Developments in the UK Economy
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Transcript of Developments in the UK Economy
Developments in the UK Economy
Developments in the UK Economy
Geoff Riley – Autumn 2013
Growth and inflation in the UK Economy
Real GDP growth (%) [ar 4 quarters] Consumer Price Inflation (%)Source: UK Statistics Agency
Per
cent
Per
cent
Consumer price inflation
Real GDP growth
Real GDP for the UKQuarterly value of real GDP (at constant prices, value added measure)
Source: Office of National Statistics
£ (b
illion
s)
£ (b
illion
s)
Growth and the Output GapTop pane: Real GDP Bottom Pane: Output Gap measured as a % of potential GDP source: OECDUK Real GDP and Output Gap
Source: Reuters EcoWin
05 06 07 08 09 10 11 12 13 14
-5
-4
-3
-2
-1
0
1
2
3
4
Per
cent
age
of p
oten
tial G
DP
-5
-4
-3
-2
-1
0
1
2
3
4
thou
sand
billi
ons
1.350
1.375
1.400
1.425
1.450
1.475
1.500
at c
onst
ant p
rices
(tho
usan
d bi
llions
)
1.350
1.375
1.400
1.425
1.450
1.475
1.500
PLOG ‐ a persistent large output gap
Output gap and unemploymentOutput Gap (% of potential GDP), Unemployment - Labour Force Survey measureThe Output Gap and Unemployment in the UK
Source: Reuters EcoWin
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
Per
cen
t
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
Unemployment rate (LFS measure)
Output gap (% of potential GDP)
Aggregate Demand (AD)£bn per year at constant 2003 pricesThe Components of Aggregate Demand
Consumer spendingCapital investment
Government consumptionImports
Exports
Source: UK Statistics Commission
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
thou
sand
billi
ons
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
GB
P (t
hous
and
billio
ns)
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Trying to achieve macro stability
Source: Reuters EcoWin
Per
cent
Perc
ent
CPI Inflation
GDP growth
Unemployment Rate
Another look at the cycleAnnual percentage change in real GDP measured at constant pricesGrowth in UK Real National Output
Source: UK Statistics Commission
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Per
cent
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
Per
cent
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
New normal growth rate likely to be slow .............
Tracking output by sectorIndex of Output (Value Added) at Constant Prices, Seasonally Adjusted, Index, 2009=100
Manufacturing Construction UK Real GDP Finance and InsuranceSource: Office for National Statistics
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Inde
x of
out
put 2
009
=100
70
75
80
85
90
95
100
105
110
115
Inde
x of
out
put 2
009
=100
70
75
80
85
90
95
100
105
110
115
The employment rate remains below peak levels
United Kingdom, Employment, Rate, Aged 16-64, seasonally adjustedEmployment Rate in the UK Economy
Source: Reuters EcoWin
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
68.0
68.5
69.0
69.5
70.0
70.5
71.0
71.5
72.0
72.5
73.0
73.5
Per
cent
68.0
68.5
69.0
69.5
70.0
70.5
71.0
71.5
72.0
72.5
73.0
73.5
Trend growth is falling – why?
