Revision Special Webinar on the UK Economy (May 2018)
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Eight years after the trough in output following the Global Financial Crisis, the UK economy is slowing down. Demand, output and jobs have been resilient in the two years since the June 2016 Brexit vote – the economy did not “fall off the cliff” as many feared. And the strength of the labour market has been a notable achievement for the Government. But there are now growing signs of a softening in growth in the UK even though the world economy is picking up quite strongly. How much further does the expansion in output have to go before risks of recession emerge once more. In 2018 Britain will be one of the slowest-growing, if not *the* slowest-growing economy in the G20.
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Revision Special Webinar on the UK Economy (May 2018)
- 1. UK Economy – Exam Update (May 2018)
- 2. UK Economy - The Overall Picture Annual % change unless stated 2016 2017 2018 Forecast Gross domestic product (GDP) 1.9 1.7 1.5 GDP per capita 1.1 1.1 0.9 Household consumption 2.9 1.7 0.9 Business investment -0.5 2.2 1.7 Consumer Price Inflation 0.7 2.7 2.4 Employment (millions) 31.7 32.1 32.2 Average earnings 2.7 2.6 2.7 LFS unemployment (rate, per cent) 4.9 4.4 4.4 Current account (BoP) (% of GDP) -5.6% -4.1% -3.7 Fiscal balance (% of GDP) -2.3% -2.2% -1.8% Sources: IMF WEO, April 2018 and OBR Budget Report; March 2018 100.0 105.0 110.0 115.0 120.0 125.0 130.0 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 2013Q3 2014Q2 2015Q1 2015Q4 2016Q3 2017Q2 Index of Actual and Potential GDP for the UK Economy Potential output Actual Output
- 3. 21 consecutive quarters of real GDP growth – but signs of a UK slowdown are becoming more prominent -8 -6 -4 -2 0 2 4 2008 Q1 2008 Q3 2009 Q1 2009 Q3 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1 2014 Q3 2015 Q1 2015 Q3 2016 Q1 2016 Q3 2017 Q1 2017 Q3 2018 Q1 Real GDP, constant prices, Per cent change Quarter on quarter (left hand side) Quarter on same quarter a year ago (right hand side) UK growth is weakening –and has been since 2014 two years before the Brexit vote. What internal & external factors are dragging on GDP growth?
- 4. Consumer demand is weakening 1. Real wages continue to stagnate for millions in work 2. Prospects of higher interest rates on mortgages 3. House prices are starting to fall in some regions 4. Historically high levels of household debt 5. Consumer confidence is now softening 6. Worries/uncertainty over Brexit may be biting now 93 94 95 96 97 98 99 100 101 102 103 1/1/06 8/1/06 3/1/07 10/1/07 5/1/08 12/1/08 7/1/09 2/1/10 9/1/10 4/1/11 11/1/11 6/1/12 1/1/13 8/1/13 3/1/14 10/1/14 5/1/15 12/1/15 7/1/16 2/1/17 9/1/17 4/1/18 UK Consumer Confidence Index (Source: OECD)
- 5. Low capital investment is a drag on trend growth 0 5 10 15 20 25 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Non-Government Capital Investment Spending as a % of GDP, Source: OECD OECD Average UK
- 6. • Unemployment dropped to 4.2% of the labour force in Feb 2018, 1.4 million people • Youth unemployment has declined from 20% in 2012 to 12% in 2018 (equivalent to 520K people aged 16-24) • Long-term jobless rate also declining to 1.1% of labour force (less than 25% of total jobless) • However … dig underneath the data: • High levels of economic inactivity • Under-employment remains a major factor - where workers stay in part-time, temporary or zero-hours contract roles because they cannot access full-time jobs - Under-employment estimated to be above unemployment • Declining median real wages and also many people who have a job experience in-work poverty and continue to rely on benefits UK Unemployment
