uk economic outlook peter matheson, economic counsellor - british embassy washington dc - 25...
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UK ECONOMY
SITUATION & PROSPECTS Peter Matheson
Economic Counsellor
British Embassy, Washington D.C.
January 2012
The UK recovery faces significant headwinds
2
The UK has experienced sluggish growth over the past year.
Externally generated shocks have largely been to blame. Commodity prices in particular
have pushed up inflation, squeezed household income and held back consumption.
The UK grew by less than 1 per cent in 2011 but the OBR expect little extra growth
until mid-2012.
The biggest risk facing the UK economy is a crisis in the eurozone. Assuming this
does not happen, the OBR gives a 1 in 3 chance of a technical recession (2 quarters of
Source: ONS and OBR forecast
Quarterly GDP Growth
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2006 2007 2008 2009 2010 2011 2012 2013 2014
Percentage change on previous quarter
OBR forecast2011 Q3
Growth is predicted to pickup after 2012
3
The OBR expect the economy to gain momentum through next year.
Growth is expected to rise above its trend rate (2.3%) by 2014.
Source: OBR, Nov 2011
Annual GDP Growth Forecast
2011 2012 2013 2014 2015 2016
Annual GDP growth % 0.9 0.7 2.1 2.7 3.0 3.0
Trade and investment will drive the recovery
4
The OBR expect the recovery to be driven by investment (red bars) and net
trade (blue bars).
HMG’s prosperity goals to boost trade and investment are therefore key.
Source: OBR, Nov 2011
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011 2012 2013 2014 2015 2016
Other Net Trade Investment GDP
Contributions to annual GDP growth (percent)
OBR Forecast
Contributions to GDP Growth
By 2014 UK growth will be 2nd highest in the G7
5
Source: IMF World Economic Outlook, September 2011
0
0.5
1
1.5
2
2.5
3
3.5
Italy Japan France UK Germany US Canada
2011-13 2014-16 Average annual GDP growth (percent)
The IMF expects the UK to grow by 1.7% on average between 2011 and 2013 – in the
middle of the pack of the G7 economies.
From 2014 the UK is expected to be the second fastest growing economy in the G7,
growing by 2.7% per year between 2014 and 2016.
Average annual GDP Growth forecasts
Unemployment is lower in the UK than most
advanced economies
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The UK’s unemployment rate is lower than many advanced economies and is
expected to stay so based on the IMF’s forecasts.
The current UK unemployment rate is 8.3%, compared with 8.6% in the US and
10.3% in the eurozone.
Source: IMF World Economic Outlook Database, September 2011
0
2
4
6
8
10
12
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Eurozone
France
UK
US
Germany
Japan
Unemployment Rate (per cent)
IMF ForecastsHistorical Data
A competitive pound offers opportunities for UK
exporters
Sterling has depreciated by more than 20% since 2007 against a broad basket of
currencies (left hand chart), including against the dollar and euro (right hand chart).
A weaker pound makes UK exports cheaper abroad, making UK businesses more
competitive.
Source: Bank of England
7
70
75
80
85
90
95
100
105
2007 2008 2009 2010 2011
Sterling effective exchange rate index, 2007 = 100
1
1.2
1.4
1.6
1.8
2
2.2
2007 2008 2009 2010 2011
Exchange rate to the pound
dollars per pound
euros per pound
Source: Bank of England
Sterling exchange rate index Dollar & euro exchange rates to pound
Geographical split of UK exports
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Good and Services Exports in 2010 Source: ONS Pink Book 2011
Export Market Share of UK Exports (%)
2010 value in £ billion
1 USA 16.5 72.21 2 Germany 8.9 38.71 3 Netherlands 7.2 31.32 4 France 6.4 28.14 5 Ireland 5.8 25.32 6 Belgium 3.7 16.27 7 Spain 3.5 15.08 8 Switzerland 3.2 14.20 9 Italy 3.2 14.00
10 China 2.3 10.26 11 Japan 2.0 8.65 12 Sweden 1.9 8.47 13 Australia 1.9 8.39 14 Singapore 1.6 7.11 15 Canada 1.6 7.03 16 India 1.4 6.13 17 Hong Kong 1.4 6.06 18 Denmark 1.3 5.67 19 Norway 1.3 5.50 20 Saudi Arabia 1.2 5.41
Eurozone42.2%
Rest of EU5.9%
EFTA4.6%
Rest of Europe
3.4%
United States16.5%
Rest of Americas
4.5%
China2.3%
Japan2.0%
Other Asia12.3%
Australasia2.2%
Africa3.9%
The UK exports all over the world.
65% of UK exports are sold in the European Union and United States.
Looking ahead, the rapidly expanding emerging markets of Asia, Africa and Latin America
are likely to offer the greatest potential for future growth.
Distribution of UK Exports
Top 20 largest export markets for the UK
UK exports are diverse, with a mix of
goods and services
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The UK is a top ten global manufacturer, and
goods comprise over 60% of our exports.
Within services exports, financial services are a
huge strength. But three quarters of UK service
exports come from non-financial services..
