Revisions to UK GDP and the Balance of Payments current account sourced from the Bank of England

Transcription

1 9 September 1 to UK GDP and the Balance of Payments current account sourced from the Bank of England By Lauren Bowers and Katrina Farrell Tel: + () , + () srdd_quarterly@bankofengland.co.uk The implementation by the Office for National Statistics (ONS) of the new international statistics manuals European System of Accounts (ESA 1) and Balance of Payments Manual (BPM) for Blue Book and Pink Book 1 has led to a number of methodological changes in the calculation of the monetary financial institutions (MFIs ) sectoral contribution to GDP and Balance of Payments, as well as the wider National Accounts. This article outlines the main methodological changes sourced from the Bank s Statistics and Regulatory Data Division and quantifies the subsequent revisions to data published by the ONS on 3 September 1. Summary The key Bank sourced revisions can be categorised into three main methodological changes; financial intermediation services indirectly measured (FISIM), MFIs foreign direct investment income and trade in allocated non-monetary gold and other precious metals. The combined impact of these Bank sourced changes on GDP and the trade balance, the income balance and the overall current account position is shown in Table 1 below. The Bank has estimated back data from either or, depending on data availability, for each methodological change; historic estimates will be handled by the ONS. All data shown are at current prices. FISIM Financial intermediation services indirectly measured (FISIM) aims to capture the service element of interest on loans and deposits. This is calculated as the difference between the amount of interest charged on loans and deposits and the interest that would have been charged at a reference rate based on interbank lending. The methodology used to calculate FISIM has been amended to use a reference rate based on the rate of return on resident interbank loans, using interest and stocks data collected on Bank statistical surveys. Previously, the resident reference rate was the quarterly average of Bank Rate for sterling business, and the quarterly average of the Federal 1 Reserve and European Central Bank base rates for foreign currency business. The previous nonresident reference rate was a mean average of the rate of return on loans and deposits with all nonresident counterparties. In addition to this change, FISIM is no longer calculated on business with nonresident MFIs and non-resident other financial corporations (OFCs) 1. These changes lead to a cumulative revision to GDP of 3bn over the period 13. Changes to non-resident FISIM also lead to revisions to the current account trade in services balance, which are offset by revisions to FISIM-adjusted net interest income within the income balance; the cumulative effects are revisions of - 5bn and + 5bn respectively over the period 13. The overall impact is therefore current account neutral. MFIs foreign direct investment (FDI) income MFIs FDI income measures the income arising from direct investment relationships, where a direct investor owns equity that entitles it to 1 per cent or more of the voting power in the direct investment enterprise. Net FDI income is calculated as outward FDI income (credits) less inward FDI income (debits), where outward FDI income constitutes the profits of UK owned non-resident branches and subsidiaries and inward FDI income is the profits of 1 FISIM is still calculated on business with resident insurance companies and pension funds, investment and unit trusts and financial auxiliaries. For a definition of financial auxiliaries please see ESA 1.3.

2 9 September 1 foreign-owned branches and subsidiaries operating in the UK. From the 1 edition of the ONS Blue Book and Pink Book, the calculation of MFIs FDI income has changed from an all-inclusive (AI) basis to a current operating performance (COP) basis, as mandated by BPM. Holding gains and losses, which are calculated as dealing profits less net spread earnings plus exceptional items less provisions for bad and doubtful debts, are now excluded from FDI income. This leads to revisions to the current account income balance; the cumulative effect is an 83bn downwards revision over 13, heavily concentrated during the financial crisis. In some periods, however, this change results in positive revisions and thus a narrowing of the current account deficit. In addition to this change, interest from intercompany debt between parent MFIs and their branches and subsidiaries has been removed from FDI income. Debt is no longer considered part of FDI for MFIs within BPM and has been moved to the other investment account along with the related financial account transactions and balance sheet positions. Thus this change has no impact on the income balance or current account position. Allocated non-monetary gold and other precious metals Data for allocated non-monetary gold and other precious metals are included in trade in goods estimates for the first time. This was a BPM5 requirement but, due to limited data availability, the UK sought and obtained a European derogation from implementing the change until now. Nonmonetary gold covers all gold other than monetary gold, which is gold to which the monetary authorities have title and is held as reserve assets. Allocated gold is where the owner actually has a physical bar of gold they can lay their hands on if they so wish. A new data source was introduced in March 13 to collect these data directly from the main UK custodians of gold and other precious metals. Data prior to this period are estimated using monetary financial institutions holdings of gold bullion. This leads to revisions to the current account trade in goods; the cumulative effect is an upwards revision of bn over 13, with more volatile month on month movements. Table 1: BoE sourced revisions to nominal GDP and the current account () GDP Trade Balance Income Balance Current account Balance Total Bank of England sourced revisions to nominal GDP Of the methodological changes discussed in this article, only those to final consumption FISIM have an impact on nominal GDP growth. The impact of the change in FISIM methodology on nominal GDP growth 3 is shown in Chart A. The cumulative effect is an upward revision of 3bn over the period Q1 to Q 13. The revisions to quarterly growth range from revisions of -. per cent to +.7 per cent in any given quarter. Chart A: BoE sourced revisions to nominal GDP growth GDP Growth (old) GDP Growth (BB1) % QoQ growth 3% % 1% % -1% -% -3% -% GDP growth figures shown are for nominal GDP seasonally adjusted This dataset is only gold until March 13 and then gold and other precious metals from April 13 onwards. Hereafter, the term gold refers to allocated non-monetary gold or allocated non-monetary gold and other precious metals respectively. 3 For information on real GDP please see the following ONS article: Summary of upcoming changes to GDP

