IntroductiontotheUKEconomy
Whatarethekeyobjectivesofmacroeconomicpolicy?
PriceStability(CPI
Inflationof2%)
GrowthofRealGDP
(NationalOutput)
FallingUnemployment/
RaisingEmployment
HigherAverageLiving
Standards(national
incomepercapita)
StableBalanceof
PaymentsontheCurrent
Account
AnEquitableDistribution
ofIncomeandWealth
Additionalobjectivesofmacroeconomicpolicy
Balancingthebudgetand
reducingthenationaldebt
Improvedaccessto
publicservices
Improvingeconomic
well-being
Improved
competitiveness
Betterregionalbalance
intheUKeconomy
Environmental
sustainability
ActualandForecastEconomicIndicatorsfortheUK
*Datafor2015and2016areforecastspublished fortheJuly2015Budget
EconomicIndicator
Grossdomesticproduct (GDP) %change
GDPlevels(2014=100)
Output gap(percentof potential GDP)
ExpenditurecomponentsofGDP
Household consumption (%change)
Generalgovernment consumption (%change)
Businessinvestment(%change)
Generalgovernment investment(%change)
Nettrade: (exports- imports) (per centofGDP)
Inflation
Consumer priceindex(annual %change)
TheLabourMarket
Employment (millions)
Averageearnings (annual %change)
Labour ForceSurvey unemployment (%rate)
Claimantcount unemployment (millions)
2014
3.0
100.0
-1.0
2015*
2.4
102.4
-0.6
2016*
2.3
104.8
-0.4
2.5
1.6
8.0
3.4
-0.6
3.0
1.2
6.0
2.4
-0.5
2.5
0.5
7.2
-0.1
-0.4
1.5
0.1
1.1
30.7
2.6
6.2
1.04
31.2
2.2
5.4
0.78
31.5
3.6
5.1
0.73
BasicBackgroundInformationfortheUKEconomy
RecentMacroeconomic Data
BackgroundInformation
Latestannualised
GDPGrowth(%)
2.6%
Currencyunit
£
GDPpercapita(US
$, PPPstandard)
Exchange ratesystem
Floating
$35,013
Currentpolicy
interestrate
0.5%
Inflationrate(%)
0.1%
Trade surplusor
deficit?
Deficit
Unemploymentrate
5.4%
(% oflabourforce)
Currentaccount
balance(%ofGDP)
-4.4%
Fiscal balance(%of
GDP)
Maincorporatetax
rate(per cent)
20%
Global
competitiveness
rankingfor2014
9th
EconomicFreedom
IndexRanking
14th
Corruption
PerceptionRanking
14th
-5.3%
Governmentdebt(%
91%
ofGDP)
Yield on10-YrGovt
Bonds(%)
Investment(%of
GDP)in2012
1.5%
15%
OtherIndicators
Latest HDI ranking
14
%ofpopulation living
belowtheirnational
povertyline
n/a
LifeExpectancy(years)
81.5
Rank for capacity to
attractskilledtalent
5th
RankforInnovationand
sophistication
8th
Ginicoefficient(Latest
publishedestimate)
36.5
TheUKEconomicCycleinRecentYears
GDPgrowthratecomparedtopreviousyear
4.0%
Source:ONS
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*
ThechartshowsrealGDPgrowthfor theUKfrom 2010-2014.Datafor2015onwards
showsforecastgrowth using figuresfrom theInternationalMonetary Fund (IMF)
HouseholdSavingRatiofortheUKEconomy
14.0
%
Thechartshowstheannual
growthinhousehold
consumption ofgoods and
servicesalong withthe
household savingratio(%of
disposable income)
12.0
10.0
8.0
6.0
Household finalconsumption
4.0
Savingsratio
2.0
0.0
-2.0
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-4.0
ThesavingratiointheUK
hasbeenfalling since2010
mainlyduetoaperiod of
relativelystrongconsumer
spending thathasoutpacedthegrowthof real
disposable income
CapitalInvestmentasashareofUKGDP
18.0
16.0
14.0
12.0
10.0
Nominal
8.0
6.0
4.0
2.0
Real
InrealtermsandexpressedasashareofGDP,
thelevelofcapitalinvestmentspending inthe
UKhasremained stubbornly low.
1980
Q2
1983
Q2
1986
Q2
1989
Q2
1992
Q2
1995
Q2
1998
Q3
2001
Q3
2004
Q3
2007
Q3
2010
Q3
2013
Q3
0.0
ThischartshowstotalinvestmentspendingmeasuredasashareofGDP–
itisexpressedinnominalandinrealtermsi.e.inflationadjusted.
KeyUKLabourMarketDatainRecentYears
Labour Force
Labour Force
Survey
Survey
Unemployment Unemployment
Level
Rate
Total
Employment
Employment
Rate
Thousands
Percentofthe
labour force
Thousands
Percentof
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
Year
Source:HM-TreasuryDatabank
UnemploymentintheUKEconomyoverLongRun
LabourForceSurveyUnemploymentRate(%)
14
11.9
12
10.7
10
8.5
8
6.9
6
4
5.5
4.7
2
0
18 month change
Unemployment Rate 16+
-2
-4
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
Theunemploymentratehasvariedoverthelast40years.Ourchart
showsthepeaksoverthisperiod– thepeakratehasbeenfalling.
