Transcript Extract 1 Part 1x

Extract 1: The UK
Economic Recovery
Extract 1: Specification Topics
Page 4
• Students should be able to
1. Show awareness of recent macroeconomic performance
of the UK and the different aims of macro policies
2. Distinguish between short-run and long-run growth
3. Describe & understand the different stages of the cycle
4. Analyse the nature and significance of output gaps
5. Define the national income multiplier and explain what
determines its size
6. Evaluate the consequences of economic growth for
employment and unemployment
Drawing out the key issues in Extract 1
• Why was economic recovery in the UK delayed?
• Have some of the structural problems facing the UK
improved over the last few years?
• Has the economy achieved some re-balancing?
• Has UK manufacturing enjoyed a strong recovery?
• Will the recession have a damaging long-term effect?
• What are the consequences of falling real wages and
falling real per capita incomes?
• To what extent has the Coalition’s fiscal policy helped to
bring about recovery?
• Will rising public and private sector debt harm prospects
for economic recovery beyond the next election?
Extract 1: Recovery in the UK Economy
Page 4
Real GDP: The volume of national output of goods and services
• UK GDP grew 0.6% in the second
quarter of 2013. This was double
the growth in the first quarter of
the year and, at an annualised
rate, equivalent to a 2.4% growth
in GDP. This was the first time
since the middle of 2011 that UK
national output had increased for
two consecutive quarters. Some
economists claimed that the UK’s
long-awaited recovery had finally
begun. The Chancellor of the
Exchequer, George Osborne,
claimed that the economy was
“healing”.
• Economic recovery a period of time
when real national output rises in
at least two consecutive quarters
• The annual rate of growth is the rate
of change over a twelve month
period. Actual GDP follows a cyclical
pattern around a longer term trend
• 2.4% annualised growth
represented a return to trend
growth for the UK although some
economists believe this rate may
have fallen because of the legacy
effects of the recession and the
global financial crisis (GFC).
Background on United Kingdom: (Pop 64.1m) (Data)
Recent Macroeconomic Data
Background Information
Latest annualised
GDP Growth (%)
2.6%
Currency unit
£
GDP per capita (US
$, PPP standard)
Exchange rate system
float
$35,013
Current policy interest
rate
0.5%
Inflation rate (%)
0.5%
Trade surplus or deficit? Def
Unemployment rate
(% of labour force)
5.8%
Current account
balance (% of GDP)
-4.4%
Fiscal balance (% of
GDP)
-5.8%
Main corporate tax rate
(per cent)
21%
Government debt (%
of GDP)
91%
Global competitiveness
ranking for 2014
9th
Yield on 10-Yr Govt
Bonds (%)
1.5%
Economic Freedom
Index Ranking
14th
Corruption Perception
Ranking
14th
Investment (% of
GDP) in 2012
15%
Other Indicators
Latest HDI ranking
14
% of population living
below their national
poverty line
n/a
Life Expectancy (years)
81.5
Rank for capacity to
attract skilled talent
5th
Rank for Innovation and
sophistication
8th
Gini coefficient (Latest
published estimate)
36.5
Chart: UK Real GDP & The Economic Cycle
Peak
Real GDP
recovers to
previous
peak
Recession
Fear of
double
dip
Chart: Annual Rate of Growth of Real GDP for the UK
One of the
features of the
UK has been the
stronger growth
story since 2013
Latest data on UK growth
can be found here
Extract 1: Recovery in the UK Economy
Page 4
Recovery phase: A recovery in real national output across sectors
• Positive signs that the UK had
entered the recovery phase of the
economic cycle included the broad
based nature of growth.
• Output had grown in all four
sectors – services, manufacturing,
construction and agriculture.
• Growth in services was 0.6% in the
second quarter of 2013 leaving its
total output only 0.2% below its
peak at the beginning of 2008.
Services make up around 80% of
UK GDP, so they provided the
largest contribution to growth.
• The UK is an economy dominated by
business and consumer services:
• In 2012, the service sector
accounted for 79% of GDP
• The production sector was 15%
• The construction sector was 6%
• In the 10 years up to 2012,
agriculture’s contribution to the UK,
measured as its share of UK Gross
Value Added (GVA), has fallen from
0.7% to 0.6%.
Read articles on the UK economic
recovery from the Guardian
Osborne and the March of the Makers!
In 2011 the UK Government put Manufacturing at the
heart of their economic growth plan
“We want the words ‘Made in Britain,’
‘Created in Britain,’ Designed in
Britain,’ ‘Invented in Britain’ to drive
our nation forward.
“A Britain carried aloft by the march
of the makers. That is how we will
create jobs and support families.”
George Osborne, 2011 Budget Speech
Examples of Manufacturing and Service Industries
Food processing
Hotels and
restaurants &
retail
Earth moving
equipment
Education, health
care, legal
services
Additive
manufacturing
(3D)
Transport and
logistics
Meaning and Importance of Value Added
Value added is the increase in the market value of goods or services
as a result of the production process. Value added excludes the
costs incurred in supplying the output of a good or service.
Value added = Value of production - Value of intermediate inputs
Low