New emerging market: the UK

The UK’s massive current account deficit is causing jitters in financial circles.

Is the UK slowly turning into an emerging market? That view is gaining ground in financial circles, reports Business Insider UK.

Two major banks, Citi and Morgan Stanley, recently published notes on the subject: “How the UK became an EM” (Citi) and “Is the UK behaving like an emerging market?” (Morgan Stanley).

As Morgan Stanley authors Jacob Nell and Melanie Baker explain, the UK's current account deficit is the largest it has been since the Second World War and is also the largest in the G10. This, it says, “points to a high level of dependence on foreign investor appetite for UK risk. If foreign investors were to lose that confidence and cease to be net purchasers of UK assets, or even become net sellers of UK assets, this could trigger a sharp adjustment.”

Together, the crash in the currency and the deficit could force the Bank of England to increase interest rates in the next months a 180-degree flip from its recent policy of monetary loosening to contain the Brexit shock. Such a response, claim the Morgan Stanley authors, is typical of an emerging market economy, not of a developed nation like the UK.

Citi analysts, for their part, note that the British pound has been moving sharply in response to “political chatter” and banking stocks are strongly correlated with movements in the currency, features that generally characterize emerging economies rather than developed ones.

The Morgan Stanley writers recognize that Britain is still holding steady on four key criteria that keep it from being tagged with EM status: institutions, domestic savings, the international role of the currency and economic structure. But, notes the Insider: “The fact that people are even discussing the possibility that the UK is turning into an emerging market is troubling.”