- 7. The UK Labour Market continues to impress 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 2001Q1 2001Q4 2002Q3 2003Q2 2004Q1 2004Q4 2005Q3 2006Q2 2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 2010Q4 2011Q3 2012Q2 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3 Unemployment Rate and Wage Inflation in the UK, (per cent, source: ONS) Regular pay growth Unemployment rate 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 2010H1 2010H2 2011H1 2011H2 2012H1 2012H2 2013H1 2013H2 2014H1 2014H2 2015H1 2015H2 2016H1 2016H2 2017H1 2017H2 NAIRU for the UK is estimated to have fallen (Per cent of the labour force) source: OBR Unemployment NAIRU (real-time estimates)
- 8. Factors helping to explain a falling NAIRU Inflation Unemployment U1U3 P1 P2 U4 SRPC1 SRPC2 Improved labour mobility and incentives Impact of skilled migration into the labour market Reduced worker bargaining power / rise of monopsony employers Effects of globalisation / technological change on consumer prices
- 9. International migration into the UK is slowing down 0 100 200 300 400 500 600 700 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Net Labour Migration for the UK, thousands Immigration Emigration Net Migration
- 10. Evaluation points on 40 year low for UK unemployment • Still significant regional variations in unemployment rates • Debate over quality of jobs rather than the quantity • Zero hours contracts – the rise of the precariat • Low pay, many reliant on in-work benefits • Shift work. Unsocial hours, work-life balance • Uncertain levels of under-employment • Barriers to getting structurally unemployed into work: • Housing shortages / expensive rents • Costs of child care / transport • Skills shortages /pattern of employment is constantly changing
- 11. Inflation • CPI inflation was 2.5% in March 2018 • UK inflation was 2.7% in 2017, peaking at 3.0% in January 2018 • Contrasting inflation rates in 2017 (Source: IMF) • Germany 1.5% • Cyprus -0.4% (deflation) • Emerging market & developing nations 4.5% • Venezuela 8,500% (March 2018) • Argentina 25% (April 2018) • India 4.5% Included in the CPI basket in 2018 Items taken out of the CPI inflation calculation in 2018 Action cameras Lager bought in nightclubs Women’s exercise leggings Peaches and nectarines Apple TV / Amazon Fire stick Child’s tricycle
- 12. Inflation likely to fall back to target in 2018 -1 0 1 2 3 4 5 6 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 UK CPI Inflation (per cent)
- 13. Sterling exchange rate 1 1.2 1.4 1.6 1.8 2 2.2 1/1/08 5/1/08 9/1/08 1/1/09 5/1/09 9/1/09 1/1/10 5/1/10 9/1/10 1/1/11 5/1/11 9/1/11 1/1/12 5/1/12 9/1/12 1/1/13 5/1/13 9/1/13 1/1/14 5/1/14 9/1/14 1/1/15 5/1/15 9/1/15 1/1/16 5/1/16 9/1/16 1/1/17 5/1/17 9/1/17 1/1/18 5/1/18 Dollar/Sterling Exchange Rate (Monthly Average) Brexit referendum
- 14. Real wages remain flat despite low unemployment 400 420 440 460 480 500 520 540 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Average weekly earnings (£s) at constant 2015 prices, seasonally adjusted Total pay Regular pay
- 15. Government Borrowing • The UK budget (fiscal) deficit was £42.6 billion in 2017-18, or 2.1% of GDP. • The fiscal deficit has shrunk by 75% since 2010 • Public sector (government) debt was 86% of GDP in March 2018, compared to 71% of GDP in 2010 -4 -2 0 2 4 6 8 10 12 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 UK Government Borrowing (% of GDP)
- 16. Government Borrowing • The UK budget (fiscal) deficit was £42.6 billion in 2017-18, or 2.1% of GDP. • The fiscal deficit has shrunk by 75% since 2010 • Public sector (government) debt was 86% of GDP in March 2018, compared to 71% of GDP in 2010 -4 -2 0 2 4 6 8 10 12 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 UK Government Borrowing (% of GDP) 0 10 20 30 40 50 60 70 80 90 100 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 UK Gross Government Debt (Percentage of GDP)
- 17. UK government bond yields remain very low 0 1 2 3 4 5 6 7 1/1/00 8/1/00 3/1/01 10/1/01 5/1/02 12/1/02 7/1/03 2/1/04 9/1/04 4/1/05 11/1/05 6/1/06 1/1/07 8/1/07 3/1/08 10/1/08 5/1/09 12/1/09 7/1/10 2/1/11 9/1/11 4/1/12 11/1/12 6/1/13 1/1/14 8/1/14 3/1/15 10/1/15 5/1/16 12/1/16 7/1/17 2/1/18 10 Year Government Bond Yield (Per cent), Monthly average
