UK must bring down trade deficit to avoid dangerous imbalances, warns IMF

BRITAIN needs to save more, train up its workers and become a more competitive economy 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 had the biggest deficit, running at 4.4pc of GDP. 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 normalising 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 4.4pc is the largest, followed by Turkey’s at 3.7pc of GDP, Mexico’s at 2.7pc and Australia’s at 2.6pc. The US’S deficit has dropped sharply to 2.4pc of GDP, from more than 6pc 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 macro-prudential 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 get help from the weaker pound, 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. Singapore’s surplus of 19pc is the largest, followed by Thailand’s 11.5pc and Switzerland’s 10.7pc.