Halister News

(Bloomberg) -- Analysts are split on whether news the U.K.’s current account deficit soared to a record 7% of GDP in 4Q makes sterling assets more vulnerable to potential outflows in the event of a vote to leave.

• While U.K. GDP growth in the fourth quarter of 2015 was revised higher, economists see little room to cheer as the June referendum on EU membership could damp growth in the months ahead and as the data shows an over-reliance on domestic consumption

BofAML (Kamal Sharma, Sebastien Cross)

• While the record current account deficit was comfortably funded by portfolio inflows in 4Q, the outlook for 1Q looks more challenging amid foreign selling of gilts and a marked slowdown in the ability of the U.K. to attract cross-border M&A flows
• The emerging funding stresses on the financial account supports our view for renewed GBP weakness in the final weeks of referendum campaigning
• February saw further foreign selling of gilts which BofAML says likely reflects Brexit concerns; with the DMO planning to front load supply there may be a significant amount of duration risk delivered to the gilt market at a time when Brexit uncertainty will be dampening foreign demand

JPMORGAN (Allan Monks)

• The data could be seized upon by people campaigning for the U.K. to stay in the EU as it suggests a vulnerability which could be exposed on a Brexit and as the country struggles to retain the confidence of foreign investors
• That struggle isn’t inevitable and the wider deficit has so far been funded without any signs of difficulty
• While GBP has weakened this reflects positioning, and gilt spreads are little changed while buying is strong
• Another mitigating factor is the improvement in the net external balance sheet

BNP (Michael Sneyd, Charlotta Puhringer)

• The U.K.’s current account deficit was more than amply financed by both portfolio inflows and FDI, underscoring the importance of external capital inflows and the appetite for U.K. assets from foreign investors
• This highlights one of the risks to GBP heading into the EU referendum on June 23 as it shows the balance of payments could be highly sensitive to foreign investor sentiment toward the U.K.

RBC (Sam Hill)

• News of a record current account deficit could provide ammunition for campaigners on both sides of the referendum debate
  • “Remain” camp may dwell on financial stability considerations given a persistent deficit relies on continued inflows of portfolio and direct investment
  • “Leave” side may suggest it strengthens the U.K.’s hand in any trade deal with the EU after Brexit as the EU18b U.K.-EU trade deficit shows the importance of U.K. markets for the region’s firms

NOMURA (Yujiro Goto, Jordan Rochester )

• Foreign portfolio flows into the U.K. financial market stayed strong in 4Q, before the date of the vote was announced
  • Foreign fixed income inflows into the U.K. were the biggest since 4Q 2008
  • In the near term though, foreign inflows may slow amid “Brexit” uncertainty, so recommend moderating GBP/USD downside exposure
• If Brexit is avoided, as Nomura expects, strong mid-term inflows into the U.K. should support GBP outperformance again

CEBR (Kay Daniel Neufeld)

• The large persistent current account deficit poses a threat to the economy and increases the possibility of a substantial currency devaluation
• Household consumption was the primary driver behind GDP growth in 4Q; this disproportionate reliance on household consumption could start to cause problems as real disposable income fell by 0.6% between 3Q and 4Q
• The savings ratio also fell
• Excessive reliance on consumer spending is also risky if demand for imports exceeds exports, leading to a widening of the trade deficit and dragging down GDP growth

UNICREDIT (Daniel Vernazza)

• A vote for Brexit could test the nerve of investors at a time when it is relying more than ever before on the “generosity of strangers”
• The GDP data doesn’t challenge UniCredit’s view that the economy is slowing and will continue to do so ahead of the EU referendum
  • The revision reflects a slightly smaller negative contribution from net trade as import growth was revised down, and a bigger build-up of inventories, which could weigh on growth in 1Q
• The still strong household consumption growth was fueled by a sharp fall in the household savings ratio, which doesn’t look sustainable

INVESTEC (Chris Hare)

• While the BoE will no doubt fret about the current account shortfall in particular, don’t expect today’s data to have much bearing on the monetary policy outlook
• Still expect rate rise in November

CAPITAL ECONOMICS (Scott Bowman, Vicky Redwood)

• The imbalances cast some doubt on the sustainability of the improvement in GDP growth in 4Q
  • Growth in 2016 looks likely to come in at or below 2015’s level as activity indicators suggest growth slowed at the start of the year and as Brexit uncertainty and a renewed fiscal squeeze weigh
• Unlikely will see a re-run of the income surpluses seen in the 2000s so an improvement in the trade balance looks necessary to make the current account sustainable again
• GBP falling if the U.K. were to vote to leave the EU could aid the long hoped-for re-balancing of the economy