3 9 September 1 Focusing on Chart A it can be seen that following implementation of the changes consistent with Blue Book 1 (BB1) methodology, growth during the crisis period is notably less negative for Q3 and Q 8. However in Q1 9, the trough of the recession, these changes cause nominal GDP growth to be revised down. percentage points. Chart B shows the overall effects of the methodological changes to final consumption FISIM. Notably, the resultant annual revisions are positive with the exception of Q3 7 to Q 8; where there are small downward revisions. The sector breakdown of final consumption FISIM revisions is shown in Chart C. The overall change to final consumption FISIM is predominantly driven by large upward revisions to consumer deposit FISIM. These are partly offset by downward revisions to both export loan and deposit FISIM. Chart B: to final consumption FISIM Final Consumption FISIM (old) Final Consumption FISIM (BB1) Chart C: Sector breakdown of final consumption FISIM revisions Final Consumption FISIM Consumer loan Export loan GG&NPISH loan Consumer deposit Export deposit GG&NPISH deposit Looking first at the changes to resident final consumption FISIM, these are being driven by the change in reference rate. The previous methodology used the Bank of England official rate (Bank Rate) for the sterling reference rate and an average of the European Central Bank (ECB) and the US Federal Reserve (FED) base rates for the foreign currency reference rate. Since March 9 Bank Rate has remained at.5 per cent and ECB and FED rates have also been historically low, resulting in an unrealistically low reference rate used within FISIM. The BB1 methodology uses the rate of return on resident interbank loans as the reference rate, calculated using stock and interest data collected on the Bank s Statistics and Regulatory Data Division survey forms. This more realistically reflects higher interbank lending rates witnessed during the crisis; as the reference rate is higher in all periods, the result is higher deposit FISIM and lower loan FISIM. The revisions to general government and non-profit institutions serving households (GG&NPISH) loan and deposit FISIM are minimal due to the initial low FISIM consumption by this sector; resulting in proportionately low revisions relative to other sectors. The large positive revisions to consumer deposit FISIM occur because of the high proportion of stocks that exist relative to other sectors. Any increase in margin caused by the increase in the reference rate therefore impacts consumer deposit FISIM most significantly. This impact is at its largest during 8 and 9 where the difference between the old and BB1 reference rates is greatest; during periods when there is less stress on interbank markets, these revisions are reduced significantly. Chart D: to consumer deposit FISIM Consumer deposit (BB1) Consumer deposit (old) Resident final consumption FISIM includes all loan and deposit FISIM included in Chart C with the exception of export loan and deposit FISIM.

