a2 macro: challenges for the uk economy
TRANSCRIPT
A2 Macro-Economics - March 2015
A2 Macro-Economics Revision WorkshopMarch 2015
Session 2:UK Economy –Future Challenges
Page 14
A2 Macro-Economics - March 2015
Linda Yueh@lindayueh
Robert Peston@Peston
Kamal Ahmed@BBCkamal
Keep following the business and economics news as part of your revision!
A2 Macro-Economics - March 2015
A2 Macro-Economics Revision WorkshopMarch 2015
Revision SupportGeoff Riley @tutor2u_econWebsite: www.beta.tutor2u.net
Page 3
A2 Macro-Economics - March 2015Page 14
Share of the main industrialized and emerging countries in the GDP 2014
Share of the main industrialized and emerging countries in the gross
domestic product (adjusted for purchasing power) in 2014
16.48% 16.28%
6.8%
4.48%
3.39% 3.33%2.87%
2.42% 2.28%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
China USA India Japan Germany Russia Brazil France UnitedKingdom
Sh
are
in
glo
ba
l G
DP
A2 Macro-Economics - March 2015Page 14
Share of global regions in the gross domestic product 2014
Share of global regions in the gross domestic product (adjusted for
purchasing power) in 2014
56.98%
32.24%
16.94%
8.55%6.81%
3.06%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Emergingmarket anddevelopingeconomies
Advancedeconomies
EU Latin America /Caribbean
Middle Eastand North
Africa
Africa Sub-Sahara
Shar
e in
glo
bal
GD
P
A2 Macro-Economics - March 2015
Challenge Explanation
Bank of England starts to raise policy interest rates
UK economy is vulnerable to even small increases in market interest rates
Planned fiscal austerity post-2015Most of the big cuts in real government spending are yet to happen
Real wage cuts and job insecurityIs the labour market model in the UK sustainable?
Imbalanced growth across regionsLondon-centric growth, with persistently high unemployment elsewhere
Threat of a sustained period of consumer price deflation
Will price deflation damage / de-rail recovery in the UK?
Risks from continued economic / financial crisis in Euro Area
How severe are the risks for example from a disorderly GREXIT from the Euro?
Some threats to the UK Economy in 2015-16
Page 15
A2 Macro-Economics - March 2015
Challenge Explanation
Bank of England starts to raise policy interest rates
UK economy is vulnerable to even small increases in market interest rates
Planned fiscal austerity post-2015Most of the big cuts in real government spending are yet to happen
Real wage cuts and job insecurityIs the labour market model in the UK sustainable?
Imbalanced growth across regionsLondon-centric growth, with persistently high unemployment elsewhere
Threat of a sustained period of consumer price deflation
Will price deflation damage / de-rail recovery in the UK?
Risks from continued economic / financial crisis in Euro Area
How severe are the risks for example from a disorderly GREXIT from the Euro?
Some threats to the UK Economy in 2015-16
Page 15
A2 Macro-Economics - March 2015
Challenge Explanation
Bank of England starts to raise policy interest rates
UK economy is vulnerable to even small increases in market interest rates
Planned fiscal austerity post-2015Most of the big cuts in real government spending are yet to happen
Real wage cuts and job insecurityIs the labour market model in the UK sustainable?
Imbalanced growth across regionsLondon-centric growth, with persistently high unemployment elsewhere
Threat of a sustained period of consumer price deflation
Will price deflation damage / de-rail recovery in the UK?
Risks from continued economic / financial crisis in Euro Area
How severe are the risks for example from a disorderly GREXIT from the Euro?
Some threats to the UK Economy in 2015-16
Page 15
A2 Macro-Economics - March 2015
Challenge Explanation
Bank of England starts to raise policy interest rates
UK economy is vulnerable to even small increases in market interest rates
Planned fiscal austerity post-2015Most of the big cuts in real government spending are yet to happen
Real wage cuts and job insecurityIs the labour market model in the UK sustainable?
Imbalanced growth across regionsLondon-centric growth, with persistently high unemployment elsewhere
Threat of a sustained period of consumer price deflation
Will price deflation damage / de-rail recovery in the UK?
