Introduction to the UK Economy

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 debt Improving economic well-being Better 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 15 and 16 are forecasts published for the July 15 Budget Economic Indicator 14 15* 16* Gross domestic product (GDP) % change 3.0 2.4 2.3 GDP levels (14=100) 100.0 102.4 104.8 Output gap (per cent of potential GDP) -1.0-0.6-0.4 Expenditure components of GDP Household consumption (% change) 2.5 3.0 2.5 General government consumption (% change) 1.6 1.2 0.5 Business investment (% change) 8.0 6.0 7.2 General government investment (% change) 3.4 2.4-0.1 Net trade : (exports - imports) (per cent of GDP) -0.6-0.5-0.4 Inflation Consumer price index (annual % change) 1.5 0.1 1.1 The Labour Market Employment (millions) 30.7 31.2 31.5 Average earnings (annual % change) 2.6 2.2 3.6 Labour Force Survey unemployment (% rate) 6.2 5.4 5.1 Claimant count unemployment (millions) 1.04 0.78 0.73

Basic Background Information for the UK Economy Recent Macroeconomic Data Latest annualised GDP Growth (%) GDP per capita (US $, PPP standard) 2.6% $35,013 Inflation rate (%) 0.1% Unemployment rate (% of labour force) Fiscal balance (% of GDP) Government debt (% of GDP) Yield on 10-Yr Govt Bonds (%) Investment (% of GDP) in 12 5.4% -5.3% 91% 1.5% 15% Background Information Currency unit Exchange rate system Current policy interest rate Trade surplus or deficit? Current account balance (% of GDP) Main corporate tax rate (per cent) Global competitiveness ranking for 14 Economic Freedom Index Ranking Corruption Perception Ranking Floating 0.5% Deficit -4.4% % 9 th 14 th 14 th 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 Rank for Innovation and sophistication Gini coefficient (Latest published estimate) 5 th 8 th 36.5

The UK Economic Cycle in Recent Years 4.0% Source: ONS GDP growth rate compared to previous year 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% 06 07 08 09 10 11 12 13 14 15 16* 17* 18* 19* * The chart shows real GDP growth for the UK from 10-14. Data for 15 onwards shows forecast growth using figures from the International Monetary Fund (IMF)

Household Saving Ratio for the UK Economy 14.0 12.0 10.0 8.0 % The chart shows the annual growth in household consumption of goods and services along with the household saving ratio (% of disposable income) 6.0 4.0 Household final consumption Savings ratio 2.0 0.0-2.0-4.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 The saving ratio in the UK has been falling since 10 mainly due to a period of relatively strong consumer spending that has outpaced the growth of real disposable income

Capital Investment as a share of UK GDP 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 In real terms and expressed as a share of GDP, the level of capital investment spending in the UK has remained stubbornly low. Nominal Real 0.0 1980 Q2 1983 Q2 1986 Q2 1989 Q2 1992 Q2 1995 Q2 1998 Q3 01 Q3 04 Q3 07 Q3 10 Q3 13 Q3 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.

Key UK Labour Market Data in Recent Years Year LabourForce Survey Unemployment Level LabourForce Survey Unemployment Rate Total Employment Employment Rate Thousands Per cent of the labour force Thousands Per cent of population of working age 11 2,593 8.1 29,376 70.3 12 2,572 8.0 29,696 71.0 13 2,476 7.6 30,043 71.5 14 2,027 6.2 30,726 72.9 15 (April) 1,813 5.5 31,053 73.4 Source: HM-Treasury Databank

Unemployment in the UK Economy over Long Run 14 12 10 8 Labour Force Survey Unemployment Rate (%) 11.9 10.7 8.5 6 4 2 6.9 4.7 5.5 0-2 18 month change Unemployment Rate 16+ -4 1973 1977 1981 1985 1989 1993 1997 01 05 09 13 The unemployment rate has varied over the last 40 years. Our chart shows the peaks over this period the peak rate has been falling.

Unemployment by Age in the UK Economy Total unemployment, seasonally adjusted 900 800 700 600 500 400 300 0 11 12 13 14 15 Q1-Q3 100 16-17 18-24 25-34 35-49 50-64 65+ The decline in unemployment since 11 has been across all age groups, but has been greater for the 18 to 49 age brackets during this period

Duration of LFS Unemployment in the UK economy Total unemployment, seasonally adjusted 3,000 2,500 2,000 1,500 1,000 Over 24 months 12-24 months 6-12 months Less than 6 months 500 05 06 07 08 09 10 11 12 13 14 15

Inflation Rate in the UK Economy in Recent Years Inflation rate 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% A lower inflation rate means prices rise more slowly this is known as disinflation CPI inflation target = 2% Source: Office for National Statistics 0.0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

CPI Inflation in the UK over the last Years 7 Annual rate of change of consumer prices (%) Source: Office for National Statistics 6 5 4 3 2 1 0-1 -2-3 1995 1996 1997 1998 1999 00 01 02 03 04 05 06 07 08 09 10 CPI all items CPI goods CPI services 11 12 13 14 The inflation rate for goods such as clothing and computing equipment has been, on average, lower than for service such as insurance and education

CPI and Core Inflation in the UK In Recent Years Annual rate of change of consumer prices (%) Source: Office for National Statistics 6 5 4 3 2 1 CPI All items Core CPI 0-1 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 CPI All Items: Percentage change over 12 months Core CPI: Excludes energy, food, alcohol & tobacco Mar-13 Oct-13 May-14 Dec-14 Jul-15

UK Balance of Trade in Goods and Services billion, seasonally adjusted 10 8 6 4 2 0-2 -4-6 -8-10 -12-14 Balance of Trade in Goods Balance of Total UK Trade Balance of Trade in Services 13 Nov 14 Feb 14 May 14 Aug 14 Nov 15 Feb 15 May 15 Aug 15 Nov 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 Annual Trade Balance ( billion) Source: Office for National Statistics 10 0-10 - -30-40 -50-60 -70 03 04 05 06 07 08 09 10 11 12 13 Rest of the EU Spain Netherlands Ireland Germany France 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?

Base Interest Rates and Mortgage Rate in the UK 8.0 Effective mortgage interest rate Base rate 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 19 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Fluctuations in the UK Exchange Rate Index 110.0 105.0 100.0 95.0 90.0 85.0 ERI : $ : 80.0 75.0 70.0 65.0 06 07 08 09 10 11 12 13 14 15

Key Summary of UK Government Finances 14-21 Per cent of GDP Outturn Forecast 14-15 15-16 16-17 17-18 18-19 19- -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 Source: OBR, November 15

The Estimated Output Gap for the UK Economy 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 Positive output gap i.e. where actual GDP is above potential GDP a sign of possible excess aggregate demand November 15 central estimate Highest forecast Lowest forecast -4.0-5.0-6.0 08 Q3 09 Q3 10 Q3 11 Q3 12 Q3 13 Q3 14 Q3 15 Q3 Negative output gap i.e. the economy has large margin of spare capacity The chart shows the estimated output gap for the UK economy. Note that there is a range of estimates from different economic forecasters.

Average UK House Prices by Region s 600,000 Mix-adjusted average house price for UK countries and English Regions, October 15 500,000 400,000 300,000 0,000 100,000 - UK England Wales Scotland Northern Ireland North East North West Yorks & The Humber East Midlands West Midlands East London South East South West

Geoff Riley @tutor2ugeoff Introduction to the UK Economy