The document summarizes the performance of the UK economy. It notes that while GDP has recovered since the recession, GDP per capita remains below pre-recession levels. Unemployment has fallen but youth unemployment remains high. Inflation fell to 0% in early 2015 due to lower food and fuel prices. The budget deficit has declined but remains over 5% of GDP, and the national debt is high at 79% of GDP. The trade deficit is growing, reflecting a lack of competitiveness, while the current account deficit was the largest in over 20 years in 2014.

1. Performance of the UK Economy
(AS and A2 Revision - May 2015)

2. www.beta.tutor2u.net

3. What are the key objectives of macroeconomic policy?
Price Stability – i.e. Low
Inflation
(CPI Inflation of 2%)
Sustainable Growth of
Real GDP (National
Output)
Falling Unemployment /
Rising Employment Rate
Higher Living Standards
(real national income per
capita)
Improved Global
Competitiveness / Trade
Balance (BoP)
A More Equitable
Distribution of Income
and Wealth

4. Strong economic growth
Falling unemployment
Inflation under control
Budget deficit declining
Business investment rising

5. The Knowledge: Economic Growth
• 2010-13 recovery was one of slowest on record
• But in 2014, the UK economy expanded by 2.7%

6. GDP has recovered but not GDP per head
80
90
100
110
120
130
140
19971998199920002001200220032004200520062007200820092010201120122013
GDP GDP per Capita
In the fourth quarter of 2014, real GDP per head in the UK was close to 16 per cent
below where it would have been if the 1955-2007 long-run trend had continued. Martin
Wolf (Financial Times, 29 April 2015)

7. Are we better off since the recession?
GDP per head remains below the 2007 peak
Real Disposable Income per head also well below 2007 level

8. What are the consequences of a fall in GDP per head?
1. Average living standards decline (falling per capita incomes)
2. More workers need an extra job to supplement their
incomes – now more than 1 million people with second jobs
3. Less consumer demand for goods & services
4. Lower incomes and low net savings makes many more
people reliant on consumer debt e.g. pay day loans
5. Becomes much harder for people to reduce debts
accumulated during the growth years including mortgages
6. Government receives lower-than-expected tax revenues –
making it a lot harder to reduce the fiscal deficit

9. Forecast output gap for the UK from 2014 through to 2019
-1%
-0.5% -0.5%
-0.2%
-0.1%
%
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
2014 2015 2016 2017 2018 2019
PercentagechangeOutput Gap – Spare Capacity Diminishing?

10. Possible 2015 Exam Issue
Assess the use of fiscal policies, including cuts in
direct taxes, as a means of improving living
standards in the UK economy.

11. Drivers of Short Term Economic Growth
Strong labour market
+ Consumer confidence
Low interest rates &
falling pound v US $
Recovery in business
capital investment
Falling import prices
e.g. oil and foodstuffs

12. Strong labour market
+ Consumer confidence
Low interest rates &
falling pound v US $
Recovery in business
capital investment
Falling import prices
e.g. oil and foodstuffs
Fiscal austerity –
cutting budget deficit
Low productivity +
Falling real wages
Risks from a period of
price deflation
Appreciating pound
versus the Euro
Drivers of Short Term Economic Growth

13. The Knowledge: Inflation
• Inflation fell from 2.8% in 2013 to 1.7% in 2014
• In March 2015, the annual rate of inflation fell to
0% - partly because of lower food and fuel prices

14. The Bank of England’s target is for inflation to be 2%. The
Governor of the Bank of England must write an open letter to
the Chancellor if inflation is more than one percentage point
higher or lower than this target (i.e. more than 3% or less 1%).
CPI Inflation has been either above 3% or less than 1% in 25 of
the 57 months since May 2010.

15. Consumer price inflation in the UK is likely to become
negative for a short period in 2015

16. Possible 2015 Exam Issue
Assess the policies that might be used to prevent
consumer price deflation in countries such as the UK

17. The Knowledge: Unemployment
• Unemployment in the UK has fallen from 8.5% of
the labour force in 2011 to 5.5% in April 2014

18. 740,000 people aged 16-24 were unemployed in December 2014. The youth
unemployment rate was 16.2% down from 20% in 2013
Country Youth Unemployment Rates (per cent)
Australia 13%
Greece 50%
France 25%
India 18%
Italy 43%
Japan 7%
Poland 23%
South Korea 8%
Spain 53%
Turkey 19%
United Kingdom 16%
United States 12%
Source: ILO and Trading Economics, Jan 2015

20. 11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
1993 Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1
The rise of self employment in the UK
Self employment as a percentage of total employment

21. Possible 2015 Exam Issues
Evaluate the policies that the UK government could
adopt to reduce unemployment without causing a
rise in inflation
Evaluate the benefits of falling unemployment for
the UK economy

