The most important statistic you've never heard of
’s the most important statistic you’ve probably never heard of – and it’s just been updated. The good news – wait for it – is that Britain is happily one step further away from economic oblivion than seemed the case three months ago.
The international investment position – the comprehensive calculation of just how much Britain owes to other countries around the world – improved in the third quarter. This is a cause for real relief – perhaps even more relief than came after Britain re-emerged from recession – for a simple reason: Britain still looks far less exposed to a capital market crisis than countries like Greece, Spain and Ireland.
This is ultimately far more important than the other main data point today – Britain’s GDP in Q3 being revised down from 1% to 0.9%.
In essence, the IIP is the national equivalent of the total amount of debt you owe on your credit card – as opposed to the current account deficit or surplus, which is the amount you borrow on your credit card each month. In other words, it’s the total stock of UK debt to overseas lenders.
And it is one of the key metrics proving Britain is far from being a capital markets basket case akin to Greece. To see why, just have a look at this graph, comparing IIPs in major European economies. As you can see, despite the fact that Britain frequently nurses an annual current account deficit far greater than its European counterparts, its international investment position isn’t quite as bad as some of those other troubled Eurozone members.
Why? Because although Britain tends to import a lot more from overseas than we export – the main component of the country’s balance of payments – this is offset to a significant degree by the fact that Britain tends to earn healthy amounts on its international investments. Quite why this is, no-one is entirely sure. One factor is likely to be the preponderance of UK multinationals earning significant amounts overseas.
Whatever the cause, that international investment income is one of the main reasons Britain’s IIP remains in an almost miraculously decent position.
In the second quarter of the year, that buffer suddenly disappeared. The investment income turned negative and Britain’s current account deficit lurched to over 4%.
The good news from today’s data is that this has suddenly been turned around – and this is one of the main reasons that despite facing a stubbornly large trade deficit, the balance of payments nonetheless improved in Q3.
And the international investment position, that most important statistic you’d probably never heard of, has improved from -22.5% to -20.7%. Don’t all cheer at once.