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ONS Economic Forum: Balance of Payments

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23 January 2015

1

mailto:[email protected]

http://www.ons.gov.uk/ons/about-ons/get-involved/events/events/economic-forum/index.html

http://www.ons.gov.uk/ons/about-ons/get-involved/events/events/economic-forum/index.html

Introduction and welcome

Joe Grice, Chief Economic Adviser, Office for National Statistics

ONS Economic Forum

23 January 2015

2

ONS Economic Forum: BoP – January 2015

09:15 Introduction & welcome

09:20 Setting the scene

09:30 Behaviour of the Trade Balance

10:15 UK Net Income & International Investment Position

11:30 Refreshment break

11:45 Measurement Changes to MFI FDI profits

12:10 Closing Comments

12:20 Close3

Agenda

Setting the sceneDarren Morgan, Deputy Director Structural & International Statistics, ONS

ONS Economic Forum23 January 2015

4

Current Account: Latest figures

International Investment position: Latest figures

So......talking points

• persistent trade deficit: why haven’t goods exports picked up?

• deterioration in the UK net income account

• increasing deficit in UK's net international investment position

..........does this signal sustainability issues?

..........how concerned should we be?

ONS Economic Forum: BoP – January 2015

09:15 Introduction & welcome

09:20 Setting the scene

09:30 Behaviour of the Trade Balance

10:15 UK Net Income & International Investment Position

11:30 Refreshment break

11:45 Measurement Changes to MFI FDI profits

12:10 Closing Comments

12:20 Close8

Agenda

Balance of Payments Seminar

Trade Section

Outline

• The trade balance in the Current account• Why is the trade position weak?• Which region/country is driving the weakness

in goods exports?• Which type of product is driving the weakness

in exports?• Broader context for UK trade performance

Trade in the Balance of Payments% of GDP Current Account by component (% GDP)

Trade has played a part in the recent CA deficit...

Cumulative contributions to the change in Current Account, relative to 2011 (% GDP)

% o

f GD

P re

lativ

e to

201

1 po

sitio

n

-6.0% GDP in Q3 2014

-1.7% GDP in 2011

... But a smaller role than in previous falls in the CA

Relative to 1971 Relative to 1985 Relative to 2011% of GDP

-4.1% GDP in Q2 1974

-5.1% GDP in Q4 1988

-6.0% GDP in Q3 2014

Cumulative contributions to changes in the current account in previous CA episodes

1.8% GDP in 1971

-0.2% GDP in 1985

-1.7% GDP in 2011

Sterling Exchange Rate

Sterling depreciated by around 25% between 2007 and 2009, but over the last year, the currency has been appreciating in trade-weighted terms.

The recent strength of the pound may have reduced the competitiveness of our exports – but as the depreciation appears to have had at most a relatively modest impact on our trading position, the importance of this effect is unclear.

The integration of global supply chains may be more important.

The trade balance varies by good/service

Trade in Services: Exports, imports & balance Trade in Goods: Exports, imports & balance

• Record trade surplus on services, offsetting trade deficit on goods• But balance reflects the difference between two much larger numbers: the values of exports and imports

UK trade - Exports

• Recent strength of services is partly due to lower imports, but also because of a resilient export performance

• Much of the weakness of aggregate UK exports is attributable to exports of goods.

Which region/country is driving the weakness in goods exports?

Goods exports to EU and non-EUCP (£ billion)

• Much of the weakness in goods exports is explained through weakness in goods exports to the EU.

• Between Q2 2011 and Q3 2014, goods exports to the EU have fallen 14%.

• Goods exports to non-EU countries follow a similar profile, but are at their early 2011 level in the most recent data

EU balances – Goods and Services

• UK Trade in Goods and Services with EU involves some bilateral surpluses (Ireland and Netherlands) and some deficits.

• The most substantial bilateral deficit within the EU is with Germany...

Recent EU bilateral deficits increased by weakness of goods exports to those countries

Germany France Netherlands

Exports, imports and deficit on goods with selected EU partners, £bn

Goods & Services exports to the non-EU

• Exports to the US have stabilised as a fraction of total non-EU exports in recent quarters, in contrast to the varying performance of some of our high-profile trading partners

Which type of product is driving the weakness in exports?

Services balance at a record high

% of GDP

... Including strong balances for financial and insurance services

Contributions to Services Balance, % of GDP

Exports of services

• Services exports dominated by financial services and other business services

• Smaller, but considerable contributions from Insurance, Transport and travel services

• Services export resilience and lower imports resulted in services surplus of 5.1% of GDP in Q3 2014

Exports of Goods by type

• Exports of goods are dominated by semi-manufactures and finished manufactures

• Fuels and Food, beverages & Tobacco also make contributions, but the majority of the recent slowdown (since 2011) is in semi-manufactures

• After growing strongly in 2009 and 2010, Finished manufactures export growth has slowed considerably

Goods Exports - drivers

Export demand has varied by product and market

Chemicals & Chemical Products Basic Metals

Exports by destination for selected products, % GDP

Export Market Growth

• While UK export performance has been weak overall, it is not out of line with the growth of our key export markets.

