The kindness of strangers.
A deficit financed by the City's global role.

The United Kingdom runs a persistent current-account deficit, the structural counterpart of an economy that consumes and invests more than it produces and saves. That deficit is financed by capital inflows, drawn by the depth and openness of UK financial markets and the City of London's role as a global financial centre. In calm conditions this is unremarkable - the UK has run external deficits for decades and financed them without difficulty. The vulnerability, captured memorably in a former Bank governor's phrase about depending on the kindness of strangers, is that the financing relies on continued foreign confidence, which can evaporate quickly when fiscal or political credibility is questioned, as the 2022 gilt crisis demonstrated.

The City of London is simultaneously the UK's greatest external strength and its central exposure. Financial and business services generate a large surplus that partly offsets the goods deficit, and the UK's expertise in finance, insurance, law and professional services is a genuine world-class export. But the same financial openness that attracts the inflows makes the UK acutely sensitive to global financial conditions and to confidence in UK policy: when the world is risk-on and trusts UK institutions, the financing flows easily; when confidence wobbles, the same openness transmits the stress directly to sterling and gilts. Post-Brexit friction has complicated the goods trade without displacing the City's centrality, leaving the UK more services-dependent and more confidence-sensitive than ever.

Sterling is the variable that absorbs the swings in external confidence. When financing is ample and the Bank holds rates high, the pound is supported; when confidence wavers, sterling weakens to restore the external balance and compensate investors for the risk. In 2026 the currency has been relatively supported by the Bank of England's reluctance to ease, which preserves a yield advantage, but it remains the cleanest expression of the market's verdict on UK credibility. A confidence shock would show up first and most violently in the pound, as it did in 2022. For the external accounts, sterling is the pressure valve - and its level is a real-time gauge of the kindness of strangers.

Our base case is comfortable financing: global confidence in UK institutions holds, the City keeps attracting inflows, the deficit is funded, and sterling stays supported by the Bank's higher-for-longer stance. The bull case is a risk-on global environment and restored UK growth credibility that draws inflows strongly and lifts sterling. The bear case is the one the UK must always guard against: a confidence shock - fiscal accident, political crisis, global risk-off - that tests the kindness of strangers, weakens sterling sharply and tightens financial conditions through the gilt market. The external accounts are sound in calm and fragile in stress, which is precisely why UK credibility is non-negotiable.