4 9 September 1 This large increase in consumer deposit FISIM is shown in Chart D. Using the previous methodology, the low reference rate resulted in persistent negative consumer deposit FISIM from Q3 8. While there are still some periods of negative FISIM under the new methodology, these are much smaller than those seen previously and intuitively the concept of negative consumer deposit FISIM on a small scale is credible. The change in methodology has therefore led to a much more plausible dataset. Chart E: to export deposit FISIM Export deposit (BB1) Export deposit (old) Chart F: to export loan FISIM Export loan (BB1) Export loan (old) Turning to export FISIM, as seen in Chart E and Chart F, revisions have been predominantly downwards across the period for both loan FISIM and deposit FISIM. These are for the most part driven by the removal of inter-financial institution business. Previously, export FISIM was calculated on business with all non-resident institutions, while BB1 methodology calculates export FISIM only on business with non-resident, non-financial institutions. The removal of inter-financial institution business therefore leads to a fall in both export loan and deposit FISIM. Notably, the large negative revisions seen in 8-9 are driven by this; in the previous dataset there was a peak in 8 caused by a sharp increase in both non-resident loan and deposit stocks over the year, the majority of which was business with non-resident financial institutions. This large increase in stocks led to elevated FISIM exports, when in reality FISIM should not have been calculated on the majority of this activity as it related to intra-bank funding, rather than the provision of a service to the real economy. By excluding inter-financial institution business there are large downwards revisions to both loan FISIM and deposit FISIM exports; this represents a more accurate depiction of export FISIM. In addition to the removal of business with nonresident financial institutions, the reference rate used within the export FISIM calculation has also been amended. With respect to FISIM exports, the reference rate previously used was a mean average of the rate of return on loans and deposits with all non-resident counterparties. The new reference rate is the rate of return on resident interbank loans; this is the same reference rate as used in the calculation of resident (non-export) FISIM. This deviates from the guidance given in ESA 1 whereby the rate of return on non-resident interbank loans should be used. Following analysis of the data obtained using the recommended methodology, it was decided that this was not an appropriate measure of UK MFIs non-resident funding costs, as it included not only intra-group business, but also intra-bank business. The resulting FISIM data was thought to be implausible as persistent negative deposit FISIM was generated due to an artificially low reference rate; as MFIs used low or non-interest bearing loans as a way of redistributing funding across group members not available to the market as a whole. The resident reference rate has therefore also been applied within the calculation of FISIM exports 5. These two separate methodological changes have differing effects on the total FISIM exports data. The change in the reference rate alone works to increase total export FISIM; the rate increases across all periods which reduces loan FISIM but increases deposit FISIM. As the deposit stocks are larger, the increase in deposit FISIM more than offsets the fall in loan FISIM. The exclusion of interfinancial institution business, however, has an opposite and far larger impact than that of the reference rate. Approximately 75 per cent to 8 per cent of all non-resident loan and deposit stocks are with financial institutions; by excluding the majority of non-resident business, FISIM exports fall 5 This deviation from ESA 1 guidelines was agreed in consultation with the ONS and Eurostat.

5 9 September 1 significantly. It is therefore this methodological change that is driving the revisions to export FISIM. Bank of England sourced revisions to the UK current account Moving to revisions to the UK current account, the overall impact of all methodological changes is shown in Chart G. This includes revisions due to the move to the current operating performance (COP) measure of FDI profits and the inclusion of nonmonetary gold, both from. The impact of changes to FISIM are current account neutral as revisions to FISIM exports within trade in services are exactly offset by revisions to FISIM-adjusted interest receivable/payable within other investment income. Chart G: BoE sourced revisions to the UK current account FDI Income Current Account (old) The cumulative effect across the period is a downwards revision of 78bn, although in some years there are positive revisions to the current account balance. The largest revisions occur over the financial crisis period, driven predominantly by the move from calculating MFIs foreign direct investment income on an all-inclusive basis to a current operating performance basis. During the crisis foreign owned MFIs resident in the UK made large dealing losses leading to a high level of net FDI income. By excluding these dealing losses in the move from all-inclusive to COP, the large net FDI profit over this period is reversed and becomes a net loss. The overall current account balance therefore falls. This is explained in more detail within the FDI income section later in the article Gold Current Account (BB1) Bank of England sourced revisions to the trade balance The overall change in the current account balance can be split into revisions to the trade balance and revisions to the income balance. Looking first at revisions to trade in goods and services within the current account, the overall impact of all changes is shown in Chart H. This includes revisions due to FISIM (from ) and allocated non-monetary gold and other precious metals (from ). The cumulative effect is a 19bn decrease in net trade across the period. This peaks in 8 where there is a downwards revision of 1bn, predominantly driven by changes to FISIM exports shown by the purple bars in Chart H. Chart H: BoE sourced revisions to UK trade in goods and services balance Net trade is therefore much weaker over the crisis than was previously shown in published data. Where previously the data were showing an increase in trade over the crisis period, there is now a large fall across 7-8 that is then reduced in 9. This is driven by the revisions to trade in services as a result of the updated calculation of FISIM. FISIM FISIM Trade (old) Gold Trade (BB1) The impact of the changes in FISIM methodology to total FISIM exports is shown in Chart I. The cumulative effect is a 5bn fall across the period 13. This is mainly driven by a 13bn downwards revision in

