LONDON, Jan. 30 (Xinhua) -- The British economy performed well in 2013 with 1.9 percent GDP growth, and some economists predict growth of up to 3 percent this year, but warning bells are sounding over the size of Britain's current account deficit.
Simon Wells, chief UK economist with HSBC Global Research, raised worries over the unbalanced nature of growth in the British economy and the current account deficit, which stands at 5.1 percent of GDP in Q3 2013, close to a peacetime record.
Wells said, "Of the 40 countries covered by HSBC economists, the UK has the fifth largest current account deficit. And while most countries have narrowed deficits over the past five years, the UK's is one of the few that have widened."
The British current account deficit is now higher than it was in 1989, when it hit 4.6 percent.
That level of deficit was not sustainable then, particularly as households were driving much of the economic growth through increased spending which was sucking in more and more imports and thus widening the deficit.
The economic boom of the late 1980s, inspired by market reforms under Margaret Thatcher's premiership, turned into a recession in the early 1990s.
The correlation with the current consumer-led recovery in Britain is uncomfortable. Confidence has returned to householders as they see their house prices rising. The latest figures, out on Wednesday, show 0.7 percent growth in house prices in January, with 8.8 percent growth year on year.
Householders feel confident enough to dip into their savings, with the savings ratio reaching a recent high of 7.8 percent in Q3 2012, to fall to 5.4 percent in Q3 2013 representing increased spending on the high street.
This has fueled the economic recovery, which now looks entrenched and which is set to deliver strong growth this year.
Wells said Britain "may be entering a period of higher domestic demand growth, which should be expected to suck in more imports, from a bad starting point."
Britain is a long way from the re-balanced economy that experts and politicians called for in the wake of the financial crisis.
Britain's Victorian reputation as the workshop of the world has long gone, with much of its manufacturing industrial base disappearing in the 1970s and 1980s.
The British economy is now dominated by the services sector, which accounts for just over three quarters of the economy. Within that the financial sector makes a strong contribution to balance of payments with a trade surplus. However, it suffered during the financial recession.
The pounds sterling suffered a 20 percent depreciation in 2008, before the crisis. It would be expected that that should have stimulated exports, but it has not been the case.
Wells explained, "Weak export growth can be explained in part on the troubles in the eurozone, the UK's largest export market."
In addition to that, Wells said that a stagnation in productivity had eroded the competitive gain.
TRADE DEFICITS ADJUST
Wells believes that the stage could be set for a sudden and uncomfortable adjustment, maybe not in the short term but further out.
Economic research show that large deficits tend to adjust eventually, through some combination of slower growth and currency depreciation, he said.
"Adjustments tend to be more disruptive if the deficit was fuelled by consumption rather than investment and if they are accompanied by large fiscal deficits. Unfortunately, the UK ticks both these boxes," said Wells.
The current account deficit has been wide for some time with no problems, and may not be harmful in 2014. Latest figures from the Office of National Statistics for November 2013 trade show the deficit in goods and services narrowing to 3.2 billion pounds (about 5.27 billion U.S. dollars), down 300 million pounds on October.
In addition the deficit on trade in goods increased by 1.8 billion pounds to 29.2 billion pounds in the three months to November.
Over the three months to November 2013, exports of goods decreased by 3 percent to 75.2 billion pounds, but were 1.5 percent higher than in the same three months in 2012, and imports decreased by 0.6 percent to 104.4 billion pounds.
However, with a large deficit in trade, and a relatively small amount of net foreign direct investment (FDI) the current account deficit is largely financed by short-term banking capital inflows.
If that "hot money" turns into outflows, then that could be troublesome as Britain is vulnerable to anything that makes sterling assets relatively less attractive.
"A faster U.S. recovery and higher U.S. interest rates are potential triggers, as is a stall in the UK momentum or a more rapid improvement in the eurozone," said Wells.
Higher U.S. rates would almost certainly lead to higher rates in Britain, as the smaller British economy seems to track the interest rates of the larger economy.
A resurgent eurozone, which would bring export benefits, would also lessen the sterling's attractiveness as a safe haven currency.