US current account deficit rebounds

The increase in the current account deficit to $111.2bn in the first quarter, equivalent to 2.6% of GDP, from $87.3bn, or 2.0% of GDP, in the final quarter of last year was due to a widening of the trade deficit and a decline in the investment income surplus.

The first-quarter figure was far worse than the consensus forecast at $97.0bn but it was broadly in line with our own $107.0bn estimate, particularly when the $6bn upward revision to the fourth-quarter deficit is factored in.

The trade deficit widened to $126.8bn, from $112.4bn, with exports down and imports up. The disappointing April trade figures indicate that the trade deficit may increase further in the second quarter, as the rebound in domestic demand boosts imports.

In addition, the primary income surplus shrank to $46.7bn, from $54.6bn. (Following the comprehensive revisions and methodological changes made in this release the investment income balance is now referred to as primary income.) Many economists appeared to have missed this but the drop in net income from abroad reported in the second-estimate of the national accounts clearly pointed to a corresponding decline in the primary income surplus. As yields on US debt securities rise over the next year or two, that income surplus is likely to shrink further.

Overall, while the size of the increase in the current account deficit may come as a shock to some, at 2.6% of GDP it is still relatively modest, particularly compared with the recent peak of more than 6% of GDP in 2006.