Hilliard surmised that the current account deficit, comprised of trade in goods and services, as well as the primary and secondary income accounts, peaked at a lower level of 4.4% of UK GDP last year.
This is a sharp decline from SG’s previous forecast of 5.8% and when the account deficit reached worryingly high 7.2% of GDP in the fourth quarter of 2015.
And by 2019, the account deficit should fall to a low of 2.3% of GDP, which should help sustain foreign investor sentiment.
The revision in the UK’s account deficit is in large part driven by the depreciation of the pound post-Brexit, said Hilliard.
Between 2015 and 2016, the total FX effect on the current account went from having a negative impact of £5.4bn to having a positive effect to the tune of £13.1bn, according to data from the ONS.
That means the translational effects of weaker sterling was responsible for a change in the current account deficit of £18.5bn in the space of one year.
While Hilliard thinks it is doubtful the pound will fall further, he believes the benefits from weaker sterling will be felt for years to come.
“It is important to realise that such effects are not transitory,” Hilliard asserted.
“If the currency moves to a new level, then the effect will persist for as long as the currency remains at that new level; to a first approximation, we expect that to be the case throughout the forecast period.
“In other words, the fall in the pound will have a lasting beneficial effect on the current account deficit.”
