Watching out for £20 billion of invisibles
Nigel Williams, 17 October 2013
When asked about the balance of payments we think first of goods. A deficit means that we are importing more things made in China and elsewhere than we sell things made in Britain. The container ships heading from Felixstowe to Rotterdam are often returning the empties to be filled with more foreign-made goods.
Then we remember services. Consultancy, design, university education and other things done for people overseas have long outweighed things done for us in return. That redresses some of the deficit. Adding services to goods generally makes the UK appear to pay its way rather better.
There is a third component – income. Usually classed as “invisible earnings”, it comes in so many subcategories that it can be close to impossible to tell what the figure actually means. A small proportion of income is compensation of employees – wages and salaries for people from a different economy. The bulk is returns on past investment. That gets subdivided according to whether it comes with a share of control – ‘direct investment‘ or FDI – or is just to make money – ‘portfolio‘ – and further split according to whether the investors are private or public, financial or non-financial. For all this investment, there is a common theme that past earnings have not been spent but invested, with a view to acquiring future earnings. Maintaining a positive balance for income may mean that UK-owned businesses abroad are performing better than foreign-owned businesses in the UK. However, the most likely way to improve the balance is to acquire more assets overseas than are sold here, which presupposes that we will first earn the money to make the investment.
Between 2011 and 2012, income credits fell by approximately £20 billion. Some components remained similar to previous years. Others changed drastically. Private non-financial institutions received £17 billion less from Direct Investment. Receipts overall were down £7 billion from dividends and £9 billion from distributed branch profits, where the whole operation was UK owned. After a £20 billion spike in 2011, total FDI credits returned to around 2010 levels in 2012, whereas debits stayed up.
What is going on? It may be an accounting treatment or a fluctuation in an exchange rate that has caused a short-term change or that may be wishful thinking. On face value, UK foreign direct investments earnt £20 billion less than a year before. From 2002 to 2012, inward investment exceeded outward by over £300 billion. The return on that investment necessarily involves more income heading overseas than comes here. A rise in the foreign-exchange value of the pound implies that overseas income will equate to fewer pounds. The opposite can cause a short-term improvement in the income component of the balance of payments but with an added consequence. With a low exchange rate, UK companies become cheaper so that foreign owners can acquire a greater share of UK productive capacity. Whatever the explanation, losing £20 billion of invisibles is enough to deserve some careful scrutiny.