Economics Exam Context for 2018

Here are some short summaries of key exam context for topical economics exam issues ahead of the June 2018 papers. We will be adding to this resource on a daily basis.

Economic Wellbeing

A selection of wellbeing indicators for the UK in 2016 and 2017 are summarised below (Source: ONS)

• Healthy life expectancy: Males 63.1 years, Females: 63.7 years
• proportion of people aged 16 and over in England who reported feelings of loneliness often or always was 5.4% in the year ending March 2017.
• 16% of UK households living with less than 60% of median income before housing costs
• Median wealth per household, including pension wealth was £259,400 in 2016
• Real median household income was £27,310 in the UK in the year ending March 2017
• In 2017, 8.0% of UK residents had no qualifications
• 8.9% of energy consumption came from renewable sources in 2016. (up from 4.3% in 2011)
• Household recycling rate for UK in 2016 was 44.6%

Update on the Global Economy in 2017 (Source: IMF World Economic Outlook, March 2018)

World economy grew 3.8% in 2017 – this is the fastest rate since 2011

• Advanced countries grew 2.3% on average
• Emerging and Developing nations grew 4.9%
• China 6.9%, India 6.7%
• Sub Saharan Africa 2.8%

Global trade in goods & services rose 4.9%
Commodity prices climbed 17%, including crude prices jumping to $65 per barrel
IMF believes that support for globalisation is weakening - NAFTA being challenged, Brexit, rise in non-tariff barriers + looming trade war between the US and China
IMF estimate - a 10 percent increase in import prices everywhere from tariffs & quotas —lowers global output and consumption by about 2 per cent after 5 years

Brexit and EU/UK Trade

Importance of trade with the EU:

• 44% of all UK exports were sold to the EU
• 53% of all UK imports came from the EU

Trade balance:

• UK ran a trade deficit with the EU in 2017 of £72 billion

Regional importance of trade with the EU

• 60% of Welsh exports go to the EU
• 59% of North East exports go to the EU

Average EU import tariffs (%) – relevant if a trade deal cannot be reached

• Dairy products 35%
• Cereals 13%
• Sugar and confectionery 24%
• Clothing 11%

Overseas aid from the UK

• In each year since 2013, UK overseas aid spending has been 0.7% of GNI
• In 2016, the UK spent £13.4 billion on overseas aid
• Five biggest recipients of bilateral aid are Pakistan, Syria, Ethiopia, Nigeria and Afghanistan. Aid to India has fallen sharply.
• Spending on humanitarian aid and supporting refugees has risen
• Spending on cancelling debt is now zero

Most UK aid is project aid

• Building antimicrobial resistance
• Sanitation and hygiene research
• Forest governance to help reduce the impact of deforestation

Unemployment in the UK Labour Market

• Unemployment continues to fall reaching 4.2% of the labour force in Feb 2018, 1.4 million people
• Youth unemployment has declined from 20% in 2012 to 12% in 2018 (520K people aged 16-24)
• The number of unemployed 16-24 year olds fell by 43% between 2010 and 2018.
• Unemployment currently at lowest rate since 1975
• Long-term jobless rate also declining to 1.1% of labour force (less than 25% of total jobless)
• Estimated NAIRU has dropped to 4.5% of labour force – has the Phillips Curve flattened?

However … dig underneath the aggregate data:

• Continued high levels of economic inactivity
• Under-employment remains a major factor - where workers stay in part-time, temporary or zero-hours contract roles because they cannot access full-time jobs - Under-employment estimated to be above Unemployment
• Declining median real wages and also many people who have a job experience in-work poverty and continue to rely on benefits

Youth Unemployment

In the UK:

• Unemployment for 16-24 year olds in UK is 12%, down from 20% in 2010
• The number of unemployed 16-24 year olds fell by 43% between 2010 and 2018.
• This is 525,000 young people
• 72,000 of young people have been unemployed for over a year

EU youth unemployment rates:

