Balance of Payments, UK: Quarter 2 (Apr to June) 2015

• The United Kingdom’s (UK) current account deficit was £16.8 billion in Quarter 2 (April to June) 2015, down from a revised deficit of £24.0 billion in Quarter 1 (Jan to Mar) 2015. The deficit in Quarter 2 (April to June) 2015 equated to 3.6% of gross domestic product (GDP) at current market prices, down from 5.2% in Quarter 1 (Jan to Mar) 2015

• The narrowing of the current account deficit was mainly due to a narrowing in the deficit on the trade account and a small narrowing in the deficit on the primary income account, slightly offset by a small widening in the deficit on the secondary income account

• The trade deficit narrowed to £3.5 billion in Quarter 2 (April to June) 2015, from £10.5 billion in Quarter 1 (Jan to Mar) 2015. This was primarily due to a narrowing in the trade in goods deficit as exports rose by £4.5 billion and imports fell by £3.2 billion

• The deficit on secondary income widened by £0.9 billion, from £5.5 billion in Quarter 1 (Jan to Mar) 2015 to £6.4 billion in Quarter 2 (April to June) 2015. This was due to a small decrease in receipts and an increase in payments

• The financial account recorded a net inflow of £14.1 billion during Quarter 2 (April to June) 2015

• The international investment position recorded UK net liabilities of £372.0 billion at the end of Quarter 2 (April to June) 2015

• An article explaining the changes implemented in the Balance of Payments and International Investment Position accompanies this bulletin (a link to the article can be found in the "Revisions since the last balance of payments statistical bulletin (Table R1, R2 and R3)" section in this bulletin)

The balance of payments summarises the economic transactions of the UK with the rest of the world. These transactions can be broken down into 3 main accounts: the current account, the capital account and the financial account.

The current account comprises the trade in goods and services account, the primary income account and secondary income account. The difference in the monetary value of these accounts is known as the current account balance. A current account balance is in surplus if overall credits exceed debits, and in deficit if overall debits exceed credits.

The sum of the current and capital account balances are equal to the balance of the financial account. As the capital account is relatively small in comparison, the current account and financial account can be said to be counterparts.

The current account balance plus the capital account balance measures the extent to which the UK is a net lender (that is, in surplus) or net borrower (that is, in deficit). The UK has run a combined current and capital account deficit in every year since 1983, and every quarter since Quarter 3 1998.

Quarter 2 2015 overview

In Quarter 2 2015, the UK was a net borrower of £17.2 billion, down from £23.9 billion in Quarter 1 2015. This was due to the total trade and total primary income deficits narrowing by £7.1 billion and £1.1 billion respectively. Slightly offsetting these was a widening in the deficit on total secondary income of £0.9 billion.

The narrowing in the total trade deficit was due to a narrowing of £7.7 billion in the trade in goods deficit, partially offset by a narrowing of £0.7 billion in the trade in services surplus. The narrowing in the trade in goods deficit was due to exports rising by £4.5 billion and imports falling by £3.2 billion. The narrowing in the trade in services surplus was due to imports rising by £0.8 billion and exports rising by just £0.2 billion.

The narrowing in the total primary income deficit was mainly due to the narrowing of the deficit on other investment, from £2.7 billion in Quarter 1 2015 to £1.6 billion in Quarter 2 2015. Additionally, the deficit on direct investment narrowed from £0.3 billion to a deficit that rounds to £0.0 billion. Partially offsetting these was a widening in the portfolio investment deficit of £0.3 billion, from £4.9 billion in Quarter 1 2015 to £5.2 billion in Quarter 2 2015.

The widening in the secondary income deficit was due to a widening of £0.8 billion in the general government deficit, from £4.5 billion in Quarter 1 2015 to £5.3 billion in Quarter 2 2015.