• Chart shows import growth in our top 20 non-EU and 28 EU trading partners, weighted by their importance to UK exports, as well as growth in the volume of UK exports

• It shows that UK export volume growth is broadly in line with the growth of our most important trading partners

Conclusions

• Balance on trade has contributed to the recent increase in the current account deficit, although it has played a smaller role than in previous deficit episodes

• Record surplus on services trade offsets to some extent a persistent deficit on goods.

• Main drivers of recent developments in services exports are financial and other business services.

• Main drivers of recent developments for semi-manufactures are Medical and Pharmaceutical products

• Growth of exports broadly in line with growth of export markets, but does not show the kind of growth we would expect given depreciation.

The deterioration in the income balance and the net international investment position

Michael Hardie, Head of International Transactions, ONS

Contents

• Recent developments

• Recent decline in current account driven by primary income

• This means UK earnings on overseas investments are now lower than foreign earnings on UK investments.

• Key drivers

• Primary Income Account• Foreign Direct Investment• Portfolio (Debt securities and Equity Securities)• Other Investment

Recent developmentsUK current account and its constituent parts, balances as a percentage of GDP, current price, seasonally adjusted

•Recent deterioration in current account has been driven by weaker primary income balance.

Source: ONS Balance of Payments Q3 2014

Recent developments

•Recent weakness in primary income driven by a fall in earnings of UK residents on investment abroad, coinciding with a stabilisation of foreign earnings in UK.

Primary income, percentage of GDP, current price, seasonally adjusted


Recent developmentsPrimary income, percentage of GDP, current price, seasonally adjusted

•Recent deterioration in income balance is driven by falling direct investment income balance, as well as a falling debt security income balance.


Primary Income Account

• International Investment Position (IIP):

• International Comparisons• Drivers of the change in IIP • Flows, currency and price changes• Type of investment (Direct, Portfolio, Other)

• Rate of Return:

• Region

Recent developmentsUK international investment position: UK assets and liabilities (% nominal GDP*)

UK net international investment position(% nominal GDP*)

*rolling four quarter sum of quarterly nominal GDP


IIP

International comparisons

Assets Liabilities

Source: IMF Balance of Payments Statistics World Bank (2013)

IIP

RevaluationContributions to cumulative change in stock of assets (£ trillions)

Contributions to cumulative change in stock of liabilities (£ trillions)

IIP

Recent developmentsUK net international investment position, constituent parts, (% nominal GDP*)



IIP

Recent developmentsRate of return on assets (earnings / stock of assets, %) and spread on investment


IIP

42

Recent developmentsRate of return on assets by region (earnings / stock of assets, %)

Foreign assets held by UK residents UK assets held by foreign residents

Foreign Direct Investment (FDI)

• Investment position and rate of return for Foreign Direct Investment (FDI):

• Region• Country• BRIC economises • Industry

Drivers: Foreign direct investment

Stock of assets and liabilities(% nominal GDP*)

Earnings (primary income, % nominal GDP)


FDI

Foreign direct investment in more detail

FDI international investment position abroad(stock of UK assets,% nominal GDP)

FDI International positions in the United Kingdom (stock of UK liabilities, % nominal GDP)

Source: ONS Foreign Direct Investment involving UK companies 2013

FDI


Which are our assets and liabilities?.....


FDI


FDI international investment position abroadAverage annual growth, 2004-2013, %)

FDI international investment position – stocks abroad


FDI

48

Earnings on investment by industry, 2013, £bn

• UK outward investment earnings come from a range of different industries.

• Mining & Quarrying and Information & Communications are the most important, following by Financial Services & Petroleum products

FDI


Industry contributions to UK Earnings on outward investment, £bn

• Recent fall in UK outward investment earnings almost entirely accounted for by these largest industries

FDI


Earnings on outward investment, actual and imputed, £bn • The lower rate

of return on these five industries since 2011 accounts for much of the fall in outward investment earnings

• Chart shows total imputed earnings, assuming that the rates of return for these five ‘movers’ is fixed at its level in 2011.

