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Prospects for the UK Economy in 2013

Wednesday, January 02, 2013
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As the sun rises on another year will the headwinds be favourable for Britain or are we facing up to another year of stresses and strains? Here is a brief commentary and overview of some of the key macroeconomic data for the UK economy together with some links to external articles and videos on economic prospects for Britain as we head in 2013.


Key indicators

Indicator

2008

2009

2010

2011

2012

2013

Real GDP (% change)

-1.0

-4.0

1.8

0.9

-0.1

0.9

Consumer spending (% change)

-1.6

-3.1

1.3

-0.9

1.1

1.6

Government current spending (% change)

1.6

0.8

0.4

0.2

1.3

-3.0

Capital investment (% change)

-4.6

-13.7

3.5

-2.4

1.8

2.5

Exports of goods and services (% change)

1.2

-8.2

6.4

4.5

-0.2

2.4

Imports of goods and services (% change)

-1.8

-11.0

8.0

0.5

2.8

2.6

Output gap - as a percentage of potential GDP

2.0

-2.8

-1.7

-1.4

-2.2

-2.3

Unemployment rate - as a percentage of labour force

5.7

7.6

7.9

8.1

8.0

8.3

Fiscal balance - as a percentage of GDP

-5.0

-10.9

-10.1

-8.3

-6.6

-6.9

Money market short term interest rates - per cent

5.5

1.2

0.7

0.9

0.9

0.7

CPI inflation - per cent

3.6

2.2

3.3

4.5

2.6

1.9

BoP Current account balance -  as a percentage of GDP

-1.0

-1.3

-2.5

-1.9

-3.3

-3.5

Source: OECD World Economic Outlook, December 2012. Data for 2013 is an OECD forecast

Commentary

1.  Output: The UK economy has endured difficult times since the start of the global financial crisis in 2007. Real GDP remains well below output levels before the recession began.

2.  Fragility: Recovery from the recession has been weak and fragile. Output grew by less than 1% in 2011 and s forecast to have been zero or mildly negative in 2012

3.  Weak private sector: A key weakness for the UK has been the low growth of private sector demand. Consumer spending on goods and services fell by more than 3% in the 2009 recession and fell again in 2011. A number of factors are holding back consumption including falling real incomes, low confidence, high levels of existing household debt and the high cost of unsecured loans

4.  Low investment: Business capital spending has also been low – it collapsed by nearly 14% in 2009 and has struggled to recover momentum ever since despite many businesses holding record levels of cash.

5.  Credit scarcity: The private sector in the UK has been weak in part because of the lack of credit from the financial system. Many commercial banks continue to de-leverage (i.e. cut their loan books) and business finance is hard to get at an affordable rate of interest. Several policies have been introduced in the last two years to encourage more lending, but with mixed results thus far

6.  Slow export growth: Exports were expected to be a driver of recovery for the UK especially after the 25% depreciation of sterling in 2008-09. But after two relatively good years in 2010 and 2011, the rate of growth of exports sold overseas has dropped once more.

7.  Spare capacity: The result of weak growth in the last few years is that the UK economy is operating with a negative output gap – GDP is well down on potential output and one consequence is a high rate of unemployment. That said, the 8% unemployment rate is lower than after previous recessions although long-term unemployment and youth jobless rates are two difficult structural problems

8.  Fiscal debt and fiscal austerity: The high level of government borrowing is shown in the table with figures for the annual fiscal deficit. Peaking at over 10% of GDP in 2009 and 2010, the Coalition government have made deficit reduction a key pillar of their macroeconomic policies and have focused on spending cuts rather than tax rises as part of their fiscal austerity programme.

9.  Inflation and real incomes: Inflation in the UK has been above the 2% target for CPI over most of the last five years. External factors such as high global commodity prices, a weaker currency and the rising price of energy have been three important reasons for inflation staying above target range

10.  Trade deficits: The UK continues to run a current account deficit on the balance of payments, the main reason for this is the widening trade deficit in goods which rose above £100 bn for the first time in 2011.

Output for the UK economy in the recession in the years 2008-09 fell by 6% from peak to trough and recovery since then has been slow and fragile. The UK suffered a deeper recession and has seen a weaker recovery than many other nations. Several factors help to explain this slow growth:

  • Falling consumer spending as real incomes have contracted and millions of people have struggled to pay off existing debts
  • Low business confidence and weak demand has held back capital investment spending
  • Export growth has been affected by low demand in the EU (Britain’s biggest export markets) and difficulties among exporting businesses in securing export finance / trade credit
  • Increasingly deep cuts in the real level of government spending and rising taxes as part of the Coalition’s fiscal austerity programme
  • Demand has not responded as much as expected to a period of expansionary monetary policy including record low base interest rates, quantitative easing and a new credit easing scheme

Download my latest UK economy presentation using this link: UK Economy Presentation (Geoff Riley - January 2013)

UK economy could face groundhog day in 2013 (Guardian)

UK economy faces another hard grind in 2013 (Telegraph)

Financial Times survey of economists - prospects for 2013




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