Notes for Summary:

1. Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December

The current account deficit equated to 3.6% of gross domestic product (GDP) at current market prices in Quarter 2 2015, compared with 5.2% in Quarter 1 2015. The deficit on trade in goods and services was equivalent to 0.7% of GDP in Quarter 2 2015, compared with 2.3% in Quarter 1 2015. The deficit on primary income equated to 1.5% of GDP in Quarter 2 2015, compared with a deficit equivalent to 1.7% in Quarter 1 2015. The deficit on secondary income equated to 1.4% of GDP in Quarter 2 2015, compared with 1.2% in Quarter 1 2015.

Notes for Current account balances as percentage of GDP

1. Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December

A deficit of £26.9 billion was recorded with the EU in Quarter 2 2015, compared with a deficit of £27.6 billion in Quarter 1 2015. This decrease was due to a narrowing in the deficit on the total trade balance, this was partially offset by a widening in the deficit on the total primary and secondary income balances. The current account surplus with non-EU countries in Quarter 1 2015 of £3.6 billion widened to £10.2 billion in Quarter 2 2015. The widening was due to the total trade balance surplus widening from £8.2 billion in Quarter 1 2015 to £13.0 billion in Quarter 2 2015. Additionally, the total primary income balance switched from a deficit of £2.0 billion in Quarter 1 2015 to a surplus of £0.4 billion in Quarter 2 2015. Offsetting these was a widening in the deficit on the secondary income balance of £0.6 billion from, £2.7 billion in Quarter 1 2015 to £3.3 billion in quarter 2 2015.

Notes for Current account with EU and non-EU countries (Table C)

1. Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December

Trade in goods covers transactions in general merchandise for which changes of ownership occur between UK residents and the rest of the world. General merchandise (with some exceptions) refers to moveable goods.

The trade in goods deficit in Quarter 2 2015 was £26.3 billion, compared with £34.0 billion in Quarter 1 2015. The narrowing in the deficit in Quarter 2 2015 was due to exports rising by £4.5 billion and imports falling by £3.2 billion.

The deficit on all components except for basic materials, narrowed between Quarter 1 2015 and Quarter 2 2015 with the largest changes as follows:

• the deficit on unspecified goods of £1.4 billion in Quarter 1 2015 switched to a surplus of £1.5 billion in Quarter 2 2015

• the deficit on finished manufactured goods narrowed by £2.0 billion, from £17.5 billion in Quarter 1 2015 to £15.5 billion in Quarter 2 2015

• the deficit on semi-manufactured goods narrowed by £1.6 billion, from £4.5 billion in Quarter 1 2015 to £2.9 billion in Quarter 2 2015

• the deficit on other fuels narrowed by £0.7 billion, from £1.9 billion in Quarter 1 2015 to £1.2 billion in Quarter 2 2015

Trade in services covers the provision of services by UK residents to non-residents and vice versa. It also covers transactions in goods which are not freighted out of the country in which transactions take place, for example, purchases for local use by foreign forces in the UK, or by UK forces abroad and purchases by tourists. Transactions in goods which are freighted into or out of the UK are included under trade in goods.

The trade in services surplus was £22.8 billion in Quarter 2 2015, a decrease of £0.7 billion from Quarter 1 2015.

Exports were £0.2 billion higher than Quarter 1 2015, at £56.2 billion, with increases mainly in the travel services, intellectual property services, and telecommunication, computer and information services of £1.3 billion, £0.5 billion and £0.2 billion respectively. Partially offsetting these were a decrease in the other business services and financial services of £1.2 billion and £0.6 billion respectively.

Imports increased by £0.8 billion to £33.3 billion, mainly due to increases in travel services, telecommunication, computer and information services, and intellectual property services each of £0.3 billion. Partially offsetting these was a decrease in financial services of £0.2 billion.

Notes for Trade in goods (Table E) and services (Table F)

1. Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December

The primary income account is comprised of compensation of employees, investment income and other primary income.