Source: OECD World Economic Outlook
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
thou
sand
billi
ons
Rea
l GD
P £
(tho
usan
d bi
llions
)
Potential GDP
Per
cen
t per
yea
r Estimated UK Trend Growth Rate Recession may have inflicted damage on trend growth
The output gap is negativePercentage
Per
cen
t
Per
cen
t
Output Gap
CPI InflationUK Policy Rates
Plenty of spare capacity
No change in policy base rates for nearly 4 years
% annual change in household spending and GDP at constant 2000 prices
Source: Office of National Statistics
Ann
ual %
cha
nge
Ann
ual %
cha
nge
Real GDP
Consumer spending
Household demand is main short term driver of AD
Average UK House PricesAll properties, average, £s
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09 10 11 12 1370000
80000
90000
100000
110000
120000
130000
140000
150000
160000
170000
180000
190000
Ave
rage
pro
perty
pric
es £
s
70000
80000
90000
100000
110000
120000
130000
140000
150000
160000
170000
180000
190000
Housing affordability
Source: HBoS Housing Research
Rat
io o
f hou
se p
rices
to a
vera
ge e
arni
ngs
Construction and JobsTop pane: Construction sector employment Lower Pane: Housing Starts
Construction employment Housing Starts per quarter, England, seasonally adjustedSource: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09 10 11 12 1310000
20000
30000
40000
50000
New
hou
ses
star
ted
10000
20000
30000
40000
50000
milli
ons
1.85
1.95
2.05
2.15
2.25
2.35
Em
ploy
men
t (m
illion
s)
1.85
1.95
2.05
2.15
2.25
2.35
Consumer Borrowing Secured on Property£ billion per month, seasonally adjusted
Source: Reuters EcoWin
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
billio
ns
-1
0
1
2
3
4
5
6
7
8
9
10
11
GB
P (b
illion
s)
-1
0
1
2
3
4
5
6
7
8
9
10
11
Real House PricesReal, house prices, Percentage change from previous yearAsset Price Deflation - Real Property Prices in Selected Countries
United Kingdom Spain Greece Ireland GermanySource: OECD World Economic Outlook
02 03 04 05 06 07 08 09 10 11 12
Per
cent
-15
-10
-5
0
5
10
15
20
Per
cent
-15
-10
-5
0
5
10
15
20
Consumer confidence remains weakExpectations over next 12 months, % balance of optimists over pessimists
Source: Reuters EcoWin
Per
cent
age
Bal
ance
of r
espo
nden
ts
State of the economy
Likely to make major purchases
People's Own Financial Situation
State of the EconomyPer cent of respondentsSurvey about the State of the UK Economy
UK Current Economic Situation, BadUK Current Economic Situation, Don't know
UK Current Economic Situation, GoodUK Current Economic Situation, Normal
Source: Reuters EcoWin
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan06 07 08 09 10 11 12
0
10
20
30
40
50
60
70
80
90
Per
cent
0
10
20
30
40
50
60
70
80
90
Low wage growth and the squeeze on real incomes continues
Annual growth of regular weekly pay, consumer price inflation (%)Annual Change in Weekly Regular Pay and CPI Inflation
Average Weekly Pay, 3 month average, seasonally adjusted Consumer Price Index (All Items)Source: Office of National Statistics
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May07 08 09 10 11 12 13
Per
cent
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Per
cent
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Consumer Price Inflation (%)
Regular Weekly Pay (% annual change)
Spending on consumer durablesReal spending at constant prices, seasonally adjusted, £ billion per quarter
Source: Reuters EcoWin
billio
ns
£s a
t con
stan
t 200
2 pr
ices
(billi
ons)
Total Real Capital Investment Spending UKUnited Kingdom, Short-term interest rate
Source: UK Statistics Commission
per c
ent
billio
ns£ (b
illion
s)
Jobs and prices
Source: Reuters EcoWin
Per
cent UK Unemployment Rate (Labour Force Survey, % of labour force)
Inflation Rate (CPI, annual % change)
Oil prices affect AD and SRAS
Source: Reuters EcoWin
US
dolla
rs p
er b
arre
l
The external environment matters a lot for the UK economy
World oil price seems to have stabilised around $100 a barrel................