Risks from continued economic / financial crisis in Euro Area
How severe are the risks for example from a disorderly GREXIT from the Euro?
Some threats to the UK Economy in 2015-16
Page 15
A2 Macro-Economics - March 2015
Challenge Explanation
Bank of England starts to raise policy interest rates
UK economy is vulnerable to even small increases in market interest rates
Planned fiscal austerity post-2015Most of the big cuts in real government spending are yet to happen
Real wage cuts and job insecurityIs the labour market model in the UK sustainable?
Imbalanced growth across regionsLondon-centric growth, with persistently high unemployment elsewhere
Threat of a sustained period of consumer price deflation
Will price deflation damage / de-rail recovery in the UK?
Risks from continued economic / financial crisis in Euro Area
How severe are the risks for example from a disorderly GREXIT from the Euro?
Some threats to the UK Economy in 2015-16
Page 15
A2 Macro-Economics - March 2015
Challenge Explanation
Bank of England starts to raise policy interest rates
UK economy is vulnerable to even small increases in market interest rates
Planned fiscal austerity post-2015Most of the big cuts in real government spending are yet to happen
Real wage cuts and job insecurityIs the labour market model in the UK sustainable?
Imbalanced growth across regionsLondon-centric growth, with persistently high unemployment elsewhere
Threat of a sustained period of consumer price deflation
Will price deflation damage / de-rail recovery in the UK?
Risks from continued economic / financial crisis in Euro Area
How severe are the risks for example from a disorderly GREXIT from the Euro?
Some threats to the UK Economy in 2015-16
Page 15
A2 Macro-Economics - March 2015
A2 Macro-Economics - March 2015
Forecasted Bank Policy Rate in UK from Q12014 to Q22020
Source: Office for Budget Responsibility; Bank of England
Note: United Kingdom; December 3, 2014
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%2
01
4 Q
1
20
14
Q2
20
14
Q3
20
14
Q4
20
15
Q1
20
15
Q2
20
15
Q3
20
15
Q4
20
16
Q1
20
16
Q2
20
16
Q3
20
16
Q4
20
17
Q1
20
17
Q2
20
17
Q3
20
17
Q4
20
18
Q1
20
18
Q2
20
18
Q3
20
18
Q4
20
19
Q1
20
19
Q2
20
19
Q3
20
19
Q4
20
20
Q1
Ban
k ra
te
A2 Macro-Economics - March 2015
Impact of Higher Interest Rates
Arguments for Arguments against
Bank should start raising interest rates gradually to avoid a rise in inflationary pressures as the recovery gains momentum
Inflation in the UK is low –indeed the main risk if deflation rather than inflation
Higher interest rates will help to control the rapid growth of house prices and help to reduce the problem of unaffordable housing
There is a high level of household debt in the UK, a small rise in interest rates will add considerably to mortgage payments and risk another recession
Page 15
A2 Macro-Economics - March 2015
Impact of Higher Interest Rates
Arguments for Arguments against
Bank should start raising interest rates gradually to avoid a rise in inflationary pressures as the recovery gains momentum
Inflation in the UK is low –indeed the main risk is deflation rather than inflation
Higher interest rates will help to control the rapid growth of house prices and help to reduce the problem of unaffordable housing
There is a high level of household debt in the UK, a small rise in interest rates will add considerably to mortgage payments and risk another recession
Page 15
A2 Macro-Economics - March 2015
Impact of Higher Interest Rates
Arguments for Arguments against
Bank should start raising interest rates gradually to avoid a rise in inflationary pressures as the recovery gains momentum
Inflation in the UK is low –indeed the main risk if deflation rather than inflation
Higher interest rates will help to control the rising house prices and then help to reduce the problem of unaffordable housing
There is a high level of household debt in the UK, a small rise in interest rates will add to mortgage payments and risk another recession
Page 15
A2 Macro-Economics - March 2015
Impact of Higher Interest Rates
Arguments for Arguments against
Bank should start raising interest rates gradually to avoid a rise in inflationary pressures as the recovery gains momentum
Inflation in the UK is low –indeed the main risk if deflation rather than inflation
