UK Macroeconomic Indicators and Policies

Introduction

• Emphasis on using UK examples, data, and figures in macroeconomic exams.
• Importance of making strong evaluations and judgments using accurate data.
• This material is crucial for exams.

Economic Growth

• Annual growth rate (Q1 2017 - Q1 2018): 1.2% (low).

• Growth in Q1 2018: 0.1% (very low, partially blamed on bad weather).

• Underlying causes of low growth:

  • Low consumer and business confidence due to Brexit uncertainty.
  • Ongoing austerity policies.
  • Strengthening of the pound against the dollar.

• OBR forecast growth rates:

  • 2018: 1.5%
  • 2019: 1.3%
  • 2020: 1.3%
  • 2021: 1.4%
  • 2022: 1.5%
  • Note: These forecasts may be revised down due to recent low growth figures.

• Positive output gap: 0.3% of GDP (actual growth > potential growth).

• Current long-run growth rate: ~1.5% (down from ~2-2.5% pre-financial crisis).

• UK economy composition:

  • Services: 79%
  • Manufacturing: 14%
  • Construction: 6%
  • Agriculture: 1%

Unemployment

• Current rate: 4.2%
• Natural rate (estimated by Mark Carney): 4.25%
• Underemployment issues: zero-hour contracts, part-time vs. full-time work, graduates in non-graduate jobs.
• Youth unemployment: 11.5%
• Long-term unemployment: 1.1%
• Wage growth: 2.8%

Consumer Confidence

• Weak since Brexit vote and shock election in 2017.
• Expected to remain weak due to Brexit uncertainty.

Income Tax Bands

• Tax-free allowance: £11,850
• Income up to £46,300: 20%
• Income £46,300 - £150,000: 40%
• Income above £150,000: 45%

Inflation

• Current rate: 2.5%

• Forecast for end of 2018: 2%

• Main drivers: food price inflation (3%), higher oil prices.

• Core inflation: similar to CPI, indicating no distortion from fuel, gas, or food prices.

• Producer Price Inflation (PPI): lower than CPI, indicating future disinflationary pressure.

• Inflation expectations: 2.9%, driving wage growth.

Trade and Balance of Payments

• Current account deficit: 4.1% of GDP, driven by trade deficit in goods.
• Trade in services surplus: insufficient to offset trade deficit.

Exchange Rates

• Recovery against the dollar: £1 = $1.37
• Weak against the euro: £1 = €1.14
• Eurozone growth forecast: 2.7%
• US growth forecast: 2.9%

Government Finances

• Current budget deficit: 2.1% of GDP (£50 billion).
• Forecast for 2021: 0.9% of GDP.
• National debt: 86% of GDP, forecast to fall to 78% by 2021.
• Bond yields: 1.4%
• Corporation tax: 19%, expected to fall to 17% by 2020.

Income Inequality

• Gini coefficient: 0.34 (higher than the OECD average of 0.31).

Interest Rates

• Bank of England rate: 0.5%
• Average lending rate: 1.5%
• Average mortgage rate: 1.75%
• Mortgage approvals: stagnant

Quantitative Easing

• Total QE: £435 billion.
• August 2016: interest rate cut from 0.5% to 0.25%, QE increased by £60 billion.
• Banks' lending to SMEs: slight improvement since 2016, but still viewed as weak by SMEs.

Supply-Side Policies

• National Productivity Investment Fund: £31 billion over the next five years.
• Corporation tax cuts: from 23% to 19%, plans to reduce to 17% by 2020.
• Subsidies and tax relief for R&D and capital investment.
• Income tax-free allowance increases to £11,850, plans to increase to £12,500 by 2020.
• Apprenticeship funding and curriculum reform (introduction of T levels).
• Transport and digital infrastructure investment: £1.7 billion for transforming cities, HS2, Crossrail, £1 billion for digital infrastructure.
• Government research spending goal: 2.4% of GDP by 2027.
• Planning reforms to increase housing supply.
• Promotion of high-pay, low-welfare society: national living wage increases, Universal Credit benefit.
• Deregulation: £10 billion red tape reduction target.
• Northern Powerhouse initiative to decentralize power and promote growth in Northern England.

Conclusion

• Memorize these key stats and supply-side policies.
• Crucial for achieving high marks in exams.

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Key Stats to Remember

• Economic growth: 1.2% (2017-2018)
• Unemployment: 4.2%
• Inflation: 2.5%
• Budget deficit: 2.1% of GDP
• Corporation tax: 19%
• Gini coefficient: 0.34
• National Productivity Investment Fund: £31 billion (next 5 years)