The economy forecast

Current account balance

This Forecast in-depth page has been updated with information available at the time of the March 2023 Economic and fiscal outlook.

Our forecast for the current account balance is constructed in a bottom-up way by forecasting its main component balances that cover cross-border flows of: trade in goods and services, investment income, transfers, and employee income.

The UK has run a large current account deficit for the past couple of decades. We forecast that the UK will continue to run a large current account deficit over the next five years, driven by the trade and investment income balances.

  Trade balance

The trade balance is equal to the value of exports less the value of imports – covering both goods and services. Our forecasts for the value of exports and imports are built up by combining our forecasts for real exports and imports with our forecasts for the export and import deflators (measures of the prices of exports and imports). The ratio of the export deflator to the import deflator is known as the ‘terms of trade’ – an indicator of how much a country can afford to import by selling a given volume of exports.

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  Income account balance

The income account balance is equal to the credits the UK generates on its overseas investments (‘assets’), less the debits it pays overseas investors who own UK-based assets (‘liabilities’). Our approach to forecasting credits and debits involves two steps:

  • First, we forecast the stock of overseas assets and liabilities. The change in the value of the stocks of assets and liabilities reflects both revaluation effects and the net acquisition of those assets and liabilities. Our forecasts for revaluations include the effect of exchange rate movements. The net acquisition of assets and liabilities is forecast using a number of behavioural equations on our macroeconomic model.
  • Then we forecast the associated effective rate of return on those assets and liabilities. These forecasts are informed by equations from our macroeconomic model but will also involve a layer of staff and BRC judgement based on the latest evidence available. The forecasts will, therefore, reflect several factors including relative interest rates domestically and overseas, movements in the exchange rate, changes in domestic and global equity prices.

Taken together, these elements provide a forecast for the income credits from UK assets abroad and the income debits from UK-based assets held by overseas investors.

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  Transfers balance

The UK makes and receives various transfers to and from international organisations. Our forecasts for these transfers are largely derived as part of our forecast for the public finances.

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  Employee income balance

The employee income balance is a relatively small component of the current account and is equal to employee compensation from abroad less employee income due abroad. Employee compensation from abroad is assumed to grow in line with GDP growth in our major trading partners, while employee income due abroad is determined by our forecast of UK compensation of employees.

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Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.