Higher interest rates will help to control the rising house prices and then help to reduce the problem of unaffordable housing
There is a high level of household debt in the UK, a small rise in interest rates will add to mortgage payments and risk another recession
Page 15
A2 Macro-Economics - March 2015
Evaluate the extent to which more flexible labour markets, including the use of ‘zero hour’ contracts, might contribute to UK growth
A2 Macro-Economics - March 2015Page 17
Employees with zero hours contracts in Great Britain 2000-2014
Number of people on a zero hours contract in UK from 2000 to 2014
Note: Great Britain; October 1, 2000 to December 31, 2014**; 16 years and older
225
176156
124108 119
147166
143
189168
190
252
586
697
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Em
plo
ye
es in
th
ou
sa
nd
s
A2 Macro-Economics - March 2015Page 17
Employees with zero hours contracts in Great Britain 2000-2014
Number of people on a zero hours contract in UK from 2000 to 2014
Note: Great Britain; October 1, 2000 to December 31, 2014**; 16 years and older
225
176156
124108 119
147166
143
189168
190
252
586
697
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Em
plo
ye
es in
th
ou
sa
nd
s
A2 Macro-Economics - March 2015
Share of employees with zero hours contracts in Great Britain 2000-2014
Share of all employees working on a zero hours contract in Great Britain
from 2000 to 2014
0.8%
0.6% 0.6%
0.4% 0.4% 0.4%
0.5%
0.6%
0.5%
0.6% 0.6% 0.6%
0.8%
1.9%
2.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sh
are
of a
ll e
mp
loye
es
A2 Macro-Economics - March 2015
Share of employees with zero hours contracts in Great Britain 2000-2014
Share of all employees working on a zero hours contract in Great Britain
from 2000 to 2014
0.8%
0.6% 0.6%
0.4% 0.4% 0.4%
0.5%
0.6%
0.5%
0.6% 0.6% 0.6%
0.8%
1.9%
2.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sh
are
of a
ll e
mp
loye
es
A2 Macro-Economics - March 2015
Answer from Student AZero hour contracts mean that employees work different hours each week. This means it is cheaper for firms to take on new staff as they do not have to guarantee them set hours. This helps firms like Tesco and Aldi who face a lot of competition. On the other hand, employees might lack motivation due to this level of insecurity and so productivity might decline
Page 17
A2 Macro-Economics - March 2015
Answer from Student AZero hour contracts mean that employees work different hours each week. This means it is cheaper for firms to take on new staff as they do not have to guarantee them set hours. This helps firms like Tesco and Aldi who face a lot of competition. On the other hand, employees might lack motivation due to this level of insecurity and so productivity might decline
Page 17
A2 Macro-Economics - March 2015
Answer from Student AZero hour contracts mean that employees work different hours each week. This means it is cheaper for firms to take on new staff as they do not have to guarantee them set hours. This helps firms like Tesco and Aldi who face a lot of competition. On the other hand, employees might lack motivation due to this level of insecurity and so productivity might decline
Page 17
A2 Macro-Economics - March 2015
Answer from Student AZero hour contracts mean that employees work different hours each week. This means it is cheaper for firms to take on new staff as they do not have to guarantee them set hours. This helps firms like Tesco and Aldi who face a lot of competition. On the other hand, employees might lack motivation due to this level of insecurity and so productivity might decline
Page 17
A2 Macro-Economics - March 2015
Answer from Student AZero hour contracts mean that employees work different hours each week. This means it is cheaper for firms to take on new staff as they do not have to guarantee them set hours. This helps firms like Tesco and Aldi who face a lot of competition. On the other hand, employees might lack motivation due to this level of insecurity and so productivity might decline
Page 17
A2 Macro-Economics - March 2015
Answer from Student AZero hour contracts mean that employees work different hours each week. This means it is cheaper for firms to take on new staff as they do not have to guarantee them set hours. This helps firms like Tesco and Aldi who face a lot of competition. On the other hand, employees might lack motivation due to this level of insecurity and so productivity might decline.