Source: ONS
Other
business services
30%
Financial services
25%
Travel
services12%
Transport services
12%
Other services
21%
Semi-Manufact
ured Goods11%
Chemicals
19%
Oil and other
Energy13%
Motor Cars7%
Other consumer
goods8%
Finished manufact
ured goods32%
Food, beverages & tobacco
6%
Other
Goods4%
Goods Exports, 2010
Services Exports, 2010 0
50
100
150
200
250
300
350
400
450
500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Services Exports
Goods Exports
Total Exports
£ billion value of UK exports (current prices)
UK export split between goods and services
Growth Strategy: The UK aims to create the
most competitive tax system in the G20
The most competitive tax system will include:
The lowest corporate tax rate in the G7 and among the lowest in the G20.
The rate is currently 26 per cent and by 2014 it will reach 23 per cent
Making the UK the best location for corporate headquarters in Europe.
Working towards a simpler, more certain tax system. 10
“The most competitive tax system in the G20 is the first of our economic ambitions.” “Our corporate tax rate (will come) right down to 23%; 16% lower than America, 11% lower than France and 7% lower than Germany – the lowest corporation tax in the G7.”
Chancellor George Osborne
The UK faces an exceptional fiscal challenge…
Source: IMF World Economic Outlook, September 2011
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According to the IMF, the UK is running one of the largest fiscal deficits in the advanced
world, which is not sustainable. In 2011, the IMF estimates the UK had the third largest
fiscal deficit as a percentage of GDP in the G7.
The fiscal deficit is the difference between public spending and Government revenue
from taxation. Government borrowing is required to fund the deficit. This in turn increases
Advanced economies fiscal balances in 2011
-15
-10
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0
5
10
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Hong
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Swed
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Switz
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Esto
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Finl
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Germ
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Israe
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Mal
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Denm
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Aust
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Belg
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Neth
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Aust
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Italy
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Cana
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Slov
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Cypr
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Unite
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Unite
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Fiscal balance as a share of GDP in 2011 (defined as Public Spending minus Public Revenue)
Surplus
Deficit
Extra austerity measures announced in the Autumn
Statement have put public finances back on track
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-5
-4
-3
-2
-1
0
1
2
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
March 2011 Forecast
November 2011 Forecast excluding new austerity measures
November 2011 Forecast with new austerity measures
Cyclically adjusted current balance (per cent of GDP)
60
62
64
66
68
70
72
74
76
78
80
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
March 2011 Forecast
November 2011 Forecast excluding new austerity measures
November 2011 Forecast with new austerity measures
Public sector net debt (per cent of GDP)
The sharp deterioration in public finances between March and November is clear by the
shift from the blue line to the red dotted line in charts above. Without additional austerity
measures, the government would have missed its debt and deficit targets.
Consequently, the government announced additional savings of £8bn in 2015/16 and
£15bn in 2016/17 in the Autumn Statement.
Government Deficit Target Government Debt Target
Source : OBR, Autumn 2011 Statement
The OBR predicts that the Government will
achieve its fiscal mandate
In each Budget Report and statement on the economy, the OBR confirms whether or
not Government policy is consistent with a better than 50% chance of achieving the
fiscal mandate.
After announcing additional austerity measures in the Autumn statement, the OBR’s
November 2011 report concludes that current policy is consistent with this aim.
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Source: OBR, November 2011
Per cent of GDP
Outturn Forecast
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Cyclically-adjusted surplus on
current budget
-5.5 -4.5 -4.6 -3.9 -2.7 -1.6 -0.6 0.5
Public sector net debt
52.9 60.5 67.5 73.3 76.6 78.0 77.7 75.8
CONCLUSIONS
> 2012 will be a tough year for the UK economy;
> Growth expected to pick-up;
> The balance of growth will move more towards exports and investment;
> Our fiscal strategy is expected to pay dividends
> Our growth strategy will complement this.
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15
The UK’s credible fiscal framework has kept
the cost of issuing public debt down
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0
1
2
3
4
5
6
7
8
Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011 Oct-2011
Yield on 10-year government bonds
Italy
France
Germany
UK
US
Cost of issuing government debt – 10-year yields
Source : DataStream
Although the UK faces considerable fiscal challenges, the government’s commitment to
hitting its fiscal targets has kept the cost of issuing government debt low.
By contrast, yields on government debt in other countries, notably in the eurozone, have
risen substantially. This reflect investor fears of a eurozone crisis and its impact on the
sustainability of public finances in those countries.
Summary of Economic Indicators Forecast by Office for Budget Responsibility (OBR), Nov 11
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OBR forecasts (percentage change year on year, unless given)
2011 2012 2013 2014 2015
Real GDP growth 0.9* 0.7 2.1 2.7 3.0
CPI Inflation 4.5 2.7 2.1 2.0 2.0
ILO unemployment rate (%) 8.1 8.7 8.6 8.0 7.2
Current Account (%GDP) -2.3 -2.6 -1.8 -1.6 -1.4
2011-12 2012-13 2013-14 2014-15 2015-16
Public net borrowing (%GDP) 8.4 7.6 6.0 4.5 2.9
The next OBR forecasts will be released with the 2012 Spring Budget.