UnemploymentbyAgeintheUKEconomy
Totalunemployment,seasonally adjusted
900
800
700
600
2011
500
2012
400
2013
2014
300
2015Q1-Q3
200
100
16-17
18-24
25-34
35-49
50-64
65+
Thedeclineinunemploymentsince2011hasbeenacrossallagegroups,
buthasbeengreaterforthe18to49agebracketsduringthisperiod
DurationofLFSUnemploymentintheUKeconomy
Totalunemployment,seasonally adjusted
3,000
2,500
2,000
Over24months
12-24months
1,500
6-12months
Lessthan6months
1,000
500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
InflationRateintheUKEconomyinRecentYears
5.0%
4.5%
Source:OfficeforNationalStatistics
Alowerinflation ratemeans
pricesrisemoreslowly– thisis
known asdisinflation
4.0%
Inflationrate
3.5%
3.0%
2.5%
2.0%
CPIinflationtarget=2%
1.5%
1.0%
0.5%
0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
CPIInflationintheUKoverthelast20Years
7
Annualrateofchangeofconsumerprices(%)
Source:OfficeforNationalStatistics
6
5
4
3
2
1
0
-1
-2
-3
CPI all items
CPI goods
CPI services
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN
Theinflationrateforgoodssuchasclothingandcomputingequipmenthasbeen,
onaverage,lowerthanforservicesuchasinsuranceandeducation
CPIandCoreInflationintheUKInRecentYears
Source:OfficeforNationalStatistics
Annualrateofchangeofconsumerprices(%)
6
5
4
3
CPIAllitems
2
CoreCPI
1
CPIAllItems:Percentagechangeover12months
CoreCPI:Excludesenergy,food,alcohol&tobacco
Jul-15
Dec-14
May-14
Oct-13
Mar-13
Aug-12
Jan-12
Jun-11
Nov-10
Apr-10
Sep-09
Feb-09
Jul-08
Dec-07
May-07
Oct-06
Aug-05
Jan-05
-1
Mar-06
0
UKBalanceofTradeinGoodsandServices
£billion,seasonally
adjusted
BalanceofTradeinGoods
BalanceofTotalUKTrade
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
2013
Nov
2014
Feb
2014
May
2014
Aug
2014
Nov
BalanceofTradeinServices
2015
Feb
2015
May
2015
Aug
2015
Nov
Britainrunsastrongsurplusinservicesbutalargeandpersistentdeficitingoods
UKTradeBalancesinGoodsandServiceswiththeEU
20
Source:OfficeforNationalStatistics
Annual Trade Balance (£ billion)
10
0
-10
-20
-30
-40
-50
-60
-70
2003
2004
Rest of the EU
2005
2006
Spain
2007
2008
Netherlands
2009
Ireland
2010
2011
Germany
2012
2013
France
TheUKrunsatradesurpluswithcountriessuchasIrelandbutverylargetrade
deficitswithcountriessuchasGermanyandSpain.Canyouexplainwhy?
BaseInterestRatesandMortgageRateintheUK
Effectivemortgageinterestrate
Baserate
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
FluctuationsintheUKExchangeRateIndex
110.0
105.0
100.0
95.0
90.0
ERI
€ :£
85.0
$:£
80.0
75.0
70.0
65.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
KeySummaryofUKGovernmentFinances2014-2021
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
Governmentborrowing
5.1
3.9
2.6
1.2
0.3
-0.4
-0.7
Cyclicallyadjustedcurrentbudget
deficit(%ofGDP)
2.4
1.6
0.5
-0.5
-1.2
-1.9
-2.4
83.1
82.5
81.7
79.9
77.3
74.3
71.3
Size ofthebudgetdeficit(%ofGDP)
TheSizeoftheNationalDebt:
Publicsectornetdebt(%ofGDP)
Source:OBR,November2015
TheEstimatedOutputGapfortheUKEconomy
4.0
Positiveoutput gap– i.e.
whereactualGDPis
abovepotentialGDP– a
signofpossibleexcess
aggregatedemand
3.0
2.0
1.0
November2015central
estimate
0.0
Highestforecast
-1.0
-2.0
Lowestforecast
-3.0
-4.0
-5.0
-6.0
2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3
Negativeoutput gap–
i.e.theeconomyhas
largemarginofspare
capacity
ThechartshowstheestimatedoutputgapfortheUKeconomy.Notethat
thereisarangeofestimatesfromdifferenteconomicforecasters.
AverageUKHousePricesbyRegion
£s
Mix-adjusted averagehousepriceforUKcountriesandEnglish
Regions,October2015
600,000
500,000
400,000
300,000
200,000
100,000
-
UK
England
Wales
Scotland Northern
Ireland
North
East
North
West
Yorks&
East
West
The Midlands Midlands
Humber
East
London
South
East
South
West
GeoffRiley@tutor2ugeoff
IntroductiontotheUKEconomy