Current information about key areas of the economy is important for those taking exams this summer. The following highlights key areas.
Economic Growth – Manufacturing output rose by 1.3%in the last quarter of 2017 with Boeing announcing it will build a new factory in Sheffield.; It has also announced closer links with Sheffield University, guaranteeing to employ 19 apprentices trained at the Advanced Manufacturing Research Centre in Rotherham which is linked to Sheffield University. At the other end of the scale, Alpkit, an outdoor equipment company in Nottingham, has increased its exports by 50% because of the EU recovery and the fall in the value of sterling. However UK car manufacturing fell by 3% in 2017, with part of the drop being caused by a reluctance to buy new diesel cars.
In global terms, the IMF has upgraded growth forecasts for the next two years for France, Germany and the USA while reducing the forecast for the UK to 1.6% this year and 1.5% next year. In terms of the forecast increases in real GDP per head, the UK is at the bottom of the G7. The IMF highlights weak investment, low productivity and Brexit uncertainty as causes for the UK’s relatively poor performance while the rest of the world benefits from US tax cuts, riding investment and increased international trade (presumably their forecast was written before concern over a US/ China trade war).
The poor figures for growth from Jan – March 2018 (only 0.1% up compared to the previous quarter) were below expectations and the worst for 5 years. While some of the blame for the poor figures can be attributed to the recent poor weather, the ONS was quick to point out that weather was not the cause of these figures and highlighted a slump in construction as a key factor. Sterling fell after the data was published since investors now think that an imminent interest rate increase is less likely. In addition, the Bank of England has now downgraded the UK’s growth forecast for this year from 1.8% (made in February) to 1.4%.
Productivity – April 2018: The latest productivity figures contain some good news for the UK since, between July and December 2017, output per hour rose by 1.7% – the fastest rise since 2005. Note that part of the rise is because of a fall in the number of hours worked. Output per person has hardly changed. The purchase of industrial robots in the UK rose in 2016, the first rise for 5 years.
The apprenticeship levy is a tax on companies (0.5% of their wage and salaries bill) with a turnover of at least £3m; they pay the tax and can then claim back money spent on training over the next two years. The scheme was introduced in 2015 and the aim is to create three million new apprenticeships by 2020 and raise the quality of training. While it has proved relatively easy to provide training in traditional industries such as construction or plumbing where apprentices can learn from current employees, designing courses in service industries has proved more difficult. In Jan 2018, 25,400 apprentices were in training, compared with 36,700 a year earlier with criticism that the scheme is too inflexible and some of the money is going to fund basic training for low-paid staff such as those working in hotels and coffee shops (labelled as apprenticeships to claim the training money).
Incomes, savings & living standards – March 2018: The Bank of England predicts that pay increases in the private sector are expected to reach 3.1% per annum, the highest rate since the financial crisis ten years ago. With inflation expected to drop below 3%, living standards should therefore rise. However pay increases for senior staff are only expected to be between 1 – 2%. The national living wage rose to £7.83 in April. In the three months to February, wages rose in real terms with earnings rising at 2.8% (at an annual rate) while inflation dropped to 2.7%. A recent OECD international comparison of real household disposable income growth since Brexit shows 1.8% growth in Europe compared with a fall of 0.3% in the UK . The savings ratio fell to 0.9%, its lowest level since 2008, as consumers attempted to keep their consumption up as their REAL disposable income fell in 2017. (The same occurred in 2016). This is not as worrying as the situation between 2004 and 2007 when the savings ratio was negative – borrowing was greater than savings.
Unemployment – Between November and February, unemployment fell to 1.42 million, reducing the rate from 4.3% to 4.2%, the lowest it has been for 43 years. The activity rate reached 75.4% (those of working age in work or looking for work as a percentage of the potential labour force), the highest since 1971.
