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UK Economy in 2015 - Macro Revision Presentation
The document summarizes the performance of the UK economy. It notes that while GDP has recovered since the recession, GDP per capita remains below pre-recession levels. Unemployment has fallen but youth unemployment remains high. Inflation fell to 0% in early 2015 due to lower food and fuel prices. The budget deficit has declined but remains over 5% of GDP, and the national debt is high at 79% of GDP. The trade deficit is growing, reflecting a lack of competitiveness, while the current account deficit was the largest in over 20 years in 2014.
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UK Economy in 2015 - Macro Revision Presentation
- 1. Performance of theUK Economy (AS and A2 Revision - May 2015)
- 2.
- 3. What are thekey objectives of macroeconomic policy? Price Stability – i.e. Low Inflation (CPI Inflation of 2%) Sustainable Growth of Real GDP (National Output) Falling Unemployment / Rising Employment Rate Higher Living Standards (real national income per capita) Improved Global Competitiveness / Trade Balance (BoP) A More Equitable Distribution of Income and Wealth
- 4. Strong economic growth Fallingunemployment Inflation under control Budget deficit declining Business investment rising
- 5. The Knowledge: EconomicGrowth • 2010-13 recovery was one of slowest on record • But in 2014, the UK economy expanded by 2.7%
- 6. GDP has recoveredbut not GDP per head 80 90 100 110 120 130 140 19971998199920002001200220032004200520062007200820092010201120122013 GDP GDP per Capita In the fourth quarter of 2014, real GDP per head in the UK was close to 16 per cent below where it would have been if the 1955-2007 long-run trend had continued. Martin Wolf (Financial Times, 29 April 2015)
- 7. Are we betteroff since the recession? GDP per head remains below the 2007 peak Real Disposable Income per head also well below 2007 level
- 8. What are theconsequences of a fall in GDP per head? 1. Average living standards decline (falling per capita incomes) 2. More workers need an extra job to supplement their incomes – now more than 1 million people with second jobs 3. Less consumer demand for goods & services 4. Lower incomes and low net savings makes many more people reliant on consumer debt e.g. pay day loans 5. Becomes much harder for people to reduce debts accumulated during the growth years including mortgages 6. Government receives lower-than-expected tax revenues – making it a lot harder to reduce the fiscal deficit
- 9. Forecast output gapfor the UK from 2014 through to 2019 -1% -0.5% -0.5% -0.2% -0.1% % -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 2014 2015 2016 2017 2018 2019 PercentagechangeOutput Gap – Spare Capacity Diminishing?
- 10. Possible 2015 ExamIssue Assess the use of fiscal policies, including cuts in direct taxes, as a means of improving living standards in the UK economy.
- 11. Drivers of ShortTerm Economic Growth Strong labour market + Consumer confidence Low interest rates & falling pound v US $ Recovery in business capital investment Falling import prices e.g. oil and foodstuffs
- 12. Strong labour market +Consumer confidence Low interest rates & falling pound v US $ Recovery in business capital investment Falling import prices e.g. oil and foodstuffs Fiscal austerity – cutting budget deficit Low productivity + Falling real wages Risks from a period of price deflation Appreciating pound versus the Euro Drivers of Short Term Economic Growth
- 13. The Knowledge: Inflation •Inflation fell from 2.8% in 2013 to 1.7% in 2014 • In March 2015, the annual rate of inflation fell to 0% - partly because of lower food and fuel prices
- 14. The Bank ofEngland’s target is for inflation to be 2%. The Governor of the Bank of England must write an open letter to the Chancellor if inflation is more than one percentage point higher or lower than this target (i.e. more than 3% or less 1%). CPI Inflation has been either above 3% or less than 1% in 25 of the 57 months since May 2010.
- 15. Consumer price inflationin the UK is likely to become negative for a short period in 2015
- 16. Possible 2015 ExamIssue Assess the policies that might be used to prevent consumer price deflation in countries such as the UK
- 17. The Knowledge: Unemployment •Unemployment in the UK has fallen from 8.5% of the labour force in 2011 to 5.5% in April 2014
- 18. 740,000 people aged16-24 were unemployed in December 2014. The youth unemployment rate was 16.2% down from 20% in 2013 Country Youth Unemployment Rates (per cent) Australia 13% Greece 50% France 25% India 18% Italy 43% Japan 7% Poland 23% South Korea 8% Spain 53% Turkey 19% United Kingdom 16% United States 12% Source: ILO and Trading Economics, Jan 2015
- 20. 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 1993 Q1 1995Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 The rise of self employment in the UK Self employment as a percentage of total employment
- 21. Possible 2015 ExamIssues Evaluate the policies that the UK government could adopt to reduce unemployment without causing a rise in inflation Evaluate the benefits of falling unemployment for the UK economy
- 22. The Knowledge: BudgetDeficit • The government’s budget (fiscal) deficit has fallen from 11% of GDP in 2010 to 5.7% in 2014
- 23. UK budget deficitfell below £100bn in 2013-14 but it remains high as % of GDP > 5% Last budget surplus was 15 years ago
- 24. The Knowledge: TheNational Debt • The national debt is the total stock of debt yet to be repaid by the government • The national debt was 79% of GDP in 2014 • It will continue to rise as long as the budget deficit is bigger than the rate of growth of GDP • Government forecasts a budget surplus in 2019
- 25. Public sector netdebt (the total stock of Government borrowing) was 79% of GDP in 2014. It is forecast to rise to 81% in 2016, before falling to 73% in 2020.