• Indicates that the fall would have been much smaller (around £4.5bn) without lower rates of return on these industries

Key drivers: Mining & Quarrying, Petroleum products, Other Manufacturing, Information & Communications and Financial Services

FDI



UK resident’s rate of return on overseas investments (earnings as % of assets)

Foreign resident’s rate of return on UK investments (earnings as % of assets)


FDI

Portfolio Investment

• Investment position and rate of return for Portfolio Investment (PI):

• Debt securities• Equity and Investment Fund Shares

Drivers: Debt securitiesStock of assets and liabilities(% nominal GDP*)

Rate of return (earnings / assets, %)Earnings (Debt Securities,)% nominal GDP)




Drivers: Debt securities

54

Drivers: Equity and Investment Fund Shares



*Stock of assets and liabilities(% nominal GDP*)

Rate of return (earnings / assets, %)



Other investment and Financial Derivatives

• Investment position and rate of return for Other Investment and Financial Derivatives

•Residual Category•Mainly consists of currency holdings and deposits

Drivers: Other Investment and financial derivatives



*Stock of assets and liabilities(% nominal GDP*)

Rate of return (earnings / assets, %)


Other Investment

Summary Slide

• Weakness in Primary Income Account

• Foreign Direct Investment• Increase in liabilities relative to assets• Declining rate of return on investment abroad• Changing Destination

• Portfolio Investment• Increase in rate of return on investment into the UK• Increasing share of assets held are from Financial Intermediaries

• Other Investment• Not as a large a driver of primary income weakness

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Michael [email protected]

01633 455923


Net international investment position (% GDP)

Source: IMF Balance of Payments Statistics World Bank


Source: IMF Balance of Payments Statistics World Bank

Changes to the Measurement of MFI FDI Profits

Rob Smith, Head of Balance of Payments and Trade Development, ONS

Revised International Standards

Key Pink Book 2014 changes

• BPM6 driven change

• Measurement of MFI FDI profits

• Introduction of remote gambling

• GNI compliance driven change

• Measurement of Financial Intermediation Services Indirectly Measured (FISIM)

• Introduction of Illegal Activities

Foreign Direct Investment

A direct investment relationship exists if the investor has an equity holding in an enterprise, resident in

another country, of 10 per cent or more of the ordinary shares or voting stock.

Outward FDI

• Parent bank in UK • Subsidiary bank in France• Income credits reflect the proportion of profit

made by the French subsidiary attributable to the UK parent

• Losses are treated as negative income credits

• So profits of non-resident branches and subsidiaries have a positive impact on the UK’s current account, while losses of these UK branches and subsidiaries have a negative impact on the UK’s current account

• Non-resident subsidiaries and branches of UK MFIs are more focused on retail banking than investment banking

Profit

InvestmentSubsidiary CompanyParent Company

Inward FDI

• Parent bank in France• Subsidiary bank in UK • Income debits reflect the proportion of profit

made by the UK subsidiary attributable to the French parent.

• Losses are treated as negative income debits• So profits of UK resident branches and

subsidiaries of non-resident parents have a negative impact on the UK’s current account, while losses of these UK resident branches and subsidiaries have a positive impact on the UK’s current account.

• UK resident branches and subsidiaries are more focused on investment banking than retail banking

Investment

ProfitSubsidiary CompanyParent Company

What is the change?

• Measurement changes from an All Inclusive (AI) to a Current Operating Performance (COP) basis

• This means we exclude holding gains and losses, which are calculated as dealing profits less net spread earnings, plus exceptional items less provisions for bad and doubtful debts are excluded

Why change?

• Long standing debate over preferred method

• Ease of comparison with other countries

• Consistency with the National Accounts

• Ensures consistency with other sectors in the accounts

Impact on Primary Income Balance

-50

-40

-30

-20

-10

0

10

20

30

40

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Total Revisions FDI MFI Revision Pink Book 13 Pink Book 14

Credits and Debits Impact

-20

-10

0

10

20

30

40

50

60

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Credits (revision) Debits (revision)

Impact on Current Account Balance

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Total Revisions FDI MFI Revision Pink Book 13 Pink Book 14

What does this change tell us?

• Significant reduction in the current account balance during the financial crisis

• Doesn’t fundamentally change our understanding of the financial crisis

• Holding gains and losses continue to be reflected in the International Investment Position

Development Priorities

• E-commerce

• Asymmetries

• Trade in value added

• Cross border property income

• Improved BPM6 compliance

Rob [email protected]

01633 651618

Annex

76

Why is this important?

GDP per capita and Gross National Income (GNI) per capita

The difference between GNI and GDP can be used to assess the net benefit to UK residents of international investment flows with the rest of the world

Gross Domestic Product (GDP) is a measure of a country’s overall economic output (which includes output and activity from both residents and non-residents within the country)

Gross national income (GNI) is the sum of value added by all producers who are residents in a country, plus income received from abroad such as employee compensation and property income

Hence a greater value of GNI over GDP is interpreted as a net benefit to the UK economy as it’s shows the economic strength of its citizens


GDP per capita and Gross National Income (GNI) per capita

•Gross National Income excludes net property income from GDP, only showing the income available to UK residents.

