News ID: 197516
Published: 0529 GMT July 29, 2017

UK must address giant trade deficit, IMF warns

UK must address giant trade deficit, IMF warns
Christine Lagarde

Britain needs to save more, train up its workers and become a more competitive economy to try to bring down its very large current account deficit, the International Monetary Fund has warned.

Analysts studied 28 of the world’s largest economies and found the UK has the biggest deficit, running at 4.4 percent of GDP, according to The Telegraph.

The IMF fears that large imbalances between economies could lead to dangerous corrections in future, as well as dangerous political demands to reduce imports.

“A greater concentration of excess deficits in advanced debtor economies may engender protectionist sentiment and raise the risk of disruptive corrections down the road,” the Fund said.

“Excess deficit countries should move forward with fiscal consolidation, while gradually normalizing monetary policy in tandem with inflation developments and focusing on structural policies that strengthen competitiveness and overall saving. Protectionist policies should be avoided as they are unlikely to reduce external imbalances and are detrimental to domestic and global growth.”

The current account deficit is made up of the trade deficit — as the UK imports more than it exports — combined with the balance of the flows into the economy from overseas investments, and out of the UK to foreign investors.

Britain’s deficit of 4.4 percent is the largest, followed by Turkey’s at 3.7 percent of GDP, Mexico’s 2.7 percent and Australia’s 2.6 percent. The US’s deficit has dropped sharply to 2.4 percent of GDP, from more than 6 percent in the pre-crisis years.

UK “structural reforms focused on broadening the skill base and investing in public infrastructure should boost productivity, improving the competitiveness of the economy,” the IMF said.

“Maintaining financial stability through macroprudential policies should also support private-sector saving. These efforts are particularly important in light of expectations that access to the EU market will become more restrictive.”

Britain should also get some help from the weaker sterling which makes imports more expensive but should boost exports, and also increases the sterling value of earnings on foreign investments.

The IMF also said that countries with high current account surpluses should work harder to reduce them, stimulating demand and increasing spending to suck in more imports and boost the flow of earnings outward to foreign investors.

“Excess surplus countries with fiscal space should allow for greater fiscal stimulus, while advancing structural reforms that support domestic demand and foster competition,” the IMF said.

Singapore’s surplus of 19 percent is the largest, followed by Thailand’s 11.5 percent and Switzerland’s 10.7 percent. Germany’s stands at 8.3 percent.

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