Forex Flash: GBP weakness has failed to reconcile UK imbalance – Goldman Sachs

FXstreet.com (Barcelona) - Despite a sharply weaker exchange rate, the UK has made little progress in addressing its external imbalances. Between 2007 and 2012, Sterling’s nominal effective exchange rate fell by 20% but the UK’s trade deficit (in goods and services) was broadly stable at 2.5% of GDP and the UK’s current account deficit widened from 2.3% to 3.7% of GDP. The GBP has fallen by a further 5% in 2013 but, having observed little impact from the previous decline, there is (understandable) skepticism that the latest weakness will make much difference to the UK’s external imbalances.

According to the Economics Research Team at Goldman Sachs, “The limited response of the UK’s external imbalances to Sterling weakness can be attributed to a combination of factors. First, high inflation in the UK has reduced the real competitiveness gain implied by Sterling’s nominal depreciation. Second, UK net exports data tend to be revised higher over time, so the existing data may overstate the size of the UK’s external imbalances.” Third, the Euro area sovereign crisis and the post-financial crisis decline in UK financial services exports have had an offsetting effect on UK imbalances. Fourth, the ongoing problems with credit supply in the UK are likely to have impeded the reallocation of resources required to supply higher demand for UK-produced goods and services.