Balancing Britain’s books: Where have our ‘missing billions’ gone?

Balancing Britain’s books: Where have our ‘missing billions’ gone?:

A whopping £500bn has fallen off Britain’s balance sheet, or so a revision to official data appears to show.

UK investors were thought to have ramped up spending abroad, giving Britain a cushion of sorts against economic and political turmoil – the net international investment figure turned positive last year for the first time since the financial crisis.

Yet revisions from the Office for National Statistics indicate that was an illusion. Unexpectedly, the stock of foreign investments in the UK still outweighs British investments abroad.
What is the net international investment position?

This measures the amount of money that British investors put into foreign assets, minus the amount foreign investors put into UK assets.

It can include bonds, shares, factories, houses, derivatives and any other investment. As a result it is particularly difficult to measure. Not all transactions are conducted on public markets and the Office for National Statistics has a battle on its hands estimating the figures.

The overall sums are mind-bogglingly huge, with both numbers at above £10.5 trillion.
How has it performed?

UK-owned assets abroad peaked at £11.4 trillion in late 2008 and have bounced around the £10 trillion to £11 trillion level ever since. Meanwhile foreign-owned assets in the UK peaked at £11.6 trillion in 2011.

The result is that net investment position historically has usually been either negative or around zero, with foreign owned assets in the UK outweighing UK-owned assets abroad.

While that may sound like a bad thing, it reflects the attractiveness of UK assets.

During the eurozone crisis, for example, Britain was often seen as something of a safe haven by international investors, keen to put their money into the UK to benefit from relatively strong economic growth.

As a result Britain was a net receiver of inflows of international investment, giving a net deficit position on this metric.

If foreign investors seek to repatriate or redistribute this investment now that the eurozone economies are picking up – or British investors become particularly keen to put money into the recovering continental economies, or indeed into any other growth area such as the US or Asia – then the metric will swing into positive territory.

Initial estimates of the international investment position did appear to show something like this happening. The fall in the pound also affected the value of overseas investments.

As a result Britain suddenly had a net ‘positive’ position of just shy of £470bn for 2016.

The new revision eliminates that positive net position, instead revealing a small negative figure.
But where has that gone?

The revised data show there was indeed a big shift in the position in 2016, but from a much lower base as the entire history of the database has been adjusted.

Instead of going from a negative position of £86.4bn to a positive £468.5bn, the gap went from minus £437.3bn to minus £21.3bn.

In terms of the change to the figure for 2016 alone, the new figures show there was more foreign investment into the UK, and less British investment abroad.

One factor was a surge in foreign investment into the UK from large specific deals, such as the £24bn acquisition of Arm Holdings by the Japanese group SoftBank.

Another long-term revision was caused by the Office for National Statistics refining the way it calculates interest on corporate bonds. It found more money than it previously realised was heading to foreign investors that hold bonds issued by British companies.

Changes to investment patterns have also had an impact. Increased levels of investment in benchmarked funds has pushed more global money than anticipated into UK stocks. As a result the net international investment position has fallen.
Is it important?

Yes and no.

In the grand scheme of things, a few hundred billion pounds – hard though it may be to believe – is not all that large.

British investors hold more than £10.5 trillion of foreign assets, and foreign investors hold more than £10.5 trillion of UK assets.

A small rise in one and fall in the other can produce very large changes in the net balance. A net change of £500bn amounts to just 2.4pc of the total assets.

The headline figures also refers to the stock of investment rather than flows, so it can be tricky to work out which element of the balance has been caused by “new” investment or asset sales.

That said, the changes can have important effects on asset prices and on the value of the pound.

Take the important example of the UK’s current account balance.

The UK runs a substantial trade deficit as Britain imports more than it exports. The gap between the two is plugged by the sale of UK assets to foreign buyers and by borrowing from abroad.

Mark Carney has dubbed this “the kindness of strangers”. If foreign investment dries up then it would cause the pound to fall, with the effect of pricing UK goods into the global market, and forcing up the cost of imports.

In this sense, a sudden fall in investments in the UK, which would be represented by that sharp rise in the net international investment position, could be worrying.

Now that the numbers indicate a small negative position, we can see that strangers are indeed still being kind to the UK.

On the other hand, ownership of foreign assets can be useful for the UK. Foreign assets provide diversification, as well as a flow of net income from abroad – something which is particularly welcome at a time of sterling depreciation. So a sharp rise in net investment could be worrying.
Will this last?

The numbers do show only a very small negative position for last year – the smallest since the financial crisis.

If that points to a slowing in foreign investment into the UK, or even a reversal, then it could be a problem.

Analysts believe there was a move to pull money out of the UK until the Bank of England began talking up the prospect of an interest rate rise.

That encouraged funds to flow back into the UK, which in turn helped to boost the value of sterling in recent weeks.

But a trend of flows out of the country could have worrying implications, given the size of the current account deficit and those warnings from Mark Carney.
How healthy are other economic indicators?

The net international investment position is only one sign of Britain’s economic health and how the world views the UK.

Another is the value of the pound.

This can be seen as the sum of all the bets on the UK economy’s future growth prospects. Investors put money into a country when they think it is likely to do well and they anticipate a higher return on their funds, pushing a currency up, and pull it when an economy performs less well.

Sterling dived after the Brexit vote but has suffered many ups and downs since – for instance rising in September when the Bank of England indicated it could raise interest rates soon, something which should improve returns for investors.

The current account, which measures goods and services imported and exported, is also worth keeping an eye on.

The UK has a substantial deficit as imports of goods far outweigh exports. The surplus in services trade is of a smaller scale than the deficit in goods, leaving the country with a deficit overall.

Analysts had anticipated this deficit would shrink following the Brexit vote as the weaker pound made imports more expensive and exports more competitive. There are few signs of this taking place as yet, however, in a blow to hopes the UK would use the weaker pound to rebalance its economy.

Monthly imports of goods and services hit a record high of £55.8bn in July, the latest figures show, while exports stood at £50.2bn.

The most important indicator of all, gross domestic product, GDP, has slowed in recent months.

Growth of 0.3pc in the first and the second quarters of this year is underwhelming.

However, economists at the EY Item Club – private sector analysts who use the Treasury’s model to calculate growth – expect that a gradual acceleration will take place, slowly but surely improving growth rates over the coming years.

H/t reader Squodgy:


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