Annual % change in UK GDP at constant prices,% of labour force unemployed
Source: UK Statistics Commission
Per
cen
t of t
he la
bour
forc
e
Per
cent
age
grow
th o
f GD
P
Real GDP (Annual % Change) LHS
Unemployment (% of the labour force) RHS
Deep recession (> 6% fall in output) and weak recovery (GDP grew only 0.7% in 2011)
Economy needs to grow at least 2% for unemployment to start falling
Unfilled job vacancies
Source: Reuters EcoWin
Num
ber o
f vac
anci
es
Num
ber o
f vac
anci
es
Monthly level of redundanciesMonthly totalRedundancies in the UK Economy
Source: Reuters EcoWin
04 05 06 07 08 09 10 11 12 13
100000
125000
150000
175000
200000
225000
250000
275000
300000
325000
redu
ndan
cies
100000
125000
150000
175000
200000
225000
250000
275000
300000
325000
Regional Unemployment RatesA selection of regional unemployment rates, per cent of the labour force, LFS measure
LondonNorth East
Northern IrelandScotland
South EastYorks and Humber
UK
Source: UK Labour Market Statistics
05 06 07 08 09 10 11 123
4
5
6
7
8
9
10
11
12
GBP
3
4
5
6
7
8
9
10
11
12
Employment in two key industriesQuarterly level of employment, seasonally adjusted, millionEmployment in UK Manufacturing and Construction Industries
Construction Industry Employment Manufacturing Industry EmploymentSource: UK Office of National Statistics
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Per
sons
em
ploy
ed (m
illion
s)
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
Per
sons
em
ploy
ed (m
illion
s)
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
Manufacturing
Construction
Duration of unemployment
Source: Reuters EcoWin
milli
ons
Per
sons
(milli
ons)
Unemployed for up to six months
Unemployed for over 12 months
Unemployed for over 24 months
GreeceIrelandItaly
SpainGermanyUnited Kingdom
South KoreaUnited States
Source: OECD World Economic Outlook
Per
cent
of t
he la
bour
forc
eYouth unemployment in Greece and Spain is over 50% of the labour force
Long term youth unemploymentThousands, people out of work for at least a yearLong Term Unemployment for people Aged 18-24
Source: Reuters EcoWin
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
25000
50000
75000
100000
125000
150000
175000
200000
225000
250000
275000
25000
50000
75000
100000
125000
150000
175000
200000
225000
250000
275000
Unemployment and Trend Growth (UK)Source: OECD World Economic Outlook
Source: OECD World Economic Outlook
04 05 06 07 08 09 10 11 12 13 14
Per
cen
t
0
1
2
3
4
5
6
7
8
9
Per c
ent
0
1
2
3
4
5
6
7
8
9
Unemployment rate (%)
Estimated UK Trend Growth Rate
Euro Zone Jobs Crisis
Unemployment Employment Labour forceSource: OECD World Economic Outlook
02 03 04 05 06 07 08 09 10 11 12 13 14
milli
ons
135.0
137.5
140.0
142.5
145.0
147.5
150.0
152.5
155.0
157.5
160.0
Per
son
(milli
ons)
135.0
137.5
140.0
142.5
145.0
147.5
150.0
152.5
155.0
157.5
160.0
Total Employment
Size of Labour Force
milli
ons
11121314151617181920
Per
son
(milli
ons)
11121314151617181920
Total Unemployment in the Euro Area
Base Interest RatesPer cent
Source: Reuters EcoWin
Per
cent
Per
cent
Forward Guidance Arrives!PercentageForward Guidance: Base Interest Rates and UK Unemployment
05 06 07 08 09 10 11 12 13
Per
cent
0
1
2
3
4
5
6
7
8
9P
erce
nt
0
1
2
3
4
5
6
7
8
9
Unemployment rate
UK policy interest rates
The Cost of Credit
Personal Lending Rates, Bank and Building Society, Average Credit Card RateAverage Overdraft Interest RateBank Rate (Policy Rate) Set by Bank of England MPCFixed Mortgage Interest Rate, average
Source: Bank of England
07 08 09 10 11 12 13
Per
cent
inte
rest
on
loan
s
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Perc
ent i
nter