- 26. The Knowledge: UKOverseas Trade • British exports have been growing only slowly • The trade deficit in goods has been increasing • Only partially offset by rising trade surplus in services
- 27. -10% -5% 0% 5% 10% 15% 20% 25% 30% 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 %ofGDP Net trade ExportsImports Trade in Services: Exports, imports & balance ?UK Trade in Services and Goods Trade in services – surplus of 5% of GDP
- 28. -10% -5% 0% 5% 10% 15% 20% 25% 30% 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 %ofGDP Net trade ExportsImports -10% -5% 0% 5% 10% 15% 20% 25% 30% 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 %OfGDP Net Trade Exports Imports Trade in Services: Exports, imports & balance Trade in Goods: Exports, imports & balance ?UK Trade in Services and Goods Trade in deficit – 7% of GDPTrade in services – surplus of 5% of GDP
- 29. The Knowledge: CurrentAccount (BoP) • Current account deficit was 5.5% of GDP in 2014 – this was the highest for over twenty years • This reflects a lack of competitiveness and loss of exports share in global markets • Strong pound might be hurting exporters • Plus steep fall in net investment incomes
- 30. The deficit in2014 was £97.9 billion (5.5% of GDP), which was the largest figure since comparable records began
- 31. Possible 2015 ExamIssue Evaluate the policies that might be most effective if the the government is to achieve an objective of reducing the deficit on the current account.
- 32. 20 40 60 80 100 120 140 160 60 70 80 90 100 110 120 130 2003 2004 20052006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sterling Exports (RHS) Imports (RHS) Sterling effective exchange rate index, 2005 = 100 ?What has been happening to the pound? Has a strengthening pound since 2013 been a factor limiting UK exports?
- 33. Possible 2015 ExamIssue Evaluate the likely macroeconomic effects of the UK exchange rate appreciating against the Euro.
- 34. The Productivity Puzzle 70.0 75.0 80.0 85.0 90.0 95.0 100.0 105.0 1997Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 GDP Output/Hour Hours Index of GDP and Productivity for the UK 2008Q1 = 100
- 35. 2014-15 Global CompetitivenessIndex (UK Rankings) Indicator UK ranking out of 144 countries Overall competitiveness 9th/144 Institutions 12th/144 Infrastructure 10th/144 Macroeconomic environment 107th/144 Labour market efficiency 5th/144 Technological readiness 2th/144 Highlighted problems for = business • Access to financing • Skills shortages in key industries
- 36. The Knowledge: InterestRates • Policy interest rates have been at a record low of 0.5% since March 2009 • Quantitative easing programme is worth £375bn (or around 16% of GDP)
- 38. While the rateof interest received on savings from deposits with financial institutions has declined since the beginning of 2013, the rate paid by households on loans has remained relatively stable
- 39. Possible 2015 ExamIssue To what extent is the policy low interest rates helping to improve the macroeconomic performance of the UK economy?
- 40. The Knowledge: FallingOil Prices • World oil prices fell from over $100 per barrel in the spring of 2014 to less than $50 at the start of 2015. They are now edging higher to around $55
- 41. Effects of loweroil prices for the UK economy Reduces import bills Lowers production costs A factor behind lower CPI inflation Increases producer profits Overall a boost to GDP growth + world economy But will lead to deep cuts in investment and jobs in North Sea May also affect demand in renewables industries
- 42. Strengths and Weaknessesof the British Economy
- 43. Falling unemployment, and inflation Worldclass universities + flexible labour market Ranked 2nd in world for technological readiness World’s best exporter of creative services Credible central bank with low inflation Rising investment in high tech manufacturing Number of successful infrastructure projects
- 44. Stagnant labour productivity growth Structural+ youth unemployment is high Dangerously high levels of income inequality Chronic shortages of affordable housing Historically high current account deficit Debt-fuelled - propped up by low interest rates Low research spending as a % of GDP
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- 46. Revision on ThePerformance of the UK Economy (May 2015)