Revision on the UK Economy

8/3/2019 Revision on the UK Economy

1/40

Revision on theUK Economy

AS and A2 Economics

May 2009


2/40

Annual percentage change in GDP at constant prices

The Economic Cycle - Growth in UK National Output

Source: UK Statistics Commission

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Percent

-5

-4

-3

-2

-1

0

1

2

3

4

5

6


3/40


4/40

Percentage rate of growth year on year at constant prices

United States - Growth and Unemployment

Source: Reuters EcoWin

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Pe

rcent

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5Unemployment Rate (% of labour force)

-1

0

1

2

3

4

5

Percent

-1

0

1

2

3

4

5

Economic Growth


5/40

Growth rate of GDP, annual % change at constant prices

China and the UK - Growth Compared


00 01 02 03 04 05 06 07 08 09

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Percent

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

China

United Kingdom


6/40

Evidence for the stock cycle in the UK

Changes in stocks and the UK economic cycle


00 01 02 03 04 05 06 07 08 09

billions

-5

-4

-3

-2

-1

0

1

2

3

4

(b

illions)

-5

-4

-3

-2

-1

0

1

2

3

4

Change in the value of stocks

-5

-4

-3

-2

-1

0

1

2

3

4

5

Percent

-5

-4

-3

-2

-1

0

1

2

3

4

5Real GDP Growth


7/40

Economics Blog

Recession - causation

Global credit crisis

Asset price deflation

Rising food and oil prices

Cuts in real disposable income

Collapse of consumer and business sentiment

De-globalisation

Falling profits, investment

Labour shedding

Financial crisis has spread to the real economy


8/40

Index of Prices 2000=100

The Economist Commodity Price Index

Source: Economist Commodity Price Index

05 06 07 08 09

100

125

150

175

200

225

250

275

300

325

I

ndex

100

125

150

175

200

225

250

275

300

325

All Commodities

Industrial Metals

Food


9/40


10/40


11/40

Net % balance of people expecting higher unemployment in the next year

Unemployment Expectations


86 88 90 92 94 96 98 00 02 04 06 08

-20

-10

0

10

20

30

40

50

60

70

80

Netbalance

-20

-10

0

10

20

30

40

50

60

70

80


12/40

Percentage of disposable income that is saved, quarterly data

Household Savings Ratio


90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Percent

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0


13/40

billion per month, seasonally adjusted data

United Kingdom Exports to Euro Zone Countries


03 04 05 06 07 08 09

billions

7

8

9

10

11

12

13

14

GBP(billions)

7

8

9

10

11

12

13

14Figures for 2006 affected by MTIC VAT fraud, also known as 'carousel fraud'


14/40

Quarterly value of capital spending at constant 2003 prices, billion

Value of UK Capital Investment Spending


88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

billions

25

30

35

40

45

50

55

60

GBP(billion

s)

25

30

35

40

45

50

55

60


15/40

Recession Fallout


16/40

Actual GDP - Potential GDP, measured as a percentage of potential GDP source: OECD

United Kingdom, Output gap of the total economy

Source: OECD World Economic Outlook

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

-4

-3

-2

-1

0

1

2

3

4

5

Percentageofpote

ntialGDP

-4

-3

-2

-1

0

1

2

3

4

5


17/40

Annual percentage change in GDP at constant prices and Short Term unemployment

Unemployment and the Economic Cycle


93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

-5

-4

-3

-2

-1

0

1

2

3

4

5

P

ercent

-5

-4

-3

-2-1

0

1

2

3

4

5

Annual growth of real GDP

millions

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

Person(millions)

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

People out of work for up to six months (LFS measure)


18/40

UK Real GDP Growth and Consumer Price Inflation. annual percentage change

UK Growth, Inflation and Policy Interest Rates


02 03 04 05 06 07 08 09

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

P

ercent

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Real GDP growth

Consumer price inflation

0

1

2

3

4

5

6

Percent

0

1

2

3

4

5

6Policy Interest Rates


19/40

Annual percentage change in the retail price index and CPI

Retail Price and Consumer Price Inflation in the UK


97 98 99 00 01 02 03 04 05 06 07 08 09

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Percent

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Consumer price index

All items retail price index (RP I)


20/40

Bank ofEngland/NOP, how do you expect prices to change o ver the next 12 months?

Inflation Expectations

How do you expect prices to change over the next 12 months?How has prices changed over the past 12 months?

Source: Bank of England

99 00 01 02 03 04 05 06 07 08 09

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Perce

nt

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5


21/40

Annual percentage change in consumer prices, unemployment rate (%)

UK Unemployment and Consumer Price Inflation


89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Percent

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Unemployment

Inflation


22/40


UK - Potential GDP and Trend Growth


90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

thousa

ndbillions

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

RealGDP(thousandbillions)

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

Potential GDP for the UK

1.50

1.75

2.00

2.25

2.50

2.75

3.00

Percent

1.50

1.75

2.00

2.25

2.50

2.75

3.00

Estimated UK Trend Growth Rate


23/40

Annual % change in output per worker for the whole economy

UK Labour Productivity and the Economic Cycle


90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

-5

-4

-3

-2

-1

0

1

2

3

4

5

Percent

-5

-4

-3

-2

-1

0

1

2

3

4

5

Labour productivity

Real GDP


24/40

Real value of world trade in US dollars, at constant 2000 prices

Global Exports of Goods and Services


90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

thousandbillions

4

5

6

7

8

9

10

11

12

13

14

USD

(thousandbillions)

4

5

6

7

8

9

10

11

12

13

14


25/40

Economics Blog

Recession Fallout Key Points

Cyclical consequences Unemployment

Rising budget deficit

Falling business investment Inflationary pressures easing / wage cuts?

