Macro Application Flashcards
2018 Annual growth rate
1.4%
Lowest since last recession
Impact of Brexit
Quarterly growth rate last quarter 2018
0.2%
Flirting with recession territory, close to negative
But from forecasts economists don’t expect a recession
Quarterly growth rate first quarter 2019
0.5%
Growth forecasts 2019
1.2% (OBR forecast)
Brexit slowing the economy down
Forecasts dependent on what happens with Brexit, if leave with no deal forecasts may be completely wrong
Growth forecast 2020
1.4%
Growth forecast 2021
1.6%
Growth forecast 2022
1.6%
Growth forecast 2023
1.6%
Annual growth rates pre-crisis
2-2.5% (potential growth rate)
But since financial crisis potential growth rate around 1.5% (impact of financial crisis)
Is the economy in a positive or a negative output gap?
Positive output gap 0.2% GDP
LR growth rate 1.5%, we’re kind of there
Real GDP/capita
Average incomes
£29,000
Total GDP
£2 trillion
How is the GDP constructed
Services: 79% (dependent on services. Financial, legal, education)
Manufacturing: 14% (no wonder weak pound done little benefit to U.K. Economy)
Construction: 6%
Agriculture: 1%
Unemployment rate
3.9%
Lowest rate since 1975
Employment rates also the highest since 1975
What is the Natural rate of unemployment? (Full employment)
4% (OBR estimate)
3.9% below that, matches POG estimate
Youth unemployment
11%
Not bad compared to Greece, Spain, Italy (much higher). But uk government probably wants this to come down
Long term unemployment (1 year or more)
1.1%
Wage growth
3.4%
High considering inflation is 1.9%
Means real wages are rising
Expect to see this as UE low, as wage bargaining high
Been a while since we’ve seen wage growth > inflation
But for last year has been higher
Consumer confidence
Weakening
Especially since January, Brexit has caused uncertainty and concern
BUT; retail sales figures have been positive so still spending
Income tax bands
Progressive income tax 0% up to £12,500 20% between £12,501-£50,000 40% £50,001-£150,000 45% >£150,000
What were income tax bands in 2010?
0% up to £6,500
20% between £6,501-£37,800
CPI inflation rate
1.9% (close to 2% target).
Expectations of around 2% as 2019 progresses
Core inflation
Mark Carney’s preferred measure of inflation, as strips out volatile prices from CPI basket (fuel, gas/electricity, food, clothing)
1.8%
Close to CPI, which tells us these volatile prices aren’t distorting the rate
Producer price inflation
2.4%
Future indicator of inflation as measures price rises of goods as they leave the factory
If they rise, input prices rise, CPI inflation likely to rise in future as these goods end up in retail shops
2.4% matches inflation expectations in the short-term
CPI inflation expected to be around 2.2% in May and June (matches PPI), but PPI expected to fall as the year progresses
Inflation expectations
2.7%
Figure high, Drives wage growth. Explains wage growth above CPI
Real pay rises.
As long as this remains robust and high, with low UE, real pay rises as long as wage growth > CPI
Current account deficit
Large
4.4% GDP
Weak £ done nothing to help CA deficit. It’s just stoked inflation, SRAS shift left. Since it in fact, CA deficit hovered 3-5%. No long term sustained improvement in it
Drivers of CA deficit
- High incomes: over last 2 years, real income rise. More M expenditure
But underlying reason; - Structural issues in the U.K. Economy (Supply Side issues): issues in particular:
Productivity; since financial crisis been shocking. 19% below G7 average of the G7(7 most industrialised nations). Since financial crisis 18% lower than pre-crisis trend. Since financial crisis productivity has barely risen. No wonder exports not competitive. Despite weak £, productivity awful
Investment: since Brexit vote, I desimated. Why would you invest when you’re uncertain about trade relations with major exporter the EU.
This is all holds back competitiveness of U.K. Exports and driver of large CA deficit
Need supply-side policies
Exchange rate (euro and dollar)
£ weak since Brexit, haven’t seen recovery
£1 = $1.30
£1 = €1.16
Before Brexit:
£1 = $1.50, £1 = €1.30
Slight recovery against €, but more Eurozone’s weakness than £’s strength
Eurozone Economy
Slowing, roughly 1% annual growth forecast
Trade concerns and issues with Chinese growth
US economy
Full employment (roughly 3% annual growth). High for developed economy
Budget deficit
2% GDP (annual borrowing by U.K.)
£41 billion
Even at FE running a budget deficit. So running a structural budget deficit
What was the budget deficit in 2010?
10% GDP
Fallen since austerity
Forecast of budget deficit in 2023
0.8% but dependent on relatively strong growth rates
National debt
83% GDP
2023 national debt forecast
74% GDP but dependent on growth rates
Why should we know bond yields?
Representative of the cost of borrowing to the U.K. Government
Current bond yield
1%
Corporation Tax
19%
28% (2010)
Conservatives want it to fall to 17% in the future
VAT
20%
Gini coefficient
0.34
0.36 (2010).
Austerity not traditional as seen in Greece and Italy
But much higher than average for OECD countries
Base rate
0.75%
November 2017: 0.25% -> 0.5%
July 2018: 0.5% -> 0.75%
Translating to low Interest rates throughout the economy
Average lending rate
1% (by banks)
Average mortgage rate
1.75% (for 2 year fix 1st time buyers)
Business confidence
Weak since Brexit vote
IR evaluation
Even though low. Consumer and business confidence low so not expecting increasing c or I
Mortgage approvals
Flat growth
Sign of low consumer confidence
House prices rising slowly
QE
£435 billion
Most recent QE
August 2016: £60 billion
To try to prevent post-Brexit recession
Willingness to lend
Very poor from financial crisis up to 2016. Banks pessimistic
Since increase but small and medium enterprises not in much value.
