Introduction to the UK Economy

What are the key objectives of macroeconomic policy?

Price Stability (CPI Inflation of 2%)

Growth of Real GDP (National Output)

Falling Unemployment /

Raising Employment

Higher Average Living Standards (national income per capita)

Stable Balance of Payments on the Current Account

An Equitable Distribution of Income

and Wealth

Additional objectives of macroeconomic policy

Balancing the budget and reducing the

national debtImproving economic

well-beingBetter regional balance

in the UK economy

Improved access to public services

Improved competitiveness

Environmental sustainability

Actual and Forecast Economic Indicators for the UK

*Data for 2015 and 2016 are forecasts published for the July 2015 Budget

Economic Indicator 2014 2015* 2016*Gross domestic product (GDP) % change 3.0 2.4 2.3GDP levels (2014=100) 100.0 102.4 104.8Output gap (per cent of potential GDP) -1.0 -0.6 -0.4Expenditure components of GDP Household consumption (% change) 2.5 3.0 2.5General government consumption (% change) 1.6 1.2 0.5Business investment (% change) 8.0 6.0 7.2General government investment (% change) 3.4 2.4 -0.1Net trade: (exports - imports) (per cent of GDP) -0.6 -0.5 -0.4Inflation Consumer price index (annual % change) 1.5 0.1 1.1The Labour Market Employment (millions) 30.7 31.2 31.5Average earnings (annual % change) 2.6 2.2 3.6Labour Force Survey unemployment (% rate) 6.2 5.4 5.1Claimant count unemployment (millions) 1.04 0.78 0.73

Recent Macroeconomic Data

Latest annualised GDP Growth (%) 2.6%

GDP per capita (US $, PPP standard) $35,013

Inflation rate (%) 0.1%

Unemployment rate (% of labour force) 5.4%

Fiscal balance (% of GDP) -5.3%

Government debt (% of GDP) 91%

Yield on 10-Yr Govt Bonds (%) 1.5%

Investment (% of GDP) in 2012 15%

Background Information

Currency unit £

Exchange rate system Floating

Current policy interest rate 0.5%

Trade surplus or deficit? Deficit

Current account balance (% of GDP) -4.4%

Main corporate tax rate (per cent) 20%

Global competitiveness ranking for 2014

9th

Economic Freedom Index Ranking 14th

Corruption Perception Ranking 14th

Other Indicators

Latest HDI ranking 14

% of population living below their national poverty line

n/a

Life Expectancy (years) 81.5

Rank for capacity to attract skilled talent 5th

Rank for Innovation and sophistication 8th

Gini coefficient (Latest published estimate) 36.5

Basic Background Information for the UK Economy

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

2017*

2018*

2019*

2020*

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

GDP

grow

th ra

te c

ompa

red

to p

revi

ous y

ear

The chart shows real GDP growth for the UK from 2010-2014. Data for 2015 onwards shows forecast growth using figures from the International Monetary Fund (IMF)

Source: ONS

The UK Economic Cycle in Recent Years

Household Saving Ratio for the UK Economy

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Household final consumptionSavings ratio

The chart shows the annual growth in household consumption of goods and services along with the household saving ratio (% of disposable income)

The saving ratio in the UK has been falling since 2010 mainly due to a period of relatively strong consumer spending that has out-paced the growth of real disposable income

%

Capital Investment as a share of UK GDP

This chart shows total investment spending measured as a share of GDP – it is expressed in nominal and in real terms i.e. inflation adjusted.

1980 Q1 Q2 Q3 1989 Q1 Q2 Q3 1998 Q2 Q3 Q4 2007 Q2 Q3 Q40.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

NominalReal

In real terms and expressed as a share of GDP, the level of capital investment spending in the UK has remained stubbornly low.

Key UK Labour Market Data in Recent Years

YearLabour Force

Survey Unemployment

Level

Labour Force Survey

Unemployment Rate

Total Employment

Employment Rate

Thousands Per cent of the labour force Thousands

Per cent of population of working age

2011 2,593 8.1 29,376 70.3

2012 2,572 8.0 29,696 71.0

2013 2,476 7.6 30,043 71.5

2014 2,027 6.2 30,726 72.9

2015 (April) 1,813 5.5 31,053 73.4

Source: HM-Treasury Databank

Unemployment in the UK Economy over Long Run

The unemployment rate has varied over the last 40 years. Our chart shows the peaks over this period – the peak rate has been falling.