Possible semi-permanent effects Rising structural unemployment

Other hysteresis effects including business failures Changes to financial system tougher regulation of

banking and other financial services

Will the UKs trend growth suffer? LRAS impact?


26/40

Policy Responses


27/40

Economics Blog

Pulling every lever

Policy rates have moved to the floor (0.5%)

75bn quantitative easing (March 2009)

25% depreciation of sterling over last 12 months

Injection of capital into the banking system

Government borrowing of more than 12% of

GDP (annual fiscal deficit > 175bn)

National debt that > 80% of GDP within 2 years


28/40

Percentage - set by the Bank ofEngland Monetary Policy Committee

Monetary Policy Interest Rates in the UK


00 01 02 03 04 05 06 07 08 09

0

1

2

3

4

5

6

Percent

0

1

2

3

4

5

6


29/40

PerCent

Interest Rates for the Euro Zone, the UK and the USA

Euro Zone Interest Rate United States Interest Rate United Kingdom Base RateSource: Reuters EcoWin

03 04 05 06 07 08 09

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Percent

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

USA Interest Rates

Bank ofEngland Rates

Euro Zone Interest Rates


30/40

Per cent, source: Bank ofEngland

The Cost of Borrowing


04 05 06 07 08 09

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Percent

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Mortgage rates

Base Interest Rates (set by BoE)

Overdrafts

Credit cards


31/40

Trade-weighted index value for sterling in the foreign exchange market, daily value

United Kingdom Effective Exchange Rate Index


04 05 06 07 08 09

70

75

80

85

90

95

100

105

110

I

ndex

70

75

80

85

90

95

100

105

110


32/40

Trade-weighted index value for sterling in the foreign exchange market, daily value

Sterling and Base Interest Rates


Jan

07

Mar May Jul Sep Nov Jan

08

Mar May Jul Sep Nov Jan

09

Mar May

70

75

80

85

90

95

100

105

110

I

ndex

70

75

80

85

90

95

100

105

110

Sterling Exchange Rate Index (trade-weighted)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Percent

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Base Interest Rates


33/40

US dollars per1, daily closing exchange rate

Dollar-Sterling Exchange Rate


Jan

06

Apr Jul Oct Jan

07

Apr Jul Oct Jan

08

Apr Jul Oct Jan

09

Apr Jul Oct

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

GBP/USD

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2


34/40

Value of one Euro, daily closing exchange rate

Euro - Sterling Exchange Rate


Nov

04 05

Mar Jul Nov

06

Mar Jul Nov

07

Mar Jul Nov

08

Mar Jul Nov

09

Mar

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

PenceperE

uro1

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00


35/40

Economics Blog

Bank ofEngland From

Independence to Impotence?1. Nowhere to go on policy interest rates liquidity trap reached?

2. Inflation target is being ignored for now (will there be a change?)

3. The key rate now is on government bonds - not the base rate

4. Government committed to HUGE borrowing 175bn in 2010

5. Will the Bank buy as many bonds as the government needs? Or willthe bank say enough is enough?

6. For most people the base rate of interest is an irrelevance

1. Look at the cost of unsecured credit

2. Even if borrowing costs are low, can you actually get a loan?


36/40

Budget Balance = Tax revenues - Total Government Spending, billion

UK Government Budget Balance


80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

billions

-170

-160

-150

-140

-130

-120

-110

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

(billions)

-170

-160

-150

-140

-130

-120

-110

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20


37/40

Measured as a percentage of national income (09-10 is a forecast from the OECD)

UK Government Spending and Taxation


90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

36

37

38

39

40

41

42

43

44

45

46

47

48

49

PercentofG

DP

36

37

38

39

40

41

42

43

44

45

46

47

48

49

Total Tax Revenue

Government Spending Budget deficit where G>T


38/40

billion at current prices, monthly data

UK Government Net Debt


98 99 00 01 02 03 04 05 06 07 08 09

billions

300

350

400

450

500

550

600

650

700

750

(billions

)

300

350

400

450

500

550

600

650

700

750


39/40

Economics Blog

Evaluation

Monetary and fiscal policy are now joined at the hip

Short term appetite (demand) for bonds eases theproblems of financing an eye-wateringly large fiscaldeficit

Good fiscal stimuli are timely, targeted, and temporary But there is no such thing as a free lunch

Fiscal policy will need to be tightened

There will be some crowding out of the private sector

We cannot ignore the risk of resurgent inflation in a

recovery whenever that comes Weak sterling poses a major credit (solvency) risk for the

UK government even if we are not (quite) an Iceland


40/40

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Revision on the UK Economy