UK ECONOMYSITUATION & PROSPECTSPeter MathesonEconomic CounsellorBritish Embassy, Washington D.C.January 2012              ...
The UK recovery faces significant headwinds     Quarterly GDP Growth                                                      ...
Growth is predicted to pickup after 2012     Annual GDP Growth Forecast    Source: OBR, Nov 2011                         2...
Trade and investment will drive the recovery        Contributions to GDP Growth                                           ...
By 2014 UK growth will be 2nd highest in the G7        Average annual GDP Growth forecasts             2011-13   2014-16  ...
Unemployment is lower in the UK than mostadvanced economies                                    Unemployment Rate (per cent...
A competitive pound offers opportunities for UKexporters    Sterling exchange rate index                                  ...
Geographical split of UK exports                        Distribution of UK Exports                                       A...
UK exports are diverse, with a mix ofgoods and services                                                                   ...
Growth Strategy: The UK aims to create themost competitive tax system in the G20                                     “The ...
The UK faces an exceptional fiscal challenge…      Advanced economies fiscal balances in 2011                             ...
Extra austerity measures announced in the AutumnStatement have put public finances back on track Government Deficit Target...
The OBR predicts that the Government willachieve its fiscal mandate In each Budget Report and statement on the economy, t...
CONCLUSIONS>   2012 will be a tough year for the UK economy;>   Growth expected to pick-up;>   The balance of growth will ...
15
The UK’s credible fiscal framework has kept the cost of issuing public debt down     Cost of issuing government debt – 10-...
Summary of Economic IndicatorsForecast by Office for Budget Responsibility (OBR), Nov 11                    OBR forecasts ...
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Uk economic outlook peter matheson, economic counsellor - british embassy washington dc - 25 january 2012

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Uk economic outlook peter matheson, economic counsellor - british embassy washington dc - 25 january 2012

