Stephen Burgess and Rachana Shanbhogue
In 2016 the UK’s current account deficit was 5.9% of GDP, the widest since official records began in 1948. Many economists, including the IMF and FPC have suggested the UK is therefore vulnerable to foreign investors becoming less willing to invest in the country. In this post we challenge the idea that the UK is at the mercy of the “kindness of strangers”. Looking at gross, rather than net capital flows since 2012 suggests inflows have been extremely subdued relative to past levels. Instead, the UK has benefitted from increasing capital gains on past foreign investments and used these to fund its spending. We argue this carries lower financial stability risks than relying on gross inflows to cover the current account deficit.
Continue reading “A prince not a pauper: the truth behind the UK’s current account deficit”
Almog Adir and Simon Whitaker
In the last few years there has been a small net overall flow of capital from advanced to emerging market economies (EMEs), in contrast to the ‘paradox’ prevailing for much of this century of capital flowing the ‘wrong’ way, uphill from poor to rich countries. In this post we show the ‘paradox’ in the aggregate flows actually concealed private capital flowing the ‘right’ way for much of the time. And even during recent turbulence, foreign direct investment (FDI) flows, likely to be particularly beneficial to growth, have persisted. But EMEs could still benefit more from harnessing capital from advanced economies and Argentina has set a useful precedent as it prepares to take over the Presidency of the G20 in 2018.
Continue reading “Do rich countries lend to poor countries?”
Despite decades of trade deficits (spending more on foreign products than foreigners spend on UK products), the UK’s net liability with the rest of the world remains negligible. How does it pull off that trick? By earning a higher return on its foreign assets than it pays on its foreign liabilities.
Continue reading “Bitesize: Trading your way out of debt”
Aidan Saggers and Chiranjit Chakraborty
Investment in the Financial Technology (FinTech) industry has increased rapidly post crisis and globalisation is apparent with many investors funding companies far from their own physical locations. From Crunchbase data we gathered all the venture capital investments in FinTech start-up firms from 2010 to 2014 and created network diagrams for each year.
Continue reading “Bitesize: Flourishing FinTech”
Ambrogio Cesa-Bianchi , Chris Redl, Andrej Sokol and Gregory Thwaites
Volatile economic data or political events can lead to heightened uncertainty. This can then weigh on households’ and firms’ spending and investment decisions. We revisit the question of how uncertainty affects the UK economy, by constructing new measures of uncertainty and quantifying their effects on economic activity. We find that UK uncertainty depresses domestic activity only insofar as it is driven by developments overseas, and that other changes in uncertainty about the UK real economy have very little effect.
Continue reading “Does domestic uncertainty really matter for the economy?”
The Law of One Price (LOOP) is an old idea in economics. LOOP states that the same product should cost the same in different places, expressed in the same currency. The intuition is that arbitrage (buying a product where it is cheap and selling it where it is expensive) should bring prices back into line. Can LOOP help us understand UK inflation? Yes. I find EU prices have much higher explanatory power for UK prices than domestic cost pressures, and the effects of exchange rate changes last longer, but build more slowly than commonly assumed.
Continue reading “A LOOPy model of inflation”
Mark Joy, Noëmie Lisack, Simon Lloyd, Rana Sajedi and Simon Whitaker
Trade liberalisation since the 1990s has boosted living standards by raising productivity growth. However, it has been predominantly skewed towards reducing barriers to goods trade, rather than services. Since then, goods-focussed exporters have seen increased current account surpluses, and those focussed on services, have seen increased deficits. Could these developments be causally related? In this post we argue that simple tweaks to a canonical two-country model can generate this result, and building on the Governor’s Mansion House Speech, we present empirical evidence that trade liberalisation has affected current account positions asymmetrically. That suggests future liberalisation of services trade, as well as generating increased gains from trade, could also help to reduce global imbalances.
Continue reading “Mind the gap: Services trade liberalisation and global imbalances”
Thomas Viegas and Emil Iordanov
Since Donald Trump was elected to the Oval Office last November, consumer confidence in the US has picked up notably. But is this post-election rise unusual?
Continue reading “Bitesize: Elections, confidence and misery (US edition)”
A fall in the real exchange rate can increase demand for domestic output in two main ways. The volume of exports – which become cheaper – is boosted. And goods and services that were previously imported can instead be supplied by domestic producers, which become more competitive as the price of imports rises. Economists call the second effect ‘import substitution’. Using data from Supply-Use tables can help us better understand the process of import substitution, in particular by examining how the composition of expenditure has influenced imports. Doing so shows that the import substitution effect of the 2008-09 depreciation was partly masked by other, co-incident factors.
Continue reading “Imports and the composition of expenditure”
Marek Raczko, Mo Wazzi and Wen Yan
Economists view the United Kingdom as a small-open economy. In economists’ jargon it means that the UK is susceptible to foreign shocks, but that UK shocks do not influence other countries. This definitely was not the case in 2016. The result of the EU referendum, even though it was a UK-specific policy event, had a global impact. Our analysis shows that the Brexit vote not only had a significant impact on UK bond and equity markets, but also spilled over significantly to other advanced economies. Moreover, this approach suggests that the initial Brexit-shock has only partially reversed and still remains a drag on global bond yields and equity prices, though there are wide error bands around that conclusion.
Continue reading “The impact of Brexit-related shocks on global asset prices”