Britain is back in the black

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ritain's current account was in balance last year for the first time since 1985, the latest official figures out yesterday showed. The unexpectedly good trade performance was fuelled by stronger than expected growth, although in the last quarter there was a shift away from the novel pattern of export- led but "feel-bad" growth that marked the first nine months of the year.

The economy expanded by 4.2 per cent last year, according to the revised gross domestic product figures for the final quarter of 1994. Despite a deterioration in the UK's trading performance in goods, a record invisibles surplus kept the current account in the black in the final quarter, leaving the annual figure in balance for the first time since 1985.

The figures were seized upon by the Chancellor, Kenneth Clarke, as further evidence that the economy was on track for low-inflation, balanced growth that would feed through to sustained increases in living standards. "The fundamentals have rarely been stronger," he claimed. A generally favourable reaction in the City helped to ward off further pressure on sterling, which closed up against the German mark.

The growth in output was certainly encouraging. Real GDP rose by 4.2 per cent in the last quarter compared with the same period in 1993 - an upward revision of 0.3 per cent. ut there were some signs that the fundamentals showed rather more familiar weaknesses than the unfamiliar strengths hailed by the Chancellor.

One hardy perennial of the ritish economy is a hearty appetite for imports. The last quarter saw a surge in imports, which grew twice as fast as exports. Consumers' expenditure kept pace with GDP for the first time in the year; but with real personal disposable income still taking a knock from higher taxes, there was little indication that consumers were willing to spend. The personal savings ratio - the subject of such anguish when it fell to 5.7 per cent in 1988 - has remained stuck at over 10 per cent since mid-1993.

For some time, investment has been the dog that has not barked - a clue seized upon by those fearing that a reviving economy will hit a capacity wall. ritain's experience of stagnant capital formation has been in marked contrast to the US, where investment has raced away. The latest figures brought some comfort, with a rise in fixed investment of 2.2 per cent on the third quarter and 4.4 per cent in the buoyant manufacturing sector. ut it is still too early to say whether the investment dog has really been unmuzzled.

There was, however, surprisingly good news on the balance of payments. Record-breaking surpluses on the invisibles account have confounded earlier gloomy expectations about the balance of payments. The latest figures reveal that the current account was in deficit by only £0.2bn in 1994.

An improvement rather than the expected deterioration in the visible trade balance played some part in this unexpected development. The trade deficit on goods fell from £13.4bn in 1993 to £10.5bn thanks partly to a higher surplus on oil.

ut sparkling performance on the invisibles account was the main factor behind the turnaround. The surplus in the final quarter reached an all- time high of £3.6bn and for the year as a whole came in at £10.4bn, another record.

The question now is whether buoyant invisibles earnings will keep the current account in the black if the balance in goods continues to worsen. This seems optimistic. The improvement on the invisibles account was brought about by a big increase in net investment income and a repeat performance is unlikely.

In 1994, the world recovery led to higher earnings on ritain's substantial direct investments overseas. Further large improvements would be surprising.

However, even if the current account does swing back into the red, it is not generally expected to repeat the huge deficits of the past few years. With the latest CI survey revealing the highest level of export order books on record, the slackening in export growth in the final quarter may prove short-lived. Goldman Sachs' latest estimate for the current account for 1995 and 1996 is the "very modest" figure of £4bn.