• Greece 44%
• Spain 37%
• Italy 34%
• UK 12%
• Germany 6%
• EU average is 16%

Relative poverty in the UK

• Relative poverty line for UK – households with income < 60% of median income in that year
• 2017 – 10.4 million people in relative low income before housing costs
• That figure rises to 14.3 million after housing costs (22% of the population)
• 2.7 million children live in relatively poor households, 4.1 million after housing costs
• This is 30% of all children
• Highest relative poverty is in London (28% of individuals)

The Minimum Wage

National Living Wage (NLW) replaced the adult minimum wage in 2016
Current rates from April 2018:

• Aged 25 and over £7.83 per hour
• Aged 21-24 years £7.38 per hour
• Aged 18-20 years £5.90 per hour
• Under 18 years £4.20 per hour
• Apprentice rate £3.70 per hour

Key points on the NLW:

• NLW is not tied to changes in inflation
• Living Wage is voluntary currently £10.20 per hour in London and £8.75 per hour elsewhere (employers can choose to pay)
• Government target is that NLW must reach 60% of median earnings by 2020. It is currently at 57% of median earnings.

Sub prime credit & household debt

• The UK Financial Conduct Authority is now responsible for monitoring high cost credit companies including pay-day lenders
• 2015 - price cap imposed on pay-day loans.
• Interest capped at 0.8% per day
• Default fees on a loan fixed at £15
• Total cost cap of 100% of loan value in default fees and interest
• Only two “roll-overs” allowed on each loan

Results of greater regulation of the sub prime credit market in the UK:

• Market for loans has got a lot smaller
• Many lenders have left the market – sub-normal profits cause firms to exit
• Loan sizes remain similar, longer repayment
• Default rates have halved
• Signs of shift to credit unions but some groups of consumers no longer have access to credit

Inflation

CPI inflation was 2.5% in March 2018
UK inflation was 2.7% in 2017, peaking at 3.0% in January 2018

Contrasting inflation rates in 2017 (Source: IMF)

• Germany 1.5%
• Cyprus -0.4% (deflation)
• Emerging market & developing nations 4.5%
• Venezuela 8,500% (March 2018)
• Argentina 25% (April 2018)
• India 4.5%

Central banks have different inflation targets

• Argentina: 15%
• India: 4% (+ or – 2%)
• Kenya: 5% (+ or – 2.5%)
• UK: 2%, Euro Zone: 2%, Japan: 2%
• Zambia: 9%

UK Current Account (BoP)

UK ran a record deficit of 5.6% of GDP in 2016. In 2017, the deficit came down to 4.1% = £82.9 billion

• UK trade deficit in goods: £136 billion
• UK trade surplus in services £107 billion
• UK trade balance in goods & services -£29bn

Current account deficit was amplified by a deficit in primary income (investment income) and secondary income (transfers)
Trade imbalances in the global economy (2017)

Current account surpluses:

• Germany 8.2% of GDP
• Singapore 19.6% of GDP
• South Korea 5.5% of GDP
• Taiwan 13.6% of GDP

Current account deficits:

• UK: 4.1% of GDP
• United States 3.0% of GDP
• Rwanda 9.6% of GDP
• Ethiopia 6.5% of GDP

The Productivity Gap

The UK continues to lag behind many other advanced economies in terms of output per hour worked. Productivity growth has been sluggish since the recession ended in 2010.

Some key factors behind the productivity gap:

1. Low rate of investment – many UK firms do not operate at the cutting edge of new technologies
2. Legacy effects of the banking crisis affecting lending to businesses who want to expand
3. Slowing rates of innovation – UK has low level of R&D spending (<2% of GDP annually)
4. Deep skills shortages in key industries
5. Relatively low levels of market competition – persistence of inefficient monopolies
6. Long tail of under-performing businesses and relative absence of globally-scaled corporations
7. Poor infrastructure e.g. in transport, telecoms and power leading to congestion & higher costs