UK: Currency valuations sufficient to fund a narrowing current account deficit - RBS

Research Team at RBS suggests that the Sterling outlook in terms of at what exchange rate the UK current account deficit is fundable.

Key Quotes

“The deficit is large and has been widening in recent years. Funding of the current account deficit requires a combination of a shift in relative demand and relative prices (i.e Sterling). The deficit is dynamic, so the funding question is a moving target.”  

“Imports have in the recent past been resilient to higher prices. This is probably because globalisation has left consumers with less suitable alternatives. But lower real incomes mean this will have to change.”

“The price elasticity of demand for UK exports since the financial crisis has been low. Stronger external demand and better credit conditions should see exporters find it easier to take advantage of Sterling’s fall. US President-elect Trump’s pledge to use fiscal policy to stimulate demand is also supportive as US bound exports have been recovering strongly and this is an important market for the UK. Busier markets, where consumers are more actively seeking goods may see Sterling’s more competitive level help UK firms pick up more orders. Euro area markets are also far stronger than they were during the periphery crisis.”

“We also expect the investment income of the balance of payments to reverse its multi-year deterioration in 2017 on currency translation effects, higher/steeper global yield curves and a higher oil price.”

“Together, this suggests that the current account deficit may narrow notably this year. Whether it is fundable will depend of the attractiveness of UK assets. This in itself is a function of the exchange rate.”