est o
n lo
ans
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Mortgage rates
Base Interest Rates (set by Bank of England)
Overdrafts
Credit cards Official interest rates are about as low as they can go and government bond yields are at record lows. Yet regular borrowers are paying well above these rates
Bank lending
M4 lending, Chg Y/Y M4 Lending, 3 month M4 Lending, 6 monthSource: Reuters EcoWin
Per
cent
QE started in March 2009
Mortgage approvalsMonthly figure, seasonally adjustedNumber of loans approved for UK house purchase
Source: Council for Mortgage Lenders
00 01 02 03 04 05 06 07 08 09 10 11 12 130
20000
40000
60000
80000
100000
120000
140000
Num
ber o
f
0
20000
40000
60000
80000
100000
120000
140000
Sterling exchange rate index
Source: Reuters EcoWin
Trad
e w
eigh
ted
inde
x
Trad
e w
eigh
ted
inde
x
Fall in the index shows a depreciation of sterling against a basket of major currencies
Top pane: Effective exchange rate index, Bottom pane: Trade balance in goods and services
Effective Exchange Rate Index, annual average valueTrade balance in Goods & Services, annual balance £bn
Source: IMF, UK Balance of Trade Statistics
90 92 94 96 98 00 02 04 06 08 10 12
billio
ns
-40
-30
-20
-10
0
10
Trad
e ba
lanc
e (b
illion
s)
-40
-30
-20
-10
0
10
70
80
90
100
110
Exc
hang
e R
ate
Inde
x
70
80
90
100
110
Trade balance has been negative since 1997, mainly as the result of a chronic deficit in goods trade
Depreciation of sterling from 2007 to 2009
Current AccountServices
Net Investment IncomeTransfers Balance
Goods
Source: Statistics Commission BoP Statistics
£ (b
illio
ns)
£ (b
illio
ns)
Trade in Goods Current account
Transfers
Investment incomeTrade in Services
High trade surplus in services
Trade deficit in goods now over £100bn
Seasonally adjusted, quarterly trade balance, £ billion
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09 10 11 12 13
billio
ns
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25S
terli
ng (£
) (bi
llions
)
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
Trade in services
Trade in goods
Key services:Business servicesFinancial servicesTransport and tourismEducation and HealthCreative industriesResearch and development
Key goods:Manufactured goodsOil / gas / mineralsFood and drinkComponents
ServicesUK is the largest service exporter in the EU
UK Balance of Trade in OilTrade Balance £bn and Brent Crude ($s per barrel)UK Trade in Oil and Brent Crude Oil Price
Source: Reuters EcoWin
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
102030405060708090
100110120
US
D/B
arre
l
102030405060708090
100110120
Annual average price for Brent crude oil
billio
ns
-17.5-15.0-12.5-10.0
-7.5-5.0-2.50.02.55.07.5
GBP
(billi
ons)
-17.5-15.0-12.5-10.0
-7.5-5.0-2.50.02.55.07.5
Annual UK balance of trade in oil
Trade Balance in Gas£ billion - annual value of exports and imports at constant 2006 prices
Source: UK Trade Statistics
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
billio
ns
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
£ (b
illion
s)
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
Exports of Gas from the UK
Imports of Gas into the UK
Trade balance in finished manufacturedTrade balance (Exports - Imports) £ billion per quarter, source: ONSUK Trade Balance in Finished Manufactured Goods
Source: Reuters EcoWin
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
billio
ns
-17.5
-15.0
-12.5
-10.0
-7.5
-5.0
-2.5
0.0
GBP
(billi
ons)
-17.5
-15.0
-12.5
-10.0
-7.5
-5.0
-2.5
0.0
The structural trade deficit in manufactured goods seems to have stabilised but why is the UK such a large net importer of manufactured products?
