of payments.

Impact on response rates

Figure 9 highlights a decline in response rates for surveys that feed into the UK balance of payments in Quarter 1 (Jan to Mar) 2020. We have undertaken a significant amount of work to ensure that the effect on the quality of our estimates are mitigated as much as possible.

This includes focusing resources on main respondents and industries, methodology reviews including but not limited to seasonal adjustment, forecast and imputation, and the use of additional sources of data (in quality assurance). More information on the measures taken can be found in Section 3 of Coronavirus and the effects on the UK balance of payments.

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) - this was suspended from 16 March 2020
  • 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.

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8. Strengths and limitations

Impact of coronavirus (COVID-19) on data quality

This release captures the first direct effects of the coronavirus (COVID-19) pandemic and lockdown restrictions. We faced an increased number of challenges in producing the UK balance of payments for Quarter 1 (Jan to Mar) 2020, including lower than usual response to surveys that feed into the estimates.

Given the uncertainties in estimating the impact of the pandemic on the accounts, users should be aware of the wider than normal statistical discrepancy between the financial and non-financial accounts. UK balance of payments data and international investment position estimates for Quarter 1 2020 are therefore subject to more uncertainty than usual because of these data collection challenges. More information on the challenges faced is available in Coronavirus and the effects on the UK Balance of Payments.

More detailed information on the strengths and limitations of the UK balance of payments data is available in the Balance of payments QMI.

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Contact details for this Statistical bulletin

Jamie Pritchard
bop@ons.gov.uk
Telephone: +44 (0)1633 456106