The UK has maintained a current account deficit since the mid-1980s, which means the country has been consistently spending more on imports and foreign investments than it earns from exports and overseas income. In Q3 2019, the UK current account deficit was £15.9 billion, or 2.8% of GDP (ONS). This persistent deficit is deeply rooted in structural changes in the UK economy:

• Deindustrialization - Since the 1980s, the UK has seen a significant decline in its manufacturing sector. This shift has reduced the country’s capacity to produce goods for exports, while domestic demand for foreign manufactured goods remained high, contributing the the trade deficit.

• Rise of Service Economy - The UK economy has pivoted towards services (see figure below), particularly financial and business services. While the UK excels in these areas, this surplus in services isn’t large enough to offset the goods deficit. In addition, physical goods often have higher transaction values than services.

• Consumer Behaviour - The UK has a culture of relatively high consumer spending and low saving rate compared to some other developed economies. This tendency towards consumption often translates into higher demand for imported goods, especially consumer electronics, clothing, and vehicles which the UK doesn’t produce in sufficient quantities domestically.

• Global Events
• There is a significant drop around 2008, when the global financial crisis properly hit the global markets. The financial account shows heightened volatility, which mirrors the turbulence in global financial markets during the crisis.
• In this course you aren’t required to know any details of the 2008 Global Financial Crisis as it is quite complex, but if you would like to learn about it some more check out this video:
• There are sharp fluctuations in the financial and current account around 2020, coinciding with the onset of the COVID-19 pandemic. This volatility is likely reflecting the initial capital inflows as investors sought safe havens and the changes in trade patterns during the early stages of global uncertainty.

This graph highlights how volatile the UK investments are to both domestic and global economic conditions.

• As highlighted, major events like the Global Financial Crisis, Brexit Referendum and COVID-19 pandemic have caused significant fluctuations in investment
• While not highlighted in the graph, the UK officially left the EU (customs union and single market) in Q1 2020, coinciding with the start of the COVID-19 pandemic
• This means we can’t necessarily isolate the impact of Brexit on investment by itself

While the UK has seen an fairly consistent upward trend in investment over the mid 2000s - early 2020s, this paints a slightly misleading picture. This figure shows that the UK is investing more in absolute terms compared to 1997 but it doesn’t tell us how investment is growing relative to the rest of the economy.

If we look at the overall investment rate (GFCF) as a % of GDP, it has fallen considerably since the 1980s. Measuring investment as a percentage of GDP gives us a different perspective as it shows how much of the country’s total economic output is being reinvested. If GDP is growing faster than investment, the investment rate as a percentage of GDP will fall, even if the absolute amount of investment is increasing.

In the late 80s investment was around 23% of GDP and from 2000s onwards hasn’t reached higher than 18%, nearly three-quarters of its previous share.

As we can see, the UK’s rate is consistently lower than all the other G7 countries who have maintained rates in the 20-25% range, apart from Italy briefly but they have since returned to that range in recent years. While investment has been growing, it hasn’t kept pace with overall economic growth, leading to a lower investment rate compared to other G7 countries.