Britain doesn't need 'kindness of strangers' - BoE researchers

A man speaks on his phone outside the Bank of England in the City of London, Britain, August 23, 2017. REUTERS/Hannah McKay (Reuters)

By David Milliken

LONDON (Reuters) - Britain does not rely on "the kindness of strangers" to fund its big current account gap, two Bank of England researchers said, disagreeing with a phrase used by Governor Mark Carney to describe the country's relationship with overseas investors.

Britain's current account deficit hit a record 5.9 percent of gross domestic product last year, raising concerns that it could be vulnerable to any sudden change of investor sentiment, particularly as it faces the challenge of Brexit.

Despite a big fall in the pound after June 2016's referendum decision to leave the European Union, which in theory should narrow the shortfall, government forecasters predicted last month that it would exceed 4 percent of GDP for the foreseeable future, unusually high for a big advanced economy.

Before the Brexit vote, Carney told lawmakers that "relying on the kindness of strangers is not optimal ... when you're running a 4, 4-1/2 percent current account deficit".

Large current account deficits are most common in emerging economies that suck in foreign finance to fund rapid growth.

Two BoE staff, Stephen Burgess and Rachana Shanbhogue, said on Thursday this did not accurately reflect Britain's position.

Rather than relying on foreign finance, Britain is instead funding its current account deficit by slowly selling down a large stock of foreign assets.

"There has been no 'kindness of strangers'," they wrote on a BoE blog used for staff research. "Rather than a pauper relying on the charity of strangers, the UK is more like a member of the landed gentry, using its past foreign investment to fund its lifestyle of excess."

Showing a falling reliance on foreign investors, the researchers said gross flows of foreign capital into Britain averaged less than 4 percent of GDP over the past three years, in contrast to more than 60 percent before the financial crisis.

Looking at the experience of other countries over the past 30 years, this suggests Britain has only a 5 percent chance of a 'sudden stop' next year - under half the average frequency for the group over the period, the BoE researchers said.

Britain has foreign assets worth over four times its annual economic output, and has been selling an amount worth 6 percent of GDP a year to fund its current account deficit, so in theory it could continue like this for decades, the researchers said.

Moreover, Britain had benefited from the value of its assets growing faster than its foreign liabilities - more than offsetting the effect of asset sales over the past five years.

Research published on the BoE's blog represents the personal views of its authors, not the BoE's official view.

Last week the BoE said the deficit remained a material risk.

(Story refiled to fix spelling of name in paragraph 6)

(Reporting by David Milliken; Editing by Richard Balmforth)