Britain's current account deficit shrank much more than expected from a record high in the final quarter of 2007 as the effect of losses suffered by foreign banks masked a gloomier underlying picture.
The Office for National Statistics said on Friday the current account gap more than halved to £8.458 billion pounds (Dh62 billion) in the three months to December, equivalent to 2.4 per cent of GDP and the smallest since mid-2005.
Analysts had predicted an £18 billion gap.
The surprisingly small deficit drove sterling higher as concerns about Britain's external position have dragged the pound down sharply in recent months, a worry highlighted by Bank of England policymakers this week.
However, the current account gap for 2007 as a whole amounted to 4.2 per cent of GDP – the highest since 1989.
"The underlying balance of payments situation remains very poor," said Philip Shaw, chief economist at Investec.
The ONS said the main reason for the narrowing in the final three months of the year was a big drop in earnings on direct investment in the UK which fell to £4.1 billion in Q4 from £14.2 billion in Q3.
Earnings on direct investment count as a negative on the current account.
That was mainly down to foreign banks reassessing the value of their assets in the wake of the credit crunch.
"The positive surprise seems entirely due to a special item which has been influenced by the financial market dislocation," said Nick Kounis, senior economist at Fortis Bank.
Separately, the ONS said GDP growth in Q4 was unrevised at 0.6 per cent, but trimmed the annual rate to 2.8 per cent from 2.9 per cent – the lowest rate since mid-2006.
Growth for the year as a whole was also revised down to 3.0 per cent from 3.1 per cent.
Analysts paid little attention to the small downward revision and were more worried about the prospect of growth slowing sharply this year as the credit crunch feeds through to households.
"GDP figures are yesterday's story," said Audrey Childe-Freeman, economist at CIBC World Markets. "We all know that 2007 was a good year for the UK economy and that 2008 will be a bad one. The question is, just how bad?"
The latest figures showed that consumers are already having to run down their savings to spend with the saving ratio for the calendar year at its lowest since 1959.
A survey from the nationwide building society on Friday showed the housing market is continuing to cool, with prices falling for the fifth month in a row to give the lowest annual rate of increase in 12 years.
A separate Friday survey showed British consumer morale fell to its lowest level in more than 15 years in March as households grew more gloomy about the economic outlook than at any time since the downturn of the early 1990s. (Reuters)
Credit crunch shrinks UK current account gap