- 18. UK Current Account (BoP) • UK ran a record deficit of 5.6% of GDP in 2016. In 2017, the deficit came down to 4.1% = £82.9 billion • UK trade deficit in goods: £136 billion • UK trade surplus in services £107 billion • UK trade balance in goods & services -£29bn • Current account deficit was amplified by a deficit in primary income (investment income) and secondary income (transfers) • Trade imbalances in the global economy (2017) • Current account surpluses: • Germany 8.2% of GDP, Singapore 19.6% of GDP • South Korea 5.5% of GDP, Taiwan 13.6% of GDP • Current account deficits: • UK: 4.1% of GDP, United States 3.0% of GDP • Rwanda 9.6% of GDP, Ethiopia 6.5% of GDP -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Components of the UK Current Account (% of GDP) Transfers and other Trade balance Net investment income
- 19. The UK Productivity Gap 89.3 96.7 100 109.9 127.9 128.7 134.5 0 20 40 60 80 100 120 140 160 Japan Canada UK Italy US France Germany Index of GDP per hour worked in 2016 (UK=100) The UK continues to lag behind many other advanced economies in terms of output per hour worked. Productivity growth has been sluggish since the recession ended in 2010. Some key factors behind the productivity gap: 1. Low investment – many UK firms are not at the cutting edge of new technologies 2. Legacy effects of the banking crisis affecting lending to businesses who want to expand 3. Slowing rates of innovation – UK has low level of R&D spending (<2% of GDP annually) 4. Deep skills shortages in key industries 5. Relatively low levels of market competition – persistence of inefficient monopolies 6. Long tail of under-performing businesses and relative absence of globally-scaled corporations 7. Poor infrastructure e.g. in transport, telecoms and power leading to congestion & higher costs
- 20. Slow productivity growth hurts trend growth 70 75 80 85 90 95 100 105 1994Q1 1994Q4 1995Q3 1996Q2 1997Q1 1997Q4 1998Q3 1999Q2 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 2013Q3 2014Q2 2015Q1 2015Q4 2016Q3 2017Q2 Measures of Labour Productivity in the UK, Index (Q4 2007=100) Output per hour Output per worker
- 21. Some structural weaknesses in the UK economy Weakness Evidence Policy action Low capital investment Private + Public Investment = 17% of GDP in 2016 Corporation tax falling to 18% in 2020 Infrastructure reaching capacity / ageing capital stock UK ranks 31st in world for broadband speeds, London airports are forecast to reach full capacity by 2034, Heathrow operates at > 98% capacity World Economic Forum ranks quality of Britain's infrastructure 24th in the world (19th in 2006) HS2, road-building programme, more funding for housing, Transforming Cities fund. CrossRail close to completion
- 22. Some structural weaknesses in the UK economy Weakness Evidence Policy action Skills gaps in the labour market / continued high levels of economic inactivity 800,000 unfilled vacancies in the labour market Shortfall of people with STEM (science, technology, engineering & mathematics) skills UK lagging behind in adult literacy Reforms to vocational education including the new “T” Level qualifications Apprenticeship Levy to get more firms to make a financial contribution to training Relaxing rules on skilled immigration Chronic under- supply of affordable and energy efficient housing New house-building well below the 250,000 per year needed to meet changing/growing needs Rising house prices & rents and serious affordability problems for young people Relaxation of planning laws Cutting VAT on developing brownfield land, taxes on land that is not developed where planning permission exists