Compensation of employees presents remuneration in return for the labour input into the production process contributed by an individual. In the international accounts, compensation of employees is recorded when the employer (the producing unit) and the employee are resident in different economies.

Investment income covers earnings (for example, profits, dividends and interest payments and receipts) arising from foreign investment in financial assets and liabilities. Credits are the earnings of UK residents from their investments abroad and other foreign assets. Debits are the earnings of foreign residents from their investments in the UK and other UK liabilities. The flow of investment in the financial account is recorded separately from earnings, although reinvested earnings of companies with foreign affiliates are a component of both. The total value of UK assets and liabilities held at any time is also recorded separately under the international investment position.

Other primary income covers earnings from rent and taxes, and subsidies on production and on the import of goods. Under the Balance of Payments Manual fifth edition, taxes and subsidies on production and on the import of goods were classified to secondary income (previously titled current transfers). The recording of rent was previously classified to other investment income.

The primary income deficit narrowed from £8.0 billion in Quarter 1 2015, to £6.9 billion in Quarter 2 2015. In terms of functional categories, the decrease was due to the deficit on other investment and direct investment narrowing, from £2.7 billion and £0.3 billion in Quarter 1 2015 to £1.6 billion and a rounded £0.0 billion in Quarter 2 2015 respectively. Partially offsetting these was a widening in the portfolio investment deficit of £0.3 billion, from £4.9 billion in Quarter 1 2015 to £5.2 billion in Quarter 2 2015.

The deficit on compensation of employees widened in Quarter 2 2015 to £57 million, from £48 million in Quarter 1 2015.

The deficit on direct investment income narrowed from £0.3 billion in Quarter 1 2015, to £16.0 million in Quarter 2 2015. The narrowing was due to payments falling more than receipts. Payments were £15.7 billion in Quarter 2 2015, £3.7 billion lower than in Quarter 1 2015. The fall was due to all sectors except for foreign-owned other sectors, recording decreases as follows:

• foreign-owned UK private non-financial corporations recorded a decrease in profits of £2.3 billion, from £12.8 billion in Quarter 1 2015 to £10.5 billion in Quarter 2 2015

• foreign-owned UK monetary financial institutions recorded a decrease in profits of £0.7 billion, from £1.9 billion in Quarter 1 2015 to £1.1 billion in Quarter 2 2015

• foreign-owned UK other financial intermediaries recorded a decrease in profits of £0.5 billion, from £3.6 billion in Quarter 1 2015 to £3.1 billion in Quarter 2 2015

• foreign-owned UK insurance companies recorded a decrease in profits of £0.2 billion, from £1.1 billion in Quarter 1 2015, to £1.0 billion in Quarter 2 2015

Receipts were £15.6 billion in Quarter 2 2015, £3.4 billion lower than in Quarter 1 2015. The fall was due to:

• UK private non-financial corporations recorded a decrease in profits of £2.5 billion, from £13.0 billion in Quarter 1 2015 to £10.5 billion in Quarter 2 2015

• UK insurance companies recorded a decrease in profits of £0.7 billion, from £1.4 billion in Quarter 1 2015 to £0.7 billion in Quarter 2 2015

• UK other financial intermediaries recorded a decrease in profits of £0.5 billion, from £3.5 billion in Quarter 1 2015 to £3.0 billion in Quarter 2 2015

Partially offsetting these, UK monetary financial institutions recorded an increase in profits of £0.2 billion in Quarter 2 2015, to £1.2 billion.

The portfolio investment income deficit widened between Quarter 1 2015 and Quarter 2 2015, from £4.9 billion to £5.2 billion. This was due to a widening in the deficit in equity securities, partially offset by a narrowing in the debt securities deficit. UK earnings on portfolio investment abroad increased by £1.7 billion, this was due to an increase of £2.0 billion in earnings on debt securities. This was partially offset by a decrease of £0.3 billion in the earnings of equity securities. Foreign earnings on portfolio investment in the UK increased by £2.0 billion, this was due to a rise of £1.7 billion and £0.3 billion in foreign earnings on UK equity securities and UK debt securities respectively.

