revision on the uk economy
TRANSCRIPT
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8/3/2019 Revision on the UK Economy
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Revision on theUK Economy
AS and A2 Economics
May 2009
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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
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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
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Growth rate of GDP, annual % change at constant prices
China and the UK - Growth Compared
Source: Reuters EcoWin
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
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Evidence for the stock cycle in the UK
Changes in stocks and the UK economic cycle
Source: Reuters EcoWin
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
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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
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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
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Net % balance of people expecting higher unemployment in the next year
Unemployment Expectations
Source: Reuters EcoWin
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
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Percentage of disposable income that is saved, quarterly data
Household Savings Ratio
Source: UK Statistics Commission
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
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billion per month, seasonally adjusted data
United Kingdom Exports to Euro Zone Countries
Source: Reuters EcoWin
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'
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Quarterly value of capital spending at constant 2003 prices, billion
Value of UK Capital Investment Spending
Source: UK Statistics Commission
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
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Recession Fallout
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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
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Annual percentage change in GDP at constant prices and Short Term unemployment
Unemployment and the Economic Cycle
Source: Reuters EcoWin
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)
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UK Real GDP Growth and Consumer Price Inflation. annual percentage change
UK Growth, Inflation and Policy Interest Rates
Source: Reuters EcoWin
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
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Annual percentage change in the retail price index and CPI
Retail Price and Consumer Price Inflation in the UK
Source: UK Statistics Commission
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)
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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
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Annual percentage change in consumer prices, unemployment rate (%)
UK Unemployment and Consumer Price Inflation
Source: Reuters EcoWin
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
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Source: OECD World Economic Outlook
UK - Potential GDP and Trend Growth
Source: OECD World Economic Outlook
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
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Annual % change in output per worker for the whole economy
UK Labour Productivity and the Economic Cycle
Source: Reuters EcoWin
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
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Real value of world trade in US dollars, at constant 2000 prices
Global Exports of Goods and Services
Source: Reuters EcoWin
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
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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?
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Policy Responses
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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
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Percentage - set by the Bank ofEngland Monetary Policy Committee
Monetary Policy Interest Rates in the UK
Source: Bank of England
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
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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
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Per cent, source: Bank ofEngland
The Cost of Borrowing
Source: Bank of England
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
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Trade-weighted index value for sterling in the foreign exchange market, daily value
United Kingdom Effective Exchange Rate Index
Source: Reuters EcoWin
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
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Trade-weighted index value for sterling in the foreign exchange market, daily value
Sterling and Base Interest Rates
Source: Reuters EcoWin
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
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US dollars per1, daily closing exchange rate
Dollar-Sterling Exchange Rate
Source: Reuters EcoWin
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
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Value of one Euro, daily closing exchange rate
Euro - Sterling Exchange Rate
Source: Reuters EcoWin
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
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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?
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Budget Balance = Tax revenues - Total Government Spending, billion
UK Government Budget Balance
Source: Reuters EcoWin
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
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Measured as a percentage of national income (09-10 is a forecast from the OECD)
UK Government Spending and Taxation
Source: OECD World Economic Outlook
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
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billion at current prices, monthly data
UK Government Net Debt
Source: Bank of England
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
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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
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