A top expert has explained why the UK’s economy seems to be floundering at the moment – and it’s not just because of the Treasury’s latest actions.
Sanjay Raja, the chief UK economist at Deutsche Bank, gave evidence to the Treasury Committee of cross-party MPs on Wednesday as concerns about a recession and the falling value of the pound continue.
According to Raja, although much of this stems from chancellor Kwasi Kwarteng’s mini-budget, there are both UK-specific factors and global issues which have exacerbated it.
He explained: “[It] has to do with what the governor of the Bank of England has been talking about for months, for quarters.
″And that’s really coming down to the terms of trade shock that the UK uniquely faces.”
“Trade shock” refers to the changes in global markets beyond the UK’s control. For instance, the fall in the pound was prompted by international markets being spooked earlier this month by Kwarteng’s £45 billion unfunded tax cuts. Raja also agreed, when asked by an MP, that Brexit will have impacted this too.
Raja explained the UK is also poorly positioned to respond to such financial turbulence. The economist noted that the UK’s “trade balance” – the difference between the value of goods a country exports and the value of goods it imports – was already off kilter.
He said: “If you look at the trade balance, look at where the trade balance is, it’s at a historic deficit.”
This means the UK was paying more for its imported goods than it was receiving through its exported goods.
“We haven’t seen this kind of trade deficit since 1955, since national account records began,” Raja added.
He then referred to the amount of borrowing needed from outside sources for the UK to stay profitable, also known as the current external financing needs.
He said: “And when you throw onto that, the current external financing needs that are extraordinary, the time going into September 23, the chancellor’s mini-budget, the ONS was talking about an 8.3% current account deficit.”
For context, between April and June, the ONS pointed out that the current account deficit was just 5.3% this year.
He said this imbalance in the UK was “one of the worst amongst developed and emerging market economies”.
“So the external financing needs of the UK are certainly a big function of what we’re seeing.
“And then you throw on the September 23 event [the mini budget], you’ve got a sidelined fiscal watchdog, you’ve got a lack of medium term fiscal plan and one of the largest unfunded tax cuts that we’ve seen since the 1970s.
“It was the straw that broke the camel’s back.”
Raja’s comments followed a bleak warning from the International Monetary Fund (IMF) which warned on Tuesday that high prices will last longer in the UK than many of its European neighbours due to these factors.
According to IMF’s forecast for next year, the UK economy will only grow by 0.3%. The body has repeatedly urged the UK to reverse its tax cuts too.