1973 1978 1983 1988 1993 1998 2003 2008 2013-4

-2

0

2

4

6

8

10

12

14

11.9

6.9

10.7

4.7

8.5

5.5

18 month change

Labour Force Survey Unemployment Rate (%)

Unemployment by Age in the UK Economy

The decline in unemployment since 2011 has been across all age groups, but has been greater for the 18 to 49 age brackets during this period

16-17 18-24 25-34 35-49 50-64 65+

200

400

600

800

1,000

20112012201320142015 Q1-Q3

Total unemployment, seasonally adjusted

Duration of LFS Unemployment in the UK economy

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

1,000

2,000

3,000

Over 24 months12-24 months6-12 monthsLess than 6 months

Total unemployment, seasonally adjusted

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Infla

tion

rate

CPI inflation target = 2%

Inflation Rate in the UK Economy in Recent Years

A lower inflation rate means prices rise more slowly – this is known as disinflation

Source: Office for National Statistics

CPI Inflation in the UK over the last 20 Years

The inflation rate for goods such as clothing and computing equipment has been, on average, lower than for service such as insurance and education

1995 JAN 1996 SEP 1998 MAY 2000 JAN 2001 SEP 2003 MAY 2005 JAN 2006 SEP 2008 MAY 2010 JAN 2011 SEP 2013 MAY-3

-2

-1

0

1

2

3

4

5

6

7

CPI all itemsCPI goodsCPI services

Annual rate of change of consumer prices (%) Source: Office for National Statistics

CPI and Core Inflation in the UK In Recent Years

CPI All Items: Percentage change over 12 monthsCore CPI: Excludes energy, food, alcohol & tobacco

Annual rate of change of consumer prices (%) Source: Office for National Statistics

Jan-05

Aug-05

Mar-06Oct-

06

May-07

Dec-07

Jul-08Fe

b-09Se

p-09Apr-1

0

Nov-10Jun-11

Jan-12

Aug-12

Mar-13Oct-

13

May-14

Dec-14

Jul-15

-1

0

1

2

3

4

5

6

CPI All itemsCore CPI

UK Balance of Trade in Goods and Services

_x0008_2013

Nov

_x0008_2013

Dec

_x0008_2014 Jan

_x0008_2014 Feb

_x0008_2014 Mar

_x0008_2014

Apr

_x0008_2014 May

_x0008_2014 Jun

_x0008_2014

Jul

_x0008_2014

Aug

_x0008_2014 Sep

_x0008_2014

Oct

_x0008_2014

Nov

_x0008_2014

Dec

_x0008_2015 Jan

_x0008_2015 Feb

_x0008_2015 Mar

_x0008_2015

Apr

_x0008_2015 May

_x0008_2015 Jun

_x0008_2015

Jul

_x0008_2015

Aug

_x0008_2015 Sep

_x0008_2015

Oct

_x0008_2015

Nov

-14-12-10

-8-6-4-202468

10

Balance of Trade in Goods Balance of Trade in ServicesBalance of Total UK Trade

£ billion, seasonally adjusted

Britain runs a strong surplus in services but a large and persistent deficit in goods

UK Trade Balances in Goods and Services with the EU

The UK runs a trade surplus with countries such as Ireland but very large trade deficits with countries such as Germany and Spain. Can you explain why?

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

Rest of the EU Spain Netherlands Ireland Germany France

Annual Trade Balance (£ billion)Source: Office for National Statistics

Base Interest Rates and Mortgage Rate in the UK

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Effective mortgage interest rate Base rate

Fluctuations in the UK Exchange Rate Index

2006 2007 2008 2009 2010 2011 2012 2013 2014 201565.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

ERI€ : £$ : £

Key Summary of UK Government Finances 2014-2021

Source: OBR, November 2015

Per cent of GDP

Outturn Forecast

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21

Revenue and spending

Tax revenues (% of GDP) 35.8 35.8 36.5 36.9 36.9 36.9 37.1

Government spending (% of GDP) 40.9 39.7 39.1 38.1 37.2 36.5 36.4

Size of the budget deficit (% of GDP)

Government borrowing 5.1 3.9 2.6 1.2 0.3 -0.4 -0.7

Cyclically adjusted current budget deficit (% of GDP) 2.4 1.6 0.5 -0.5 -1.2 -1.9 -2.4

The Size of the National Debt:

Public sector net debt (% of GDP) 83.1 82.5 81.7 79.9 77.3 74.3 71.3

The Estimated Output Gap for the UK Economy

The chart shows the estimated output gap for the UK economy. Note that there is a range of estimates from different economic forecasters.

2008 Q32009 Q3

2010 Q32011 Q3

2012 Q32013 Q3

2014 Q32015 Q3

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

November 2015 central es-timateHighest forecastLowest forecast

Negative output gap – i.e. the economy has large margin of spare capacity

Positive output gap – i.e. where actual GDP is above potential GDP – a sign of possible excess aggregate demand

Average UK House Prices by Region

£s

UK

Engla

ndWale

s

Scotla

nd

Northern

Irelan

d

North Ea

st

North W

est

Yorks

& The H

umber

East M

idlands

West M

idlands

East

London

South Ea

st

South W

est-

100,000

200,000

300,000

400,000

500,000

600,000

Mix-adjusted average house price for UK countries and English Regions, October 2015

Introduction to the UK Economy

Geoff Riley @tutor2ugeoff