Page 17
A2 Macro-Economics - March 2015
Answer from Student BFlexible labour markets increase the efficiency of employing staff by making it easier to hire and fire employees. ‘Zero hour’ contracts help to do this as employers can hire staff but only pay them for the hours they work each week. This means that it is easier for firms to hire staff and so might reduce the number of people out of work. However, the number of hours staff work may be limited or part-time, meaning low paid workers may need to receive top up tax credits. This raises the opportunity cost of flexible labourmarkets for the government.
Page 17
A2 Macro-Economics - March 2015
Answer from Student BFlexible labour markets increase the efficiency of employing staff by making it easier to hire and fire employees. ‘Zero hour’ contracts help to do this as employers can hire staff but only pay them for the hours they work each week. This means that it is easier for firms to hire staff and so might reduce the number of people out of work. However, the number of hours staff work may be limited or part-time, meaning low paid workers may need to receive top up tax credits. This raises the opportunity cost of flexible labourmarkets for the government.
Page 17
A2 Macro-Economics - March 2015
Answer from Student BFlexible labour markets increase the efficiency of employing staff by making it easier to hire and fire employees. ‘Zero hour’ contracts help to do this as employers can hire staff but only pay them for the hours they work each week. This means that it is easier for firms to hire staff and so might reduce the number of people out of work. However, the number of hours staff work may be limited or part-time, meaning low paid workers may need to receive top up tax credits. This raises the opportunity cost of flexible labourmarkets for the government.
Page 17
A2 Macro-Economics - March 2015
Answer from Student BFlexible labour markets increase the efficiency of employing staff by making it easier to hire and fire employees. ‘Zero hour’ contracts help to do this as employers can hire staff but only pay them for the hours they work each week. This means that it is easier for firms to hire staff and so might reduce the number of people out of work. However, the number of hours staff work may be limited or part-time, meaning low paid workers may need to receive top up tax credits. This raises the opportunity cost of flexible labourmarkets for the government.
Page 17
A2 Macro-Economics - March 2015
Answer from Student BFlexible labour markets increase the efficiency of employing staff by making it easier to hire and fire employees. ‘Zero hour’ contracts help to do this as employers can hire staff but only pay them for the hours they work each week. This means that it is easier for firms to hire staff and so might reduce the number of people out of work. However, the number of hours staff work may be limited or part-time, meaning low paid workers may need to receive top up tax credits. This raises the opportunity cost of flexible labourmarkets for the government.
Page 17
A2 Macro-Economics - March 2015
Answer from Student BFlexible labour markets increase the efficiency of employing staff by making it easier to hire and fire employees. ‘Zero hour’ contracts help to do this as employers can hire staff but only pay them for the hours they work each week. This means that it is easier for firms to hire staff and so might reduce the number of people out of work. However, the number of hours staff work may be limited or part-time, meaning low paid workers may need to receive top up tax credits. This raises the opportunity cost of flexible labourmarkets for the government.
No application!
A2 Macro-Economics - March 2015Page 17
A2 Macro-Economics - March 2015
Main export partners for the United Kingdom 2012
United Kingdom: Main export partners in 2012
11.3%
10.5%
8.8%
7.4%
6.2%
5.1%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Germany United States Netherlands France Ireland Belgium
Sh
are
of to
tal e
xp
ort
s
A2 Macro-Economics - March 2015
Challenge Explanation
GREXIT – a disorderly exit of the Euro by Greece
A big risk for the UK economy
Launch of QE in the Euro AreaWill cause Euro to depreciate and make UK exports less competitive
USA reverses QE and starts to raise policy interest rates
United States is one of the UK’s main export destinations
Severe slowdown in Asian economies including China