UK – EU27 Trade BalanceMonthly balance of trade in goods and services, £ billion, seasonally adjustedUnited Kingdom Trade Balance with EU27
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09 10 11 12 13
billio
ns
-6
-5
-4
-3
-2
-1
0
GB
P (b
illion
s)
-6
-5
-4
-3
-2
-1
0
UK – India TradeAnnual data, £ billion
Source: Reuters EcoWin
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
billio
ns
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
GB
P (b
illion
s)
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
Exports to India
Imports from India
Annual Balance of Trade
UK China Trade£ billion per month, trade in goods and servicesUK, Exports to and Imports from China
Source: Reuters EcoWin
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
billio
ns
0.0
0.5
1.0
1.5
2.0
2.5
3.0
GBP
(billi
ons)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exports to China
Imports from China
Exports and Imports as Share of GDPAnnual value of UK exports as a percentage of GDPUK- Exports and Imports of Goods and Services as % of GDP
Exports of goods & services, % Imports of goods & services, %Source: Euro Stat
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
% o
f GD
P
15
20
25
30
35
40
45
50
% o
f GD
P
15
20
25
30
35
40
45
50
FDI into the UK EconomyValue of external liabilities - direct and portfolio investmentForeign Investment in the UK Economy
Source: Reuters EcoWin
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
thou
sand
billi
ons
0.0
0.5
1.0
1.5
2.0
2.5
3.0
£ (th
ousa
nd b
illion
s)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Portfolio investment
Direct investment
Fiscal PolicyMeasured as a % of national income, data for 2013-14 is a forecast
Source: OECD World Economic Outlook
03 04 05 06 07 08 09 10 11 12 13 1434.0
36.0
38.0
40.0
42.0
44.0
46.0
48.0
50.0
52.0P
er c
ent o
f GD
P
34.0
36.0
38.0
40.0
42.0
44.0
46.0
48.0
50.0
52.0
Tax Revenue (% of GDP)
Government Spending (% of GDP)
The big issue in fiscal policy is fiscal austerity –i.e. Cutting the budget deficit through spending cuts and tax rises G>T =
budget deficit
How much borrowing can the UK take?
Source: OECD World Economic Outlook
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-12.0-10.0-8.0-6.0-4.0-2.00.02.04.0
% o
f GD
P
-12.0-10.0-8.0-6.0-4.0-2.00.02.04.0
Annual government budget balance
Budget deficit
Budget surplus
20
40
60
80
% o
f GD
P
20
40
60
80
Net Government Debt (% of GDP)
Fiscal austerity as Coalition aims to cut the size of the budget deficit over the next five years – will the pain work?
monthly average 10 year bond yield, per cent, source: IMF
Greece Ireland UK Spain ItalySource: IMF
08 09 10 11 12 130
5
10
15
20
25
30P
erce
nt
0
5
10
15
20
25
30The UK government can borrow money for 10 years at cheap interest rates (around 2%) – whereas the cost of borrowing for other countries is significantly higher – this gives the UK an advantage – has it been used well?
Interest on UK Government Debt£ billion at current prices, non-seasonally adjustedInterest Payable on United Kingdom Government Debt
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09 10 11 12
£ (b
illion
s)
20
25
30
35
40
45
50
£ (b
illion
s)
20
25
30
35
40
45
50
Government spendingAnnual % change in government spending at constant prices, 2013 and 2014 is a forecastUK Government Spending and the Economic Cycle
Real government spending Real GDP [ar 1 year]Source: OECD World Economic Outlook
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Per
cent
-5
-4
-3
-2
-1
0
1
2
3
4
5
Per
cent
-5
-4
-3
-2
-1
0
1
2
3
4
5
Growth of Real GDP
Growth of Govt Spending
Govt spending chart does not include capital spending
The squeeze on public sector jobsPer cent, seasonally adjustedUK Public Sector Employment as % of Total Employment
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09 10 11 12 13
milli
ons
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
GB
P (m
illion
s)
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
BRICs growth
Source: International Monetary Fund
Ann
ual %
cha
nge
in re
al G
DP
Ann
ual %
cha
nge
in re
al G
DP
China
India
Brazil
GermanyUnited Kingdom
IrelandGreece
SpainEuro Zone
Source: OECD World Economic Outlook
04 05 06 07 08 09 10 11 12 13 14
Ann
ual %
cha
nge
in re
al G
DP
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Ann
ual %
cha
nge
in re
al G
DP
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Productivity in the UKIndex of output per hour worked, whole economy, seasonally adjusted
Source: Reuters EcoWin
01 02 03 04 05 06 07 08 09 10 11 12
87.5
90.0
92.5
95.0
97.5
100.0
102.5
105.0
Inde
x
87.5
90.0
92.5
95.0
97.5
100.0
102.5
105.0
One of the puzzles of the period since the recession came to an end – why has labour productivity grown so slowly?
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