6 9 September 1 Chart I: to FISIM exports The methodological changes to FISIM exports are outlined above. The peak in 8 seen in the previous data was caused by a sharp increase in both non-resident loan and deposit stocks over the year, the majority of which related to business with non-resident financial institutions. This was predominantly intra-group and intra-bank funding done at low rates. Having excluded this business in the move to the new FISIM methodology, this peak is removed and a large negative revision is recorded. The downwards revisions we see across the period mean that financial services exports are much weaker over the crisis than was seen in previous data. Allocated non-monetary gold and other precious metals The second component of the revisions to trade is the inclusion of allocated non-monetary gold and other precious metals within the trade data. This was a BPM5 requirement but, due to limited data availability, the UK sought and obtained a European derogation from implementing the change until now. Chart J outlines the new data for net exports of gold. Estimates are provided back to when Form BT data are first available. The cumulative effect is an upwards revision to trade in goods of bn over the period. This ranges from a 5bn net export of gold in 13 to a bn net import in 7. These data are highly erratic month on month, but the year-on year movements are much less volatile as monthly movements mostly offset each other FISIM Exports (BB1) FISIM Exports (old) Chart J: Allocated non-monetary gold and other precious metals Trade in Gold Monthly max Monthly min From February to March 13 monthly data comprise UK monetary financial institutions beneficial holdings of gold bullion. The sterling equivalent value of MFIs bullion holdings was collected over this time, with anecdotal information from reporting institutions used to estimate net trade with non-residents. Monthly data from April 13 onwards are based on custodial holdings of gold, silver, platinum and palladium, converted into sterling using prevailing market prices 7. The net change in domestic holdings is then used to calculate trade with nonresidents. As only the net change can be estimated using these data, there is no indication of the gross exports and imports behind this figure. This is therefore treated as a net export within the National Accounts and Balance of Payments. The inclusion of these data within trade going forwards will lead to erratic month on month movements in the balance of trade in goods. The newly collected Form PM data show the month on month movements to be extremely volatile ranging from a net import of 8bn to a net export of 11bn in 13. Total net trade in goods has fluctuated around - 9bn a month during 13 (seasonally adjusted) and so the inclusion of this data will significantly change the monthly balance and often drive the month-on-month movements in the trade balance. These data will therefore be included under erratic items in the monthly trade Statistical Bulletin. The inclusion of the data in the accounts does not have any impact on GDP, as changes in net exports are mirrored by offsetting changes in inventories These data are sourced from Form BT (item 35A). 7 For more information of the source and compilation of these data please see the appendix.

7 9 September 1 Bank of England sourced revisions to the income balance The second part of the revisions to the current account are those to the income balance. These revisions drive the overall change to the current account position shown in Chart G. This includes revisions due to the change in measurement of FDI profits and FISIM. The overall impact of all changes to the income balance is shown in Chart K. start from, although Bank sourced revisions to FISIM only start in. Chart K: BoE sourced revisions to the current account income balance FDI income Income balance (old) The cumulative effect is a 59bn downwards revision to the income balance over the period. This is predominantly driven by downwards revisions to income on foreign direct investment relating to the change in calculation from an allinclusive basis to a current operating performance basis. These downward revisions are then partly offset by upwards revisions to net other investment income, attributable to the changes to FISIM methodology. MFIs FDI income 8 As seen in Chart K, the majority of the revisions to the current account income balance are driven by the move from the AI to COP measurement of MFIs foreign direct investment. Previously MFIs earnings on foreign direct investment (FDI) were calculated on an all-inclusive (AI) basis i.e. including all elements of MFIs income and expenditure data. BPM guidelines move the measurement of FISIM-adjusted interest Income balance (BB1) earnings on FDI to a current operating performance basis. The COP basis excludes all holding gains and losses (dealing profits less net spread earnings plus exceptional items less provisions of bad and doubtful debts). Chart L shows the revisions to MFIs FDI income as a result of the methodological change. are estimated back to. Chart L: to MFIs net foreign direct investment income due to AI/COP All-inclusive COP The overall effect is a cumulative decrease of approximately 83bn in MFIs net foreign direct investment income between and 13, heavily weighted during the financial crisis. The largest revision recorded is in 8 where there is a downwards revision of 3bn; the previous peak in net FDI income at this time is completely removed a 8bn net profit becomes a 15bn net loss. This is split between revisions to outward FDI income and inward FDI income. Charts M and N show outward and inward income on both an AI and COP basis (please note the different scales used). Chart M: Outward MFIs FDI income Please note the charts and revisions detailed in this section show only the revisions to MFIs FDI income as a result of the move from AI to COP. Thus the effect of excluding interest on loan capital is not shown, although this is negligible AI COP (outward) -

