IntroductiontotheUKEconomy

Whatarethekeyobjectivesofmacroeconomicpolicy?

PriceStability(CPIInflationof2%)

GrowthofRealGDP(NationalOutput)

FallingUnemployment/RaisingEmployment

HigherAverageLivingStandards(nationalincomepercapita)

StableBalanceofPaymentsontheCurrent

Account

AnEquitableDistributionofIncomeandWealth

Additionalobjectivesofmacroeconomicpolicy

Balancingthebudgetandreducingthenationaldebt

Improvingeconomicwell-being

BetterregionalbalanceintheUKeconomy

Improvedaccesstopublicservices

Improvedcompetitiveness

Environmentalsustainability

ActualandForecastEconomicIndicatorsfortheUK

*Datafor2015and2016areforecastspublished fortheJuly2015Budget

EconomicIndicator 2014 2015* 2016*Grossdomesticproduct (GDP)%change 3.0 2.4 2.3GDPlevels(2014=100) 100.0 102.4 104.8Outputgap(percentofpotential GDP) -1.0 -0.6 -0.4ExpenditurecomponentsofGDPHousehold consumption (%change) 2.5 3.0 2.5Generalgovernmentconsumption (%change) 1.6 1.2 0.5Businessinvestment(%change) 8.0 6.0 7.2Generalgovernment investment(%change) 3.4 2.4 -0.1Nettrade: (exports- imports) (percentofGDP) -0.6 -0.5 -0.4InflationConsumer priceindex(annual%change) 1.5 0.1 1.1TheLabourMarketEmployment (millions) 30.7 31.2 31.5Averageearnings (annual %change) 2.6 2.2 3.6Labour ForceSurvey unemployment (%rate) 6.2 5.4 5.1Claimantcount unemployment (millions) 1.04 0.78 0.73

RecentMacroeconomic Data

LatestannualisedGDPGrowth(%) 2.6%

GDPpercapita(US$, PPPstandard) $35,013

Inflationrate(%) 0.1%

Unemploymentrate(% oflabourforce) 5.4%

Fiscal balance(%ofGDP) -5.3%

Governmentdebt(%ofGDP) 91%

Yield on10-YrGovtBonds(%) 1.5%

Investment(%ofGDP)in2012 15%

BackgroundInformation

Currencyunit £

Exchange ratesystem Floating

Currentpolicyinterestrate 0.5%

Trade surplusordeficit? Deficit

Currentaccountbalance(%ofGDP) -4.4%

Maincorporatetaxrate(per cent) 20%

Globalcompetitivenessrankingfor2014

9th

EconomicFreedomIndexRanking 14th

CorruptionPerceptionRanking 14th

OtherIndicators

Latest HDI ranking 14

%ofpopulation livingbelowtheirnationalpoverty line

n/a

LifeExpectancy(years) 81.5

Rank for capacity toattractskilledtalent 5th

RankforInnovationandsophistication 8th

Ginicoefficient(Latestpublishedestimate) 36.5

BasicBackgroundInformationfortheUKEconomy

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* 2018* 2019* 2020*

GDPgrow

thra

teco

mparedtopreviousy

ear

ThechartshowsrealGDPgrowthfor theUKfrom2010-2014.Datafor2015onwardsshowsforecastgrowthusing figuresfromtheInternationalMonetaryFund (IMF)

Source:ONS

TheUKEconomicCycleinRecentYears

HouseholdSavingRatiofortheUKEconomy

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.02000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Household finalconsumption

Savingsratio

Thechartshowstheannualgrowthinhouseholdconsumption ofgoodsandservicesalongwiththehousehold savingratio(%ofdisposable income)

ThesavingratiointheUKhasbeenfallingsince2010mainlyduetoaperiodofrelativelystrongconsumerspending thathasout-pacedthegrowthof realdisposable income

%

CapitalInvestmentasashareofUKGDP

ThischartshowstotalinvestmentspendingmeasuredasashareofGDP–itisexpressedinnominalandinrealtermsi.e.inflationadjusted.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.01980 Q2

1983 Q2

1986 Q2

1989 Q2

1992 Q2

1995 Q2

1998 Q3

2001 Q3

2004 Q3

2007 Q3

2010 Q3

2013 Q3

Nominal

Real

InrealtermsandexpressedasashareofGDP,thelevelofcapitalinvestmentspending intheUKhasremainedstubbornly low.

KeyUKLabourMarketDatainRecentYears

Year

Labour ForceSurvey

UnemploymentLevel

Labour ForceSurvey

UnemploymentRate

TotalEmployment

EmploymentRate

Thousands Percentofthelabour force Thousands

Percentofpopulation ofworkingage

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-TreasuryDatabank

UnemploymentintheUKEconomyoverLongRun

Theunemploymentratehasvariedoverthelast40years.Ourchartshowsthepeaksoverthisperiod– thepeakratehasbeenfalling.