Inflation – The rate of inflation for March dropped to 2.5%, compared to 2.7% in February, the second consecutive month it has fallen (It was 3.1% in November). Falling inflation has cast doubt on when the next interest rate will occur. However oil prices have reached their highest level for almost four years to $77.32 a barrel, because of increased demand from US drivers combined with an earlier cold spell in Europe reducing stocks, the long-term impact of OPEC production cuts and most recently, the recent political events in Iran where the threat of sanctions will reduce Iran’s oil sales.
There has been discussion about whether the 2% CPI target for inflation is still appropriate. Some economists are suggesting a higher target would be more appropriate to ensure faster growth and continued low unemployment while others suggest that it should be scrapped and replaced with a nominal GDP target (combining both inflation and growth), which would involve a much greater focus on the components of AD.
Government debt: Between 2007 and 2017, total government debt (the national debt) rose from £560bn to £1760bn which, as a share of GDP, was a rise from 36% to 85%. It is currently at 76.4% of GDP and predicted to fall to 75.3% by 2025. The latest figures (for the last year to March) show that the UK government ran a surplus of £112m on the current budget (day-to-day services such as pay for soldiers, NHS nurses and civil servants, and welfare payments such as JSA and pensions) FOR THE FIRST TIME IN 15 YEARS. What this means is that the only borrowing undertaken by the government last year was for investment in infrastructure, such as roads, schools, airports and railways. George Osborne, when Chancellor, aimed to achieve this in 2016 but, because of the slow recovery and low productivity, it has taken until 2018. The overall budget deficit was £42.6bn, a drop of £3.5bn compared to last year and the lowest since 2007.
Monetary Policy update: In 2016, post the Brexit vote, base rate was cut from 0.5% to 0.25% and a further £60bn of QE took place. In November 2017, the rate rise was reversed. The BofE introduced the Term Funding Scheme (TFS) to replace the Funding for Lending Scheme. Under the scheme, which will last until 2022, banks are able to borrow up to 5% of their loan book at a very low rate of interest. The BofE has also amended the leverage ratio (equity:assets) by removing central bank deposits from the asset side and increasing the ratio from 3% to 3.25%. Overall, this is seen as making the requirement less onerous.
At the start of 2017, household debt was increasing at its fastest rate since 2006 and the BofE financial Policy Committee (which is responsible for financial stability) was concerned by the increase and has instructed high street banks to add £10bn to their balance sheets in case of default and £11.4bn in case of an economic downturn. The latest figures (March 2018) show a fall in credit provided by high street lenders (overdrafts, credit card borrowing and car finance) from £1.7bn the previous month to £300m, the smallest figure since 2012, creating fears of a significant slowdown in growth. The slowdown in lending is partly the result of reduced consumer confidence but also due to lenders strengthening their balance sheets following warnings from the Bank of England.
Interest rates were expected to be increased on 10th May but, because of the UK’s sluggish economic performance, the Bank of England has left them on hold at 0.5%. However a rate rise later this year is still predicted by the Governor of the Bank of England.
House Prices: The Halifax announced a fall of 3.1% in house prices last month, the largest monthly fall since September 2010 and the second largest since they started their house price index in 1983. Mortgage approvals fell 10% in March. However house price data is extremely volatile.Reasons for this included a loss of confidence in the housing market, foreign demand slowing, and a feeling that the peak of the boom has been reached.
Foreign Trade: UK ran a service sector surplus on the BofP from Oct – Dec 2017 of £20bn with exports of £43.3bn and a service surplus of £80bn for the whole year. The main area of service exports was the EU (40%), hence the importance of obtaining a suitable free trade agreement, post Brexit, which includes services. The USA, at 20%, was the single largest country. Banking, insurance, travel and business services were the main surplus categories. Trade in goods was negative so overall, in the last quarter, there was a deficit of £11bn.
Given that balance of payments figures are particularly inaccurate, it is no surprise that the 2016 deficit is likely to be revised down in next month’s data by £10bn (£30.9bn v an original estimate of £40.7bn), down from 2.1% of GDP to 1.6%., because of under-estimated earnings from financial traders in the Uk.
The US trade (goods and services) deficit has risen to its largest for almost a decade, rising to $57.6bn in February.