8 9 September 1 Chart N: Inward MFIs FDI income AI COP (inward) These charts show that the revisions are driven mainly on the inward side i.e. by foreign owned branches and subsidiaries resident in the UK. Cumulative revisions to outward FDI are 9bn over the period 13 compared with cumulative revisions to inward FDI of 9bn over the same period. As net FDI income is calculated as outward income less inward income, this large increase in inward FDI income leads to a large fall in the net position. The large revisions on the inward side are due to the nature of the business of those institutions whose income is included here. Foreign owned branches and subsidiaries operating in the UK often have large trading arms, while branches and subsidiaries of UK owned banks operating abroad tend to be focussed more on retail banking. Holding gains and losses therefore form a much greater part of UK resident foreign owned banks profit compared with UK owned branches and subsidiaries abroad. Until revisions are relatively small and stable as, in aggregate, MFIs had a much lower level of both holding gains/losses and total profit. The financial crisis, however, saw foreign owned branches and subsidiaries recording large trading losses and large provisions for bad debts. This is shown by the blue bar in 8 in Chart N; inward FDI income on an AI basis at this time falls to an historic low of - 9bn. Excluding these trading losses and provisions leads to a large rise in inward FDI income to 19bn in this year, and consequently causes a significant fall in net foreign direct investment income. Following the move from AI to COP, MFIs net FDI income looks very different over the period, particularly during the crisis years. As can be seen in Chart L, previous data showed MFIs making a large net FDI profit over the crisis period as the losses on the inward side considerably outstripped the losses made on the outward side, leading to a large positive net position. The move from calculating FDI income on all-inclusive to a current operating performance basis removes this large increase over the crisis and the resulting data show a net loss. Splitting this into outward and inward FDI income, both now increase over the crisis, with profits on the inward side increasing significantly. These profits are primarily driven by large tax refunds on the significant losses recorded, as well as a peak in net interest income at this time and high net spread earnings (NSE). The latter two factors are partially a result of the significant cut in Bank Rate in 8, which increased margins and trading volumes. The profits on the inward side are much greater than on the outward side as foreignowned MFIs in the UK had much larger losses on which to claim tax refunds and much higher trading activity on which to earn NSEs. This then leads to the negative net position in the new COP data that we see in Chart L. By excluding holding gains and losses, FDI income becomes much less volatile quarter on quarter. The remaining income streams tend to be quite stable over time and so we can expect MFIs FDI income to fluctuate around the new level in the future. This methodological development constitutes a key change in the move to BPM reporting and dramatically changes the overall picture of the UK s current account position over the crisis; where previously 8 saw a large reduction of the current account deficit, there is now a large widening of the deficit at this time. FISIM-adjusted interest income 9 The other component of the changes to the current account income balance is the revision to FISIMadjusted interest payable and receivable within other investment income. The revision to FISIM exports outlined earlier leads to equal and opposite revisions within the income balance; the impact of the changes to FISIM methodology is therefore current account neutral. Chart O outlines the revisions to FISIM-adjusted net interest income. are provided back to as with the revisions to FISIM exports. The cumulative effect is an upwards revision of 5bn 9 This is interest income within other investment income adjusted for FISIM. To calculate this, deposit FISIM exports are added to interest payments and loan FISIM exports are subtracted from interest receipts. Please note the effect of including interest on loan capital is not shown in either the chart or revisions detailed in this section.

9 9 September 1 over the period -13. This is mainly over the crisis period where a revision of 13bn is seen in 8. Chart O: to FISIM-adjusted net interest income FISIM-adjusted net interest income (BB1) FISIM-adjusted net interest income (old) -5 These revisions reflect the exact opposite of the revisions to FISIM exports described earlier and shown in Chart I. These revisions work partly to offset the downwards revisions we see as a result of the move from AI to COP within the income balance. Conclusion The publication of Blue Book and Pink Book 1 includes significant revisions to both GDP and the current account from Bank sourced data. With respect to GDP, Bank sourced revisions have led to increases across the period due to changes in the methodology used to calculate FISIM. With respect to the current account, Bank revisions have led predominantly to falls across the period, driven mainly by the revisions to the income balance relating to the move from calculating MFIs FDI income on an all-inclusive basis to a current operating performance basis. Within the trade balance there are downwards revisions driven by changes to FISIM exports. These are offset within the current account by upwards revisions to other investment income within the income balance. We will also see more volatile month on month movements in the trade balance in future, as net trade in precious metals is included in the dataset. 9

