Introduction to the UK Economy
What are the key objectives of macroeconomic policy?
Price Stability (CPI
Inflation of 2%)
Growth of Real GDP
(National Output)
Falling Unemployment /
Raising Employment
Higher Average Living
Standards (national
income per capita)
Stable Balance of
Payments on the Current
Account
An Equitable Distribution
of Income and Wealth
Additional objectives of macroeconomic policy
Balancing the budget and
reducing the national debt
Improved access to
public services
Improving economic
well-being
Better regional balance
in the UK economy
Improved
competitiveness
Environmental
sustainability
Actual and Forecast Economic Indicators for the UK
*Data for 2015 and 2016 are forecasts published for the July 2015 Budget
Economic Indicator
Gross domestic product (GDP) % change
GDP levels (2014=100)
Output gap (per cent of potential GDP)
Expenditure components of GDP
Household consumption (% change)
General government consumption (% change)
Business investment (% change)
General government investment (% change)
Net trade: (exports - imports) (per cent of GDP)
Inflation
Consumer price index (annual % change)
The Labour Market
Employment (millions)
Average earnings (annual % change)
Labour Force Survey unemployment (% rate)
Claimant count 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
Basic Background Information for the UK Economy
Recent Macroeconomic Data
Background Information
Latest annualised
GDP Growth (%)
2.6%
Currency unit
£
Exchange rate system
Floating
GDP per capita (US
$, PPP standard)
$35,013
Current policy
interest rate
0.5%
Inflation rate (%)
0.1%
Trade surplus or
deficit?
Deficit
Unemployment rate
(% of labour force)
5.4%
Current account
balance (% of GDP)
-4.4%
Fiscal balance (% of
GDP)
-5.3%
Main corporate tax
rate (per cent)
20%
Government debt (%
of GDP)
91%
Global
competitiveness
ranking for 2014
9th
Yield on 10-Yr Govt
Bonds (%)
1.5%
Economic Freedom
Index Ranking
14th
Corruption
Perception Ranking
14th
Investment (% of
GDP) in 2012
15%
Other Indicators
Latest HDI ranking
14
% of population living
below their national
poverty line
n/a
Life Expectancy (years)
81.5
Rank for capacity to
attract skilled talent
5th
Rank for Innovation and
sophistication
8th
Gini coefficient (Latest
published estimate)
36.5
The UK Economic Cycle in Recent Years
GDP growth rate compared to previous year
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*
The chart shows real GDP growth for the UK from 2010-2014. Data for 2015 onwards
shows forecast growth using figures from the International Monetary Fund (IMF)
Household Saving Ratio for the UK Economy
14.0
%
The chart shows the annual
growth in household
consumption of goods and
services along with the
household saving ratio (% of
disposable income)
12.0
10.0
8.0
6.0
Household final consumption
4.0
Savings ratio
2.0
0.0
-2.0
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-4.0
The saving ratio in the UK
has been falling since 2010
mainly due to a period of
relatively strong consumer
spending that has outpaced the growth of real
disposable income
Capital Investment as a share of UK GDP
18.0
16.0
14.0
12.0
10.0
Nominal
8.0
6.0
4.0
2.0
Real
In real terms and expressed as a share of GDP,
the level of capital investment spending in the
UK has remained 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
This chart shows total investment spending measured as a share of GDP –
it is expressed in nominal and in real terms i.e. inflation adjusted.
Key UK Labour Market Data in Recent Years
Labour Force
Survey
Unemployment
Level
Labour Force
Survey
Unemployment
Rate
Total
Employment
Employment
Rate
Thousands
Per cent of the
labour force
Thousands
Per cent of
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-Treasury Databank
Unemployment in the UK Economy over Long Run
Labour Force Survey Unemployment Rate (%)
14
11.9
12
10.7
10
8.5
8
6.9
6
5.5
4
4.7
2
0
18 month change
Unemployment Rate 16+
-2
-4
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
The unemployment rate has varied over the last 40 years. Our chart
shows the peaks over this period – the peak rate has been falling.
Unemployment by Age in the UK Economy
Total unemployment, seasonally adjusted
900
800
700
600
2011
500
2012
400
2013
2014
300
2015 Q1-Q3
200
100
16-17
18-24
25-34
35-49
50-64
65+
The decline in unemployment since 2011 has been across all age groups,
but has been greater for the 18 to 49 age brackets during this period
Duration of LFS Unemployment in the UK economy
Total unemployment, seasonally adjusted
3,000
2,500
2,000
Over 24 months
12-24 months
1,500
6-12 months
Less than 6 months
1,000
500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Inflation Rate in the UK Economy in Recent Years
5.0%
4.5%
Source: Office for National Statistics
A lower inflation rate means
prices rise more slowly – this is
known as disinflation
4.0%
Inflation rate
3.5%
3.0%
2.5%
CPI inflation target = 2%
2.0%
1.5%
1.0%
0.5%
0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
CPI Inflation in the UK over the last 20 Years
Annual rate of change of consumer prices (%)
Source: Office for National Statistics
7
6
5
4
3
2
1
0
-1
-2
CPI all items
CPI goods
CPI services
-3
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
The inflation rate for goods such as clothing and computing equipment has been,
on average, lower than for service such as insurance and education
CPI and Core Inflation in the UK In Recent Years
Source: Office for National Statistics
Annual rate of change of consumer prices (%)
6
5
4
3
CPI All items
2
Core CPI
1
0
CPI All Items: Percentage change over 12 months
Core CPI: Excludes energy, 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
Mar-06
Aug-05
Jan-05
-1
UK Balance of Trade in Goods and Services
£ billion, seasonally
adjusted
Balance of Trade in Goods
Balance of Total UK Trade
Balance of Trade in Services
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
2013
Nov
2014
Feb
2014
May
2014
Aug
2014
Nov
2015
Feb
2015
May
2015
Aug
2015
Nov
Britain runs a strong surplus in services but a large and persistent deficit in goods
UK Trade Balances in Goods and Services with the EU
20
Source: Office for National Statistics
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
The UK runs a trade surplus with countries such as Ireland but very large trade
deficits with countries such as Germany and Spain. Can you explain why?
Base Interest Rates and Mortgage Rate in the UK
Effective mortgage interest rate
Base rate
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
Fluctuations in the UK Exchange Rate Index
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
Key Summary of UK Government Finances 2014-2021
Per cent of GDP
Outturn
Forecast
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Revenue and spending
Tax revenues (% of GDP)
35.8
35.8
36.5
36.9
36.9
36.9
37.1
Government spending (% of GDP)
40.9
39.7
39.1
38.1
37.2
36.5
36.4
Government borrowing
5.1
3.9
2.6
1.2
0.3
-0.4
-0.7
Cyclically adjusted current budget
deficit (% of GDP)
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 of the budget deficit (% of GDP)
The Size of the National Debt:
Public sector net debt (% of GDP)
Source: OBR, November 2015
The Estimated Output Gap for the UK Economy
4.0
Positive output gap – i.e.
where actual GDP is
above potential GDP – a
sign of possible excess
aggregate demand
3.0
2.0
1.0
November 2015 central
estimate
0.0
-1.0
Highest forecast
-2.0
Lowest forecast
-3.0
-4.0
-5.0
-6.0
2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3
Negative output gap –
i.e. the economy has
large margin of spare
capacity
The chart shows the estimated output gap for the UK economy. Note that
there is a range of estimates from different economic forecasters.
Average UK House Prices by Region
Mix-adjusted average house price for UK countries and English
Regions, October 2015
£s
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
Geoff Riley @tutor2ugeoff
Introduction to the UK Economy