Gold flows help UK current account, but economy flatlined in late 2019

By William Schomberg and Andy Bruce

LONDON (Reuters) - Britain narrowed its current account deficit in the last three months of 2019, but much of the improvement in one of the economy's fundamental areas of weakness was due to volatile swings in gold trade.

Official data on Tuesday also confirmed Britain's economy flatlined in the fourth quarter, before the hit from the coronavirus. That reflected caution among households, who increased their savings, and businesses, which cut investment, ahead of a December national election.

The balance of payments deficit, back in focus as the coronavirus crisis hammers financial markets, stood at 5.6 billion pounds ($6.90 billion) in the fourth quarter, down from nearly 20 billion pounds in the previous three months.

At 1.0% of gross domestic product, it was Britain's smallest current account deficit since the second quarter of 2011 and was also lower than a median forecast of 7.0 billion pounds in a Reuters poll of economists.

But excluding the often large movements of non-monetary gold and other precious metals - reflecting London's status as a global financial centre - the gap was 17.1 billion pounds, down by less than 2 billion pounds from the third quarter, and equivalent to just over 3% of GDP.

Britain is now set for a huge increase in public spending, and borrowing, to counter the effects of a near shutdown of its economy to slow the spread of the epidemic.

In 2019 as a whole, which smoothes out the swings in precious metal trading, the current account deficit stood at 3.8% of gross domestic product, the Office for National Statistics said.

WEAK BEFORE THE VIRUS

The ONS data painted a picture of a weak economy at the end of 2019. GDP showed zero growth in the fourth quarter, matching a previous estimate.

The data showed caution among households and firms before the election, emphatically won by Prime Minister Boris Johnson but which could have led to further uncertainty about Brexit and a big political shift to the left.

Samuel Tombs, an economist with Pantheon Macroeconomics, said GDP would have contracted by 0.3% in the fourth quarter without a 1.5% jump in government spending.

Economists are forecasting a steep contraction in economic growth in the coming months.

"Overall, we think the coronavirus will deliver a hit to economic activity well in excess of the 6% fall in the financial crisis and the 8% drop in the Great Depression," Ruth Gregory, an economist with Capital Economics, said.

"And while we assume that GDP will recover fairly quickly in the second half of 2020, it may be a few years before the economy reaches the level it would have done had the coronavirus shock not happened."

(Reporting by Andy Bruce; Writing by William Schomberg; Editing by Andrew Heavens and John Stonestreet)