Balance of payments deficit rises £8bn to record £32bn

Britain suffered a record current account deficit last year as the highest-ever goods trade deficit, bigger payments to the European Union and insurance payouts to victims of Hurricane Katrina all took their toll, official data showed yesterday.

The Office for National Statistics reported a balance of payments shortfall of £32bn for the full year, with the fourth quarter's £11bn deficit matching the record set in the third quarter because of a sharp drop in the traditional surplus in investment income. The annual deficit was up from £24bn in 2004.

As a share of national income, however, the deficit was not a record. That honour belongs to 1989, when the deficit reached a record of 5.1% of gross domestic product - double last year's 2.6%. The 2005 figure was the worst for five years, however.

Last year's goods trade deficit, which the ONS has already reported, accounted for £5bn of the £9bn deterioration in the current account position. The traditional surplus in services trade shrank by £2.7bn last year to £18.7bn, mainly due to a £2bn outflow of payments from British insurance companies to cover losses in the United States from Hurricane Katrina. And payments by Britain into the EU rose by nearly £1bn last year to £5.4bn because of the addition of 10 new countries in 2004.

Economists were alarmed by the fourth-quarter deficit figure of £11bn, which was several billion worse than they had expected and put the quarterly deficit at 3.6% of GDP, the joint worst since the early 1990s and one which, along with other weak economic data, pushed the pound down on the foreign exchanges. It fell half a percent against the dollar to just above $1.73 and to 69.2p to the euro.

The ONS said the main reason was a sharp drop in the surplus of British companies' returns on their investments abroad minus the outflows on investments that foreigners have in this country. That surplus dropped to a four-year low of £3.7bn, largely due to big dealing profits made by foreign-owned banks in the City flowing out of Britain. The ONS also left unrevised its previous estimate that the British economy - the world's fifth largest - expanded by 0.6% in the fourth quarter of 2005 from the third, leaving annual growth at just 1.8%, the lowest since the early 1990s when Britain was deep in recession. It revised down an earlier estimate for industrial production to a fall of 0.9% on the quarter but revised up services output to a rise of 1%, the strongest for two years.

Mervyn King, the Bank of England governor, said on Tuesday that he expected growth to stay at fourth-quarter levels for much of this year, supported by a continuing recovery in consumer spending. But data from the Bank yesterday showed a fall in the number of new mortgage approvals in February, the first drop since October 2004 and one which makes the sustainability of the recent housing market revival uncertain, say economists.

The Bank said approvals fell to a seasonally adjusted 115,000 last month from 121,000 the month before. Analysts had expected the figure to show another rise. Its figures come on top of weaker mortgage figures from the British Bankers' Association earlier in the week.

Alan Castle, an economist at Lehman Brothers, said he was not convinced that house prices would pick up in the next few months as quickly as suggested by the recent strength in approvals. "Although further short-term support to the national figures from buoyant markets in London and the south-east is likely," he said, referring to the London housing market's recent jump due to big City bonuses and money flowing in from overseas investors.

Ross Walker, of Royal Bank of Scotland, said: "The upside for house prices is very limited; the market looks expensive with valuations at historic highs."