What has happened in the UK economy recently?

GDP 3rd quarter growth dropped to 0.5%, largely due to a weak construction sector.

Private sector wages are growing at their fastest rate for 13 years at approximately 3.5% in real terms in the three months to August. However this is partly due to the very low inflation we have experienced in recent months.

The unemployment rate has dropped from 5.5% to 5.4% in the three months to August, the lowest since Spring 2008 and deflation has returned with the September rate being -0.1%.

Oil demand is predicted to fall still further, suggesting prices will remain low throughout 2016 according to the International Energy Agency.

China and the UK

There has been much attention given over to China in recent weeks, following the visit of President XI and the signing of many deals between China and the UK, not least in the energy sector where China (and France) will be financing and largely building a generation of nuclear power plants in the UK. The Times commented that it will not be long before a Midlands UK businessman or woman could breakfast on Chinese cereal (Weetabix), travel to London on a partly Chinese-financed railway (HS2) for a meeting in a Chinese office development (China has invested heavily in UK property), then make a call home on a Chinese mobile phone and arrange to take the family out to a Chinese owned pizza chain (PizzaExpress) to discuss the possible purchase of a Sunseeker Yacht, a company acquired by China in June 2013. It is also worth noting that Chinese tourists to the UK have doubled between 2009 and 2014 to 185,000 and there were 10,468 Chinese pupils and 87,895 students at UK  independent schools and  universities respectively in 2014. By 2030 the World Bank estimates that 30% of global investment will come from China, the year it is estimated that it will become the world’s largest economy.

Currently China provides 9% of our imports of goods but we are only their 7th biggest source of their imports and our 22nd largest export market for goods so there is considerable potential for growth there. Given the UK Government’s intention to move to a budget surplus and not to borrow even to invest, China provides a valuable source of finance for infrastructure investment.

However all is not well at home with recent Chinese growth figures falling to 6.9% in the third quarter, slightly below the target rate of 7%. There has been some doubt expressed about the validity of this figure and some economists suggest that a true figure would be significantly lower, not least because nominal growth was only 6.2% implying a 0.7% deflation in China over the period which some commentators suggest is inaccurate. An alternative measure looks at statistics for electricity, bank lending and rail cargo which suggests growth of between 3% – 4%. Such discrepancies put the UK’s recent fall in GDP growth to 0.5% into perspective.

Macroeconomic musings 8th October

The UK economy continues to progress well. This year, for the 3rd year in succession, it is likely to achieve the fastest growth in GDP of the G7 countries and, also this year, real disposable income grew at its fastest rate for five years. In terms of happiness, as measured by the ONS, people are  more content than ever with a happiness rating of 7.5/10, the highest since the survey was first carried out in 2012.

However not all is going according to plan. The current account deficit continues at a record level and is being financed by overseas borrowing, inward FDI (not a bad thing) and sales of assets such as London property. As a result, although GDP is doing well, GNP (or GNI) which measure the amount of income going to UK firms and households, as opposed to GDP, which looks at activity in the UK, is doing less well and has grown by approximately 1% per year less than GDP. The difference between them is the net amount of money flowing out of the UK, for example the foreign industries in the UK sending their profits home. Furthermore we are receiving less in the form of interest, profit and dividends from our overseas assets because of lower interest rates and reduced profits as other countries struggle to escape the recession.

Natural monopoly and competitive markets

Any economics student who has studied long run cost curves should be familiar with the idea of natural monopoly.  Many utilities, such as telephones, water and electricity supply are natural monopolies.  This creates a problem when it come to privatizing a state monopoly, because a private monopoly can result.

In some cases the British government solved the problem by separating the natural monopoly, the network part of the business, from the supply section.  So we have UK Power Networks and a number of competing gas and electricity firms.  In the case of BT that was not the case and the privatized firm was allowed to keep its network.  However, this may be about to change, as this article shows:


There will certainly be advantages and disadvantages to separating the network from the operator, but economic theory suggests it could be a good move.