  1. 1. UK ECONOMYSITUATION & PROSPECTSPeter MathesonEconomic CounsellorBritish Embassy, Washington D.C.January 2012 1
  2. 2. The UK recovery faces significant headwinds Quarterly GDP Growth Percentage change on previous quarter 1.5 2011 Q3 OBR forecast 1 0.5 0 -0.5 -1 -1.5 -2 -2.5 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: ONS and OBR forecast 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. 2 The biggest risk facing the UK economy is a crisis in the eurozone. Assuming this
  3. 3. Growth is predicted to pickup after 2012 Annual GDP Growth Forecast Source: OBR, Nov 2011 2011 2012 2013 2014 2015 2016 Annual GDP growth % 0.9 0.7 2.1 2.7 3.0 3.0 The OBR expect the economy to gain momentum through next year. Growth is expected to rise above its trend rate (2.3%) by 2014. 3
  4. 4. Trade and investment will drive the recovery Contributions to GDP Growth Contributions to annual GDP growth (percent) 3.5 OBR Forecast 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 2011 2012 2013 2014 2015 2016 Other Net Trade Investment GDP Source: OBR, Nov 2011 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. 4
  5. 5. By 2014 UK growth will be 2nd highest in the G7 Average annual GDP Growth forecasts 2011-13 2014-16 Average annual GDP growth (percent) 3.5 3 2.5 2 1.5 1 0.5 0 Italy Japan France UK Germany US Canada Source: IMF World Economic Outlook, September 2011 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. 5
  6. 6. Unemployment is lower in the UK than mostadvanced economies Unemployment Rate (per cent) 12 Historical Data IMF Forecasts Eurozone 10 France UK 8 US Germany 6 Japan 4 2 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: IMF World Economic Outlook Database, September 2011 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 6
  7. 7. A competitive pound offers opportunities for UKexporters Sterling exchange rate index Dollar & euro exchange rates to pound Sterling effective exchange rate index, 2007 = 100 Exchange rate to the pound 105 2.2 100 2 dollars per pound 95 1.8 90 1.6 85 1.4 80 euros per pound 1.2 75 70 1 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Source: Bank of England Source: Bank of England 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 7
  8. 8. Geographical split of UK exports Distribution of UK Exports Africa Australasia 3.9% Top 20 largest export markets for the UK 2.2% Other Asia Share of UK 2010 value in Export Market 12.3% Exports (%) £ billion 1 USA 16.5 72.21 Japan 2 Germany 8.9 38.71 2.0% 3 Netherlands 7.2 31.32 4 France 6.4 28.14 China Eurozone 2.3% 5 Ireland 5.8 25.32 42.2% 6 Belgium 3.7 16.27 Rest of Americas 7 Spain 3.5 15.08 4.5% 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 United States 13 Australia 1.9 8.39 16.5% 14 Singapore 1.6 7.11 15 Canada 1.6 7.03 Rest of Rest of EU 16 India 1.4 6.13 EFTA Europe 5.9% 17 Hong Kong 1.4 6.06 4.6% 3.4% 18 Denmark 1.3 5.67 19 Norway 1.3 5.50 Good and Services Exports in 2010 20 Saudi Arabia 1.2 5.41 Source: ONS Pink Book 2011 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 8
  9. 9. UK exports are diverse, with a mix ofgoods and services Goods Exports, 2010 Food, Semi- UK export split between goods and services beverages & tobacco Other Goods Manufact ured 4% 6% Goods £ billion value of UK exports (current prices) 11% 500 Total Exports 450 Chemicals Finished 19% 400 manufact 350 ured goods Services Exports 300 32% 250 Oil and other 200 Other Energy Motor consumer 13% Cars 150 goods 7% 8% Goods Exports 100 50 Services Exports, 2010 Transport 0 services Other 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 12% services 21% Source: ONS Travel services 12% The UK is a top ten global manufacturer, andgoods comprise over 60% of our exports. Other Financial business Within services exports, financial services are a services 25% services 30%huge strength. But three quarters of UK service 9
  10. 10. Growth Strategy: The UK aims to create themost competitive tax system in the G20 “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 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. 10
  11. 11. The UK faces an exceptional fiscal challenge… Advanced economies fiscal balances in 2011 Fiscal balance as a share of GDP in 2011 (defined as Public Spending minus Public Revenue) 15 Surplus 10 5 0 -5 Deficit -10 -15 Korea Luxembourg Greece Austria Ireland Netherlands Cyprus Slovenia Sweden Israel Malta Belgium Switzerland Estonia Hong Kong SAR Singapore Italy Japan Slovak Republic United Kingdom Australia Denmark Iceland Canada France Finland Germany Spain Czech Republic Portugal Norway United States New Zealand Taiwan Source: IMF World Economic Outlook, September 2011 According to the IMF, the UK is running one of the largest fiscal deficits in the advancedworld, which is not sustainable. In 2011, the IMF estimates the UK had the third largestfiscal deficit as a percentage of GDP in the G7. The fiscal deficit is the difference between public spending and Government revenue 11
  12. 12. Extra austerity measures announced in the AutumnStatement have put public finances back on track Government Deficit Target Government Debt Target Cyclically adjusted current balance (per cent of GDP) Public sector net debt (per cent of GDP) 2 80 78 1 76 0 74 72 -1 70 -2 68 -3 66 64 -4 62 -5 60 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 March 2011 Forecast March 2011 Forecast November 2011 Forecast excluding new austerity measures November 2011 Forecast excluding new austerity measures November 2011 Forecast with new austerity measures November 2011 Forecast with new austerity measures Source : OBR, Autumn 2011 Statement The sharp deterioration in public finances between March and November is clear by theshift from the blue line to the red dotted line in charts above. Without additional austeritymeasures, the government would have missed its debt and deficit targets. Consequently, the government announced additional savings of £8bn in 2015/16 and 12
  13. 13. The OBR predicts that the Government willachieve 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. 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 -5.5 -4.5 -4.6 -3.9 -2.7 -1.6 -0.6 0.5 current budget Public sector net debt 52.9 60.5 67.5 73.3 76.6 78.0 77.7 75.8 Source: OBR, November 2011 13
  14. 14. 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. 14
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  16. 16. The UK’s credible fiscal framework has kept the cost of issuing public debt down Cost of issuing government debt – 10-year yields Yield on 10-year government bonds 8 Italy 7 6 5 UK 4 France 3 Germany 2 US 1 0 Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011 Oct-2011 Source : DataStream Although the UK faces considerable fiscal challenges, the government’s commitment tohitting 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, haverisen substantially. This reflect investor fears of a eurozone crisis and its impact on the 16
  17. 17. Summary of Economic IndicatorsForecast by Office for Budget Responsibility (OBR), Nov 11 OBR forecasts (percentage change year on year, unless given) 2011 2012 2013 2014 2015Real GDP growth 0.9* 0.7 2.1 2.7 3.0CPI Inflation 4.5 2.7 2.1 2.0 2.0ILO unemployment rate (%) 8.1 8.7 8.6 8.0 7.2Current Account (%GDP) -2.3 -2.6 -1.8 -1.6 -1.4 2011-12 2012-13 2013-14 2014-15 2015-16Public net borrowing (%GDP) 8.4 7.6 6.0 4.5 2.9The next OBR forecasts will be released with the 2012 Spring Budget. 17

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