11.9

6.9

10.7

4.7

8.5

5.5

-4

-2

0

2

4

6

8

10

12

14

1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

18 month changeUnemployment Rate 16+

LabourForceSurveyUnemploymentRate(%)

UnemploymentbyAgeintheUKEconomy

Thedeclineinunemploymentsince2011hasbeenacrossallagegroups,buthasbeengreaterforthe18to49agebracketsduringthisperiod

100

200

300

400

500

600

700

800

900

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

2011

2012

2013

2014

2015Q1-Q3

Totalunemployment,seasonallyadjusted

DurationofLFSUnemploymentintheUKeconomy

500

1,000

1,500

2,000

2,500

3,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Over24months

12-24months

6-12months

Lessthan6months

Totalunemployment,seasonallyadjusted

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Infla

tionrate

CPIinflationtarget=2%

InflationRateintheUKEconomyinRecentYears

Alowerinflation ratemeanspricesrisemoreslowly– thisisknownasdisinflation

Source:OfficeforNationalStatistics

CPIInflationintheUKoverthelast20Years

Theinflationrateforgoodssuchasclothingandcomputingequipmenthasbeen,onaverage,lowerthanforservicesuchasinsuranceandeducation

-3

-2

-1

0

1

2

3

4

5

6

7

1995 JAN

1996 JAN

1997 JAN

1998 JAN

1999 JAN

2000 JAN

2001 JAN

2002 JAN

2003 JAN

2004 JAN

2005 JAN

2006 JAN

2007 JAN

2008 JAN

2009 JAN

2010 JAN

2011 JAN

2012 JAN

2013 JAN

2014 JAN

CPI all items

CPI goods

CPI services

Annualrateofchangeofconsumerprices(%) Source:OfficeforNationalStatistics

CPIandCoreInflationintheUKInRecentYears

CPIAllItems:Percentagechangeover12monthsCoreCPI:Excludesenergy,food,alcohol&tobacco

Annualrateofchangeofconsumerprices(%) Source:OfficeforNationalStatistics

-1

0

1

2

3

4

5

6

Jan-05

Aug-05

Mar-06

Oct-06

May-07

Dec-07

Jul-0

8

Feb-09

Sep-09

Apr-10

Nov-10

Jun-11

Jan-12

Aug-12

Mar-13

Oct-13

May-14

Dec-14

Jul-1

5

CPIAllitems

CoreCPI

UKBalanceofTradeinGoodsandServices

-14-12-10-8-6-4-20246810

�2013Nov

�2014Feb

�2014May

�2014Aug

�2014Nov

�2015Feb

�2015May

�2015Aug

�2015Nov

£billion,seasonallyadjusted

BalanceofTradeinGoods BalanceofTradeinServicesBalanceofTotalUKTrade

Britainrunsastrongsurplusinservicesbutalargeandpersistentdeficitingoods

UKTradeBalancesinGoodsandServiceswiththeEU

TheUKrunsatradesurpluswithcountriessuchasIrelandbutverylargetradedeficitswithcountriessuchasGermanyandSpain.Canyouexplainwhy?

-70

-60

-50

-40

-30

-20

-10

0

10

20

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Rest of the EU Spain Netherlands Ireland Germany France

Annual Trade Balance (£ billion)Source:OfficeforNationalStatistics

BaseInterestRatesandMortgageRateintheUK

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Effectivemortgageinterestrate Baserate

FluctuationsintheUKExchangeRateIndex

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ERI

€ :£

$:£

KeySummaryofUKGovernmentFinances2014-2021

Source:OBR,November2015

PercentofGDP

Outturn Forecast

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

Revenueandspending

Tax revenues(%ofGDP) 35.8 35.8 36.5 36.9 36.9 36.9 37.1

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

Size ofthebudgetdeficit(%ofGDP)

Governmentborrowing 5.1 3.9 2.6 1.2 0.3 -0.4 -0.7

Cyclicallyadjustedcurrentbudgetdeficit(%ofGDP) 2.4 1.6 0.5 -0.5 -1.2 -1.9 -2.4

TheSizeoftheNationalDebt:

Publicsectornetdebt(%ofGDP) 83.1 82.5 81.7 79.9 77.3 74.3 71.3

TheEstimatedOutputGapfortheUKEconomy

ThechartshowstheestimatedoutputgapfortheUKeconomy.Notethatthereisarangeofestimatesfromdifferenteconomicforecasters.

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3

November2015centralestimate

Highestforecast

Lowestforecast

Negativeoutput gap–i.e.theeconomyhaslargemarginofsparecapacity

Positiveoutput gap– i.e.whereactualGDPisabovepotentialGDP– asignofpossibleexcessaggregatedemand

AverageUKHousePricesbyRegion

£s

-

100,000

200,000

300,000

400,000

500,000

600,000

UK England Wales Scotland NorthernIreland

NorthEast

NorthWest

Yorks&The

Humber

EastMidlands

WestMidlands

East London SouthEast

SouthWest

Mix-adjusted averagehousepriceforUKcountriesandEnglishRegions,October2015

IntroductiontotheUKEconomy

GeoffRiley@tutor2ugeoff