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IntroductiontotheUKEconomy
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Whatarethekeyobjectivesofmacroeconomicpolicy?
PriceStability(CPIInflationof2%)
GrowthofRealGDP(NationalOutput)
FallingUnemployment/RaisingEmployment
HigherAverageLivingStandards(nationalincomepercapita)
StableBalanceofPaymentsontheCurrent
Account
AnEquitableDistributionofIncomeandWealth
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Additionalobjectivesofmacroeconomicpolicy
Balancingthebudgetandreducingthenationaldebt
Improvingeconomicwell-being
BetterregionalbalanceintheUKeconomy
Improvedaccesstopublicservices
Improvedcompetitiveness
Environmentalsustainability
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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
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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
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-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
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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
%
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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.
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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
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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(%)
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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
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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
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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
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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
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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
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UKBalanceofTradeinGoodsandServices
-14-12-10-8-6-4-20246810
�2013Nov
�2014Feb
�2014May
�2014Aug
�2014Nov
�2015Feb
�2015May
�2015Aug
�2015Nov
£billion,seasonallyadjusted
BalanceofTradeinGoods BalanceofTradeinServicesBalanceofTotalUKTrade
Britainrunsastrongsurplusinservicesbutalargeandpersistentdeficitingoods
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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
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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
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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
€ :£
$:£
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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
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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
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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
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IntroductiontotheUKEconomy
GeoffRiley@tutor2ugeoff