10 9 September 1 APPENDIX GLOSSARY OF TERMS All-inclusive This measurement of FDI income includes all elements of an MFIs income and expenditure. Allocated non-monetary gold Allocated gold is where the owner actually has a physical bar of gold, that they can lay their hands on if they so wish. This is different to unallocated gold, where an investor has an account denominated in gold, much as an account can be denominated in sterling, euros or dollars. The holder of an unallocated gold account cannot lay claim to any specific gold bar, so this type of investment is very similar to a deposit and is treated as such within the National Accounts and Balance of Payments. Non-monetary gold covers all gold other than monetary gold. Monetary gold is gold to which the monetary authorities (or others who are subject to the effective control of the monetary authorities) have title and is held as reserve assets. A new data source, Form PM 1, was introduced in April 13 to collect allocated nonmonetary data after BoE and ONS discussions with the London Bullion Market Association and the London Platinum and Palladium Market. This form collects a sectoral breakdown of custodial holdings of gold, silver, platinum and palladium, reported in troy and fine troy ounces. Volume data are converted into sterling using prevailing market prices, with the net change in domestic holdings used to calculate trade with non-residents. BPM Balance of Payments Manual Sixth edition. This is the latest version of the IMF statistical reporting guidelines and standards. Current operating performance This measurement of FDI income excludes holding gains and losses. For MFIs, these are calculated as dealing profits less net spread earnings, plus exceptional items less net provisions for bad and doubtful debts. ESA 1 European System of Accounts 1. This is the latest version of European statistical reporting guidelines and standards, which Bank of England statistical reporting aims to meet. Export FISIM also known as non-resident FISIM, is the sum of export loan FISIM and export deposit FISIM. It is earned on UK MFIs loans to nonresidents and deposits from non-residents. 1 The new Form PM and definitions are available at: xcodes_pm.pdf efs/def_pm.pdf 1 Final consumption FISIM the proportion of both loan and deposit FISIM that is consumed to satisfy individual needs or the needs of a community, and not used within the production process. Hence this is the portion of FISIM that feeds into the calculation of GDP and is consumed by general government, non-residents and households. Financial intermediation services indirectly measured (FISIM) an estimation of the implicit revenue received by MFIs for providing loans and accepting deposits. This is calculated by the difference between the amount of interest charged on loans and deposits and the interest that would have been charged at a reference rate based on inter-bank lending. FISIM-adjusted net interest income interest income within other investment income adjusted for FISIM. To calculate this, deposit FISIM exports are added to interest payments and loan FISIM exports are subtracted from interest receipts. Other investment income includes interest on loans and deposits, repurchase and reverse repurchase transactions, loan capital and Export Credit Guarantee Department lending. Foreign direct investment FDI arises when an investor resident in one country makes an investment that gives control or a significant degree of influence on the management, assumed to be 1% or more of voting stock, of an enterprise that is resident in another country. Net foreign direct investment income is calculated as outward FDI income, which constitutes the profits/losses of UK owned non-resident branches and subsidiaries, less inward FDI income, which constitutes the profits/losses of foreign-owned branches and subsidiaries operating in the UK. General government and non-profit institutions serving households (GG&NPISH) - General government includes the central government, state government, local government and social security funds. Central banks, other official monetary authorities and public corporations are not part of the general government sector. Non-profit institutions serving households cover institutions such as charities, religious institutions, trade unions and consumer associations. Gross domestic product (GDP) Measures the total value of output of an economy. Inward FDI income (debits) Profits/losses of foreign-owned branches and subsidiaries operating in the UK.

11 9 September 1 Monetary and financial institutions (MFIs) MFIs include all banks and building societies operating in the UK. Net spread earnings NSEs capture the service income from specific trading activities. They reflect the margin earned from a MFIs dealing transactions between the transaction price and the mid-market price at the time of the transaction for foreign exchange, securities and derivatives respectively. Outward FDI income (credits) Profits/losses of UK owned non-resident branches and subsidiaries. Real economy is the part of the economy responsible for the production of goods and services, as opposed to the section concerned with buying and selling on the financial markets. 11