Part A: UK current account

Chart A.20 The UK current account deficit remains large Decomposition of the UK current account(a) Sources: ONS and Bank calculations. (a) Primary income mainly consists of compensation of employees and net investment income. Secondary income consists of transfers.

Chart A.21 There have been material inflows of portfolio investment and FDI over the past few years Net inward financing flows(a) Sources: ONS and Bank calculations. This is the change in UK foreign liabilities, less the change in UK foreign assets, for each category of investment. Four-quarter moving average. Portfolio investment consists of debt securities (including government debt), equities andinvestment fund shares. Other investment consists mostly of loans and deposits. The total net inward-financing flow is equal in magnitude to the current account deficit (plus net errors and omissions).

Chart A.22 Both the UK private and public sectors were net borrowers in 2016 Q2, and ultimately rely on funding from abroad Net lending as a share of GDP by sector Sources: ONS and Bank calculations. Includes households, non-profit institutions serving households, private non-financial corporations and financial corporations. General government plus public corporations.

Chart A.23 There has not been a widespread rise in risk premia on sterling assets in 2016 Sterling ERI and implied risk premia on sterling assets(a) Sources: Bank of America Merrill Lynch Global Research, Bank of England, Bloomberg, IMF, Thomson Reuters Datastream and Bank calculations. Series are normalised to have an average of zero and a standard deviation of one over the period 1 January 2000 to 18 November 2016. Data show the changes in these normalised series since 4 January 2016. As implied by a dividend discount model. Option-adjusted spreads. Sterling-denominated corporate bonds issued in domestic or eurobond markets. Derived using the model described in Malik, S and Meldrum, A (2016), ‘Evaluating the robustness of UK term structure decompositions using linear regression methods’, Journal of Banking & Finance, Vol. 67, June, Pages 85–102. Sterling effective exchange rate index.

Chart A.24 Overseas investors’ net purchases of UK equities have fallen in recent quarters Changes in non-resident net holdings of FTSE 100 shares(a)(b)(c)(d) Sources: ONS, S&P Global Market Intelligence and Bank calculations. Quarterly net changes in non-resident holdings of FTSE 100 companies’ shares, as listed on the index at 15 November 2016. The estimate for the change in the holding of shares in 2016 Q4 is based on data up to 15 November 2016. Both the 2016 Q3 and Q4 changes in the holding of shares are shown as percentages of quarterly nominal GDP in 2016 Q2. The change in the holding of shares is weighted at each quarterly period by the price of the underlying stock. These data are updated on the date on which a change in shareholding is formally registered, not the date on which the transaction itself takes place, which may be earlier. Data are non seasonally adjusted. The S&P’s disclaimer of liability, which applies to the data provided, is available at www.bankofengland.co.uk/publications/Documents/fsr/2016/fsr16nov4.xlsx.

Chart A.25 Sterling depreciation has improved the UK net foreign asset position Annual changes in the United Kingdom’s net international investment position(a) Sources: Bank of England, ONS and Bank calculations. Bank staff estimates of annual changes in the net international investment position, based on the model outlined by Taylor, C (2016), ‘Analysis of the UK’s international investment position: 2016’. Estimates for 2015 and 2016 H1 may be subject to large revisions as the ONS incorporates annual survey data when they become available. Estimates do not include financial derivatives and employees’ stock options.

Chart A.26 UK banks’ short-term foreign currency liabilities are large UK banks’ balance sheets by currency(a) Sources: Bank of England and Bank calculations. Data as on 30 September 2016, for the seven largest UK banks, UK-resident entities only. Total assets (liabilities) includes gross reverse repo (repo) and group lending (funding). Total foreign currency assets (liabilities) calculated as total assets (liabilities) less sterling only assets (liabilities). Sterling assets and liabilities include foreign currency swaps. Wholesale funding with a maturity of three months or less. Shown on a net repo basis and excluding group funding.