- 23. Brexit Uncertainty: UK-EU Trade • Importance of trade with the EU (Data for2016) • 44% of all UK exports were sold to the EU • 53% of all UK imports came from the EU • Trade balance: • UK ran a trade deficit with the EU in 2017 of £72 billion • Regional importance of trade with the EU • 60% of Welsh exports go to the EU • 59% of North East exports go to the EU • Average EU import tariffs (%) – relevant if a trade deal cannot be reached • Dairy products 35% • Cereals 13% • Sugar and confectionery 24% • Clothing 11%
- 24. UK Economy – Exam Update (May 2018)
Hinweis der Redaktion
- Eight years after the trough in output following the Global Financial Crisis, the UK economy is slowing down. Demand, output and jobs have been resilient in the two years since the June 2016 Brexit vote – the economy did not “fall off the cliff” as many feared. And the strength of the labour market has been a notable achievement for the Government. But there are now growing signs of a softening in growth in the UK even though the world economy is picking up quite strongly. How much further does the expansion in output have to go before risks of recession emerge once more. In 2018 Britain will be one of the slowest-growing, if not *the* slowest-growing economy in the G20.
- Having taken five years for GDP to recover to pre-recession levels, the latest data show that the UK economy is now 11% bigger than it was before the recession. 21 consecutive quarters of growth is a note-worthy achievement. But notice here how the annual rate of growth of real GDP has been weakening since 2014. The slowdown cannot be due entirely to Brexit-related factors.
- Consumer demand accounts for nearly two thirds of aggregate demand so any weakening of consumer confidence and spending has a significant impact on the economy. Confidence is softening in part because of economic uncertainties and despite the very low rates of unemployment. A number of high street stores have closed and there is pressure on profit margins in the supermarket industry reflected in Sainsbury’s bid to merge with Asda.
- The UK has the lowest percentage of non-government capital investment spending as a percentage of gross domestic product (GDP) across the OECD between 1995 and 2015. UK non-Government investment was14.0% of GDP in 2015, compared with 17.9% across the OECD as a whole. Low investment means that the UK’s capital stock of machinery and buildings is ageing and it is a factor behind a drop in the estimated trend rate of growth for the UK. Government sector investment is now rising after several years of austerity but there is a substantial infrastructure backlog to address.
- The labour market – on the surface – is a shining light in recent macroeconomic performance. The LFS measure of unemployment is now at the lowest level since the mid 1970s and employment is at a record high. We have seen a sustained fall in unemployment without it triggering an acceleration in wage and consumer price inflation. It seems as if the Phillips Curve has flattened and shifted inwards so that the British economy can operate at a higher level of employment without inflation picking up. Both the Bank of England and the OBR recently lowered their estimated NAIRU – shown in the chart.
- Net migration over the past 10 years has ranged from a low of +154,000 in 2012 to a high of +336,000 in 2015. Further historical trends from 1964 for long-term international migration to and from the UK show that net migration has been continually positive since 1994.
- Fall in inflation is being helped by an appreciation in the external value of the pound.
- Great stats here from Ian Stewart at Deloitte! The UK has run a deficit on trade in goods and services for 52 of the last 70 years and every year since 1998. The lion’s share of the deficit is concentrated on trade with Germany, China, Spain, Belgium, the Netherlands and Norway. In 2016 the UK ran trade surplus with 67 countries, including the US, Ireland, Switzerland, the United Arab Emirates, Saudi Arabia, Australia and Brazil.
- Productivity growth in the UK economy has fallen from 4.7% a year on average between 2000 and 2007 to 1% a year on average since 2008