The deficit on earnings from other investment narrowed by £1.0 billion to £1.6 billion in Quarter 2 2015. UK earnings from other investment abroad increased by £1.3 billion to £6.4 billion, while foreign earnings on other investment in the UK increased by £0.3 billion to £8.0 billion.

The deficit on other primary income was £0.2 billion in Quarter 2 2015, virtually unchanged from Quarter 1 2015.

Notes for Primary income account (Table G)

1. Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December

Secondary income represents the provision (or receipt) of an economic value by one party without directly receiving (or providing) a counterpart item of economic value. In plain terms, this is a transaction representing “something for nothing” or without a quid pro quo. Transfers can be in the form of money or of goods or services provided without the expectation of payment. General government transfers include receipts, contributions and subscriptions from or to European Union (EU) institutions and other international bodies, bilateral aid and military grants.

The deficit on secondary income widened by £0.9 billion, from £5.5 billion in Quarter 1 2015 to £6.4 billion in Quarter 2 2015. This was primarily due to a small decrease in receipts and an increase in payments.

It should be noted that the quarterly path of net contributions to EU institutions can be erratic due to the timing of payments.

Notes for Secondary income account (Table H)

1. Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December

The capital account comprises 2 components: capital transfers and the acquisition or disposal of non-produced, non-financial assets.

Under BPM6, there is no longer a requirement to record migrant transfers. The manual clarifies that the change in the residence does not involve a transaction between 2 entities but a change in status.

Capital transfers are those involving transfers of ownership of fixed assets, transfers of funds associated with the acquisition or disposal of fixed assets, and cancellation of liabilities by creditors without any counterparts being received in return. As with current transfers, they can be subdivided into general government transfers and other sectors transfers. The main sources of information are government departments (Department for International Development and HM Treasury) and the Bank of England. Compensation payments from the EU are also included here, for example, payments related to the destruction of animals to combat BSE and foot and mouth disease.

The sale or purchase of non-produced, non-financial assets covers intangibles such as patents, copyrights, franchises, leases and other transferable contracts, and goodwill. It also covers transactions involving tangible assets that may be used or needed for the production of goods and services but have not themselves been produced, such as land and sub-soil assets. The use of such assets is recorded under trade in services as royalties and license fees; only the outright purchase or sale of such assets is recorded in the capital account.

The capital account recorded a deficit of £0.4 billion in Quarter 2 (April to June) 2015, a switch from a surplus of £0.1 billion in Quarter 1 (Jan to Mar) 2015.

The financial account covers transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents, for example, the acquisitions and disposals of foreign shares by UK residents.

The financial account showed a net inflow (that is, more money flowing into the UK) of £14.1 billion in Quarter 2 2015, compared with a net inflow of £11.6 billion in Quarter 1 2015. UK investment abroad switched from net investment (net buying of assets abroad) of £84.9 billion in Quarter 1 2015 to net disinvestment (net selling of assets abroad) of £49.2 billion in Quarter 2 2015. Investment in the UK switched from net investment (net buying of UK assets) of £96.5 billion in Quarter 1 2015 to net disinvestment (net selling of UK assets) of £35.1 billion in Quarter 2 2015.

Direct investment recorded a net inflow (that is, more money flowing into the UK) of £5.9 billion in Quarter 2 2015, compared with a net inflow of £42.6 billion in Quarter 1 2015.

For further information on the impact of foreign direct investment acquisitions and disposals, please see background notes, section 3, part 2 interpreting the data.