Emerging economies are one of the key drivers in the world economy
Volatile world commodity pricesThe UK is a net importer of commodities but also has important oil/gas and renewables industries
Some Key Policy Challenges for the UK Economy [International]
Page 17
A2 Macro-Economics - March 2015
A2 Macro-Economics - March 2015
Gross domestic product (GDP) growth rate in Greece 2018
Greece: Real gross domestic product (GDP) growth rate from 2008 to
2018 (compared to the previous year)
-0.22%
-3.14%
-4.94%
-7.11% -6.98%
-3.86%
0.6%
2.87%
3.71%
2.53%
3.28%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
2008 2009 2010 2011 2012 2013 2014* 2015* 2016* 2017* 2018*
GD
P g
row
th r
ate
co
mp
are
d to
pre
vio
us y
ea
r
A2 Macro-Economics - March 2015
Unemployment rate in Greece 2018
Greece: Unemployment rate from 2008 to 2018
7.65%
9.46%
12.53%
17.65%
24.24%
27.25%
25.76%
23.84%
20.88%
18.58%
15.82%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2008 2009 2010 2011 2012 2013 2014* 2015* 2016* 2017* 2018*
Unem
plo
ym
ent
rate
A2 Macro-Economics - March 2015
Inflation rate in Greece 2018
Greece: Inflation rate from 2008 to 2018 (compared to the previous year)
4.15%
1.21%
4.71%
3.33%
1.5%
-0.92% -0.8%
0.3%
1.05%1.24% 1.24%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2008 2009 2010 2011 2012 2013 2014* 2015* 2016* 2017* 2018*
Infla
tio
n r
ate
co
mp
are
d to
pre
vio
us y
ea
r
A2 Macro-Economics - March 2015
Greece: real economy debt change from 2007 to 2014
Percentage change in real economy debt-to-GDP ratio in Greece from
2007 to 2014, by sector
70%
13%
20%
103%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Government Corporate Household Total
Pe
rcen
tag
e c
ha
ng
e
A2 Macro-Economics - March 2015
• Average wage is €600 (£450) a month• Unemployment is at 25%, with youth
unemployment almost 50%• Economy has shrunk by 25% since 2008• Country's debt is 175% of GDP• Borrowed €240bn (£188bn) from the EU, the
ECB and the IMF
“Greek democracy today chose to stop going gently into the night. Greek democracy resolved to rage against the dying of the light”
Greek finance minister YanisVaroufakis after Syriza’s victory in January’s elections
Grexit And Other scenarios
Page 17
A2 Macro-Economics - March 2015
Greek default Grexit
i.e. Greece refuses to pay its outstanding debts or renegotiates payment terms
i.e. Greece decides to leave the Eurozone and introduces its own currency; ‘new drachma’
German and French banks would be hardest hit. Could reduce EZ growth and so UK exports
A new Greek currency would be at a low value v the £ so UK exports would be more expensive
UK banks and institutions who have lent to Greece have a big debt write-off
Greece’s foreign debts balloon; hard to pay back those to UK banks
Greece needs a further EU or IMF loan. The UK government may need to contribute cash
Other nations follow suit, such as Italy and Spain. Their exports also become cheaper
Page 17
A2 Macro-Economics - March 2015
A2 Macro-Economics - March 2015
Crude oil prices: UK Brent 2013-2016
UK Brent crude oil prices from 2013 to 2016 (in U.S. dollars per barrel)
108.64
99.02
57.56
75
0
20
40
60
80
100
120
2013 2014 2015* 2016*
Price
in
U.S
. d
olla
rs p
er
ba
rre
l
A2 Macro-Economics - March 2015
Advantages Disadvantages
• Cheaper petrol prices – reducing transport costs and helping to increase real incomes
• Reduction in value of UK north sea assets, lower tax revenues for the government and a deep cut back in new oil and gas exploration
• Lower CPI inflation due to falling prices for fuel, energy and manufactured products that use oil as an input
• Reduced revenue from UK oilexports as demand is price inelastic
• Fall in business energy costs as power stations are cheaper to run
• More vehicle miles as fuel prices fall – causing a rise in carbon emissions
Effect of lower oil prices on the UK economy
Page 17
A2 Macro-Economics - March 2015
Average supermarket and petrol station diesel prices in the United Kingdom, 2013-2014
Comparison of the price of diesel from supermarkets and petrol stations
in the UK between January 2013 and December 2014 (in pence per litre)
100
105
110
115
120
125
130
135
140
145
150
Pri
ce p
er
liter
in p
ence
Supermarket average UK average
A2 Macro-Economics - March 2015
A2 Macro-Economics Revision WorkshopMarch 2015
Revision SupportGeoff Riley @tutor2u_econWebsite: www.beta.tutor2u.net
Page 3