22. The Knowledge: Budget Deficit
• The government’s budget (fiscal) deficit has
fallen from 11% of GDP in 2010 to 5.7% in 2014

23. UK budget deficit fell below
£100bn in 2013-14 but it
remains high as % of GDP > 5%
Last budget surplus was 15 years ago

24. The Knowledge: The National Debt
• The national debt is the total stock of debt yet to
be repaid by the government
• The national debt was 79% of GDP in 2014
• It will continue to rise as long as the budget
deficit is bigger than the rate of growth of GDP
• Government forecasts a budget surplus in 2019

25. Public sector net debt (the total stock of
Government borrowing) was 79% of GDP
in 2014. It is forecast to rise to 81% in
2016, before falling to 73% in 2020.

26. The Knowledge: UK Overseas Trade
• British exports have been growing only slowly
• The trade deficit in goods has been increasing
• Only partially offset by rising trade surplus in
services

27. -10%
-5%
0%
5%
10%
15%
20%
25%
30%
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
%ofGDP
Net trade Exports Imports
Trade in Services: Exports, imports & balance
?UK Trade in Services and Goods
Trade in services – surplus of 5% of GDP

28. -10%
-5%
0%
5%
10%
15%
20%
25%
30%
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
%ofGDP
Net trade Exports Imports
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
%OfGDP
Net Trade Exports Imports
Trade in Services: Exports, imports & balance Trade in Goods: Exports, imports & balance
?UK Trade in Services and Goods
Trade in deficit – 7% of GDPTrade in services – surplus of 5% of GDP

29. The Knowledge: Current Account (BoP)
• Current account deficit was 5.5% of GDP in 2014
– this was the highest for over twenty years
• This reflects a lack of competitiveness and loss of
exports share in global markets
• Strong pound might be hurting exporters
• Plus steep fall in net investment incomes

30. The deficit in 2014 was £97.9 billion
(5.5% of GDP), which was the
largest figure since comparable
records began

31. Possible 2015 Exam Issue
Evaluate the policies that might be most effective if
the the government is to achieve an objective of
reducing the deficit on the current account.

32. 20
40
60
80
100
120
140
160
60
70
80
90
100
110
120
130
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sterling Exports (RHS) Imports (RHS)
Sterling effective exchange rate index, 2005 = 100
?What has been happening to the pound?
Has a strengthening pound
since 2013 been a factor
limiting UK exports?

33. Possible 2015 Exam Issue
Evaluate the likely macroeconomic effects of the UK
exchange rate appreciating against the Euro.

34. The Productivity Puzzle
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1
GDP
Output/Hour
Hours
Index of GDP and Productivity for the UK 2008Q1 = 100

35. 2014-15 Global Competitiveness Index (UK Rankings)
Indicator
UK ranking out of
144 countries
Overall
competitiveness
9th/144
Institutions 12th/144
Infrastructure 10th/144
Macroeconomic
environment
107th/144
Labour market
efficiency
5th/144
Technological
readiness
2th/144
Highlighted problems for = business
• Access to financing
• Skills shortages in key industries

36. The Knowledge: Interest Rates
• Policy interest rates have been at a record low of
0.5% since March 2009
• Quantitative easing programme is worth £375bn
(or around 16% of GDP)

38. While the rate of interest received on savings from
deposits with financial institutions has declined
since the beginning of 2013, the rate paid by
households on loans has remained relatively stable

39. Possible 2015 Exam Issue
To what extent is the policy low interest rates
helping to improve the macroeconomic
performance of the UK economy?

40. The Knowledge: Falling Oil Prices
• World oil prices fell from over $100 per barrel in
the spring of 2014 to less than $50 at the start of
2015. They are now edging higher to around $55

41. Effects of lower oil prices
for the UK economy
Reduces import bills
Lowers production costs
A factor behind lower CPI
inflation
Increases producer profits
Overall a boost to GDP
growth + world economy
But will lead to deep cuts
in investment and jobs in
North Sea
May also affect demand
in renewables industries

42. Strengths and Weaknesses of the
British Economy

43. Falling unemployment,
and inflation
World class universities
+ flexible labour market
Ranked 2nd in world for
technological readiness
World’s best exporter of
creative services
Credible central bank
with low inflation
Rising investment in
high tech manufacturing
Number of successful
infrastructure projects

44. Stagnant labour
productivity growth
Structural + youth
unemployment is high
Dangerously high levels
of income inequality
Chronic shortages of
affordable housing
Historically high current
account deficit
Debt-fuelled - propped
up by low interest rates
Low research spending
as a % of GDP

45. www.beta.tutor2u.net

46. Revision on The Performance of the
UK Economy (May 2015)