Direct investment abroad switched in Quarter 2 2015 to net disinvestment of £9.2 billion, from net investment of £0.3 billion in Quarter 1 2015. The switch was due to an increase in net disinvestment of debt instruments, from £7.5 billion in Quarter 1 2015 to net disinvestment of £14.0 billion in Quarter 2 2015. In addition, reinvested earnings switched from net investment of £3.0 billion in Quarter 1 2015 to net disinvestment of £1.3 billion in Quarter 2 2015. Slightly offsetting these was an increase in net investment of equity capital, from net investment of £4.8 billion in Quarter 1 2015 to net investment of £6.1 billion in Quarter 2 2015.

On a sector basis, the switch was due to private non-financial corporations recording increased net disinvestment, from £1.3 billion in Quarter 1 2015 to net disinvestment of £15.9 billion in Quarter 2 2015. Additionally, monetary financial institutions switched, from net investment of £0.3 billion in Quarter 1 2015 to net disinvestment of £0.7 billion in Quarter 2 2015. Partially offsetting these was an increase in net investment by other financial intermediaries, from net investment of £2.6 billion in Quarter 1 2015 to £7.3 billion in Quarter 2 2015. Additionally, insurance companies recorded a decrease in net disinvestment, from £1.3 billion in Quarter 1 2015 to net disinvestment of £0.3 billion in Quarter 2 2015.

Direct investment in the UK switched in Quarter 2 2015 to net disinvestment of £3.3 billion, from net investment of £42.9 billion in Quarter 1 2015. The switch was due to a switch in debt instruments, from net investment of £30.8 billion in Quarter 1 2015 to net disinvestment of £13.1 billion in Quarter 2 2015. In addition, reinvested earnings decreased, from net investment of £8.6 billion in Quarter 1 2015 to net investment of £6.3 billion in Quarter 2 2015.

On a sector basis, the switch was mainly due to foreign investment in UK private non-financial corporations switching from net investment of £36.8 billion in Quarter 1 2015 to net disinvestment of £8.6 billion in Quarter 2 2015.

Portfolio investment recorded a net inflow (that is, more money flowing into the UK) of £95.0 billion in Quarter 2 2015, an increase from a net inflow of £43.5 billion in Quarter 1 2015. The increase was due to non-residents continuing to invest in the UK, as UK residents decreased their portfolio investments abroad.

Portfolio investment abroad switched in Quarter 2 2015 to net disinvestment of £39.0 billion, from net investment of £24.4 billion in Quarter 1 2015. The switch was due to investment in debt securities switching from net investment of £37.8 billion in Quarter 1 2015 to net disinvestment of £25.4 billion in Quarter 2 2015.

Portfolio investment in the UK showed net investment of £56.1 billion in Quarter 2 2015, a decrease from net investment of £68.0 billion in Quarter 1 2015. This was due to decreased net investment in debt securities, from net investment of £52.1 billion in Quarter 1 2015 to net investment of £40.2 billion in Quarter 2 2015.

Financial derivatives and employee stock options showed net settlement receipts of £80.9 billion in Quarter 2 2015, following net settlement receipts of £3.2 billion in Quarter 1 2015.

Other investment in Quarter 2 2015 recorded a net outflow (that is, more money flowing from the UK) of £4.9 billion, compared with a net outflow of £58.7 billion in Quarter 1 2015.

Other investment abroad showed a switch from net investment of £44.4 billion in Quarter 1 2015 to net disinvestment of £83.0 billion in Quarter 2 2015. The switch was mainly due to UK residents switching from making net deposits of £8.0 billion in Quarter 1 2015 to making net withdrawals of deposits abroad of £42.4 billion in Quarter 2 2015. This was mainly due to other UK financial corporations switching from making net deposits of £27.0 billion in Quarter 1 2015, to net withdrawals of deposits of £23.8 billion in Quarter 2 2015. Additionally, there was a switch in short-term loans by UK monetary financial institutions from net advances of £38.3 billion in Quarter 1 2015 to net repayments of £41.0 billion in Quarter 2 2015.

