One reason for the turnaround is that households have become net borrowers: their savings rate fell slightly last year and spending on housing rose. But a bigger development is that non-financial companies are now investing more of their profits. Last year, their capital spending was equivalent to 94.5 per cent of retained profits, the highest ratio since 2001. This might be very good news for equity investors if it is a sign of an improvement in genuinely profitable investment opportunities rather than merely a pick-up in animal spirits.
But there is a problem here. Financial balances must add up to zero: if one sector is a net borrower, another must be a net saver. For this reason, falls in the corporate sector's surplus have usually been accompanied by falls in the government's deficit. For example, corporate deficits in 1988 and in 2000 were the counterpart of government surpluses and corporate surpluses between 2005 and 2013 were the counterpart of government deficits. However, this negative co-movement has broken down. Since 2011, non-financial companies' financial surplus has fallen by £68.7bn, but government borrowing has fallen by only £27.7bn. The biggest counterpart to the corporate sector's falling financial surplus has been an increased overseas deficit.
This could be a sign that government borrowing is indeed 'structural': it has persisted even though private sector financial balances have normalised. But it might also be due to the global savings glut. If foreigners want to be net savers, someone must borrow, and that someone has been the UK government. The fact that sterling is strong and index-linked gilt yields have fallen are consistent with this.
There are, however, signs of this turning around. Recently, a recovery in the euro area has helped narrow the trade gap. This should soon lead to falling government borrowing.