•Stiglitz report highlights that this may be a better measure of wellbeing compared to UK GDP.

•GNI growth has recently lagged behind GDP growth, reversing the trend seen in the previous decade.

Source: ONS UK Economic Accounts Q3 2014

Why is this important?•Running a current account deficit means that the ‘rest of the world’ is lending to the UK economy.

•Lending and borrowing in all headline UK sectors must equal zero.

•At the moment, government borrowing is offsetting lending in the rest of the world sector.

Sector net lending (+) / borrowing (-), % of nominal GDP


Financial stability

•Large level of assets and liabilities relative to UK GDP

•Greater sensitivity to exchange rates and equity price differentials (and divergences in performance between countries – e.g. current position).

•Hence, changes to the value of these assets and liabilities could start to affect the current account, and the difference between GNI and GDP to a greater degree.

•Interest rate risk

UK international investment position: UK assets and liabilities (% nominal GDP*)



Foreign direct investment in more detail: inward investment

N.B. Computer, electronic and optical products has been excluded as an outlier

Evidence to suggest industry GVA growth may result in higher FDI growth (2004-2013)


Case study: Icelandic banking crisisIceland international investment position: Iceland assets and liabilities (% nominal GDP)

Iceland net international investment position (% nominal GDP)

•Following the expansion by the banks in 2003, Iceland’s IIP a % of GDP increased rapidly for both assets and liabilities.

•However, Iceland’s NIIP (% of GDP) shows the growth of liabilities consistently surpassed that of assets over the period.

Case study: Icelandic banking crisisComposition of Iceland net international investment position (% nominal GDP)

The driver of the large negative NIIP as a % of GDP has been the growth in Portfolio investment (inc. debt securities and equities) and other investment.

Case study: Icelandic banking crisisIcelandic GDP and GNI

The driver of the large negative NIIP as a % of GDP has been the growth in Portfolio investment (inc. debt securities and equities) and other investment.

[email protected]

Changes to FDI Statistics

Introduction

What is FDI?

• Foreign Direct Investment

• Cross Border Activity

• At least 10% ownership

• At least 6 months

What are Inwards and Outwards FDI?

• Parents & Subsidiaries in this example denoted by:

• Inwards FDI

• Outwards FDI

Parent Company

Subsidiary Company

What are Flows, Positions and Earnings?

Parent Company

Subsidiary Company

£

P1 P2 P3

P2P3P4P1

Which variables changed, and why?Parent Company

Subsidiary Company •The changes are due to a move from IMF’s BPM5 to BPM 6

•Move from Directional Principle to Asset Liability Principle

•From cross survey data to between survey data

•Some variables have changed due to the Asset/Liability Principle:

How does FDI work?

• Flow of money A: This is money flowing from the UK parent company to the French subsidiary branch

• Flow of money B: This is money flowing from the subsidiary in France to the parent company in the UK

• Flow of money C: This is money flowing from the subsidiary in the UK to the parent company in France

• Flow of money D: This money flowing from the parent company in France to the subsidiary in the UK

AC

B

D

Parent Company

Subsidiary Company

Directional Principle

A-B= Outward flows

D-C= Inward flows

Outward flows – Inward flows = Net position directional

AC

B

D

Parent Company

Subsidiary Company

= A – B + C – D

Asset/Liability Principle

A+C= Asset flows

B+D= Liability flows

Asset Flows – Liability flows = Net position asset/liability

AC

B

D

Parent Company

Subsidiary Company

= A + C – B – D

= A –B + C – D

Net Directional position vs Asset/Liability

AC

B

D

Parent Company

Subsidiary CompanyA-B= Outward flows

C-D= Inward flows

Outward flows – Inward flows = Net position directional

A+C= Asset flows

B+D= Liability flows

Asset Flows – Liability flows = Net position asset/liability

= A + C – B – D

= A –B + C – D

Email us- [email protected]

FDI Publications- http://www.ons.gov.uk/ons/rel/fdi/foreign-direct-investment/index.html

Annual Pink Book Publications- http://www.ons.gov.uk/ons/rel/bop/united-kingdom-balance-of-payments/index.html

Quarterly Balance of Payments Publications-http://www.ons.gov.uk/ons/rel/bop/balance-of-payments/index.html

Closing

mailto:[email protected]

http://www.ons.gov.uk/ons/rel/fdi/foreign-direct-investment/index.html

http://www.ons.gov.uk/ons/rel/fdi/foreign-direct-investment/index.html

http://www.ons.gov.uk/ons/rel/bop/united-kingdom-balance-of-payments/index.html

http://www.ons.gov.uk/ons/rel/bop/united-kingdom-balance-of-payments/index.html

http://www.ons.gov.uk/ons/rel/bop/balance-of-payments/index.html

http://www.ons.gov.uk/ons/rel/bop/balance-of-payments/index.html

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