Other investment in the UK showed an increase in net disinvestment, from net disinvestment of £14.3 billion in Quarter 1 2015 to net disinvestment of £87.9 billion in Quarter 2 2015. The increase was mainly due to a switch in non-resident deposits with UK monetary financial institutions from making net deposits of £26.3 billion in Quarter 1 2015, to making net withdrawals of deposits of £111.4 billion in Quarter 2 2015. Partially offsetting this was a switch in short-term loans to UK other financial corporations, from net repayments of £43.0 billion in Quarter 1 2015 to net advances of £19.8 billion in Quarter 2 2015.

Reserve assets showed net investment of £1.0 billion in Quarter 2 2015, compared with net investment of £12.6 billion in Quarter 1 2015.

Notes for Financial account (Table J)

1. Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December

The international investment position brings together the available estimates of the levels of identified UK external assets (foreign assets owned by UK residents) and identified UK external liabilities (UK assets owned by foreign residents) at the end of each calendar period.

The international investment position showed net external liabilities (that is, liabilities exceed assets) of £372.0 billion at the end of Quarter 2 2015, compared with net external liabilities of £345.9 billion at the end of Quarter 1 2015. UK external assets abroad decreased by £864.8 billion from the end of Quarter 1 2015, to a level of £9,691.9 billion at the end of Quarter 2 2015. The decrease in the stock of UK external assets in Quarter 2 2015 was mainly due to a decrease in the stock of financial derivatives and employee stock options, other investment and portfolio investment. UK external liabilities decreased by £838.7 billion in Quarter 2 2015, to a level of £10,063.9 billion. The decrease in UK external liabilities in Quarter 2 2015 was mainly due to a decrease in the stock of financial derivatives and employee stock options and other investment in the UK.

Within the Quarter 2 2015 bulletin, we have applied the 2012 and 2013 benchmark data from the annual Foreign Direct Investment survey. For further information on the impact of annual benchmarking, please see background notes, section 4, part 3 applying annual benchmark data.

Notes for International investment position (Table K)

1. Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September, and Quarter 4 refers to October to December

Data in this release have been revised from Quarter 1 (Jan to Mar) 1997. Revisions tables are included in the balance of payments reference tables (Tables R1, R2 and R3). A detailed assessment of changes to the Balance of Payments and International Investment Position annually for 1997 to 2014 can be found in this article also published today (257.9 Kb Pdf). In addition to changes highlighted in the article (257.9 Kb Pdf), which are carried through to Quarter 1 2015, revisions are also due to:

Trade in goods – Revisions from Quarter 1 (Jan to Mar) 2014 reflect revised data from HM Revenue & Customs and other data suppliers, revised estimates of trading associated with VAT Missing Trader Intra-Community (MTIC) fraud, revised survey data on trade prices and a reassessment of seasonal factors. Further information on trade is available in the UK Trade July 2015 statistical bulletin.

Trade in services – Revisions from Quarter 1 (Jan to Mar) 2014 are due to updated transport survey information and administrative sources and a reassessment of seasonal factors.

Secondary income account – Revisions to the secondary income account are due to revised source data for transfers involving the UK government, the use of the latest data for various ONS surveys and a reassessment of seasonal factors.

Capital account – Revisions to the capital account are attributable to revised source data from HM Treasury and the ONS International Trade in Services survey.

Primary income, financial account and international investment position – Revisions from Quarter 1 (Jan to Mar) 2014 reflect new and revised survey data, a reassessment of coverage adjustments to data from the Bank for International Settlements and a reassessment of seasonal factors. Revisions also reflect new estimates from the Bank for International Settlements.

Quarterly revisions to the current account balance as a percentage of GDP
Revisions to the current account balance as a percentage of GDP in this release may be due to revisions to the current account detailed above and / or changes to nominal GDP.

Table 1 provides revisions to the current account balance as a percentage of GDP annually between 2011 to 2014 and quarterly between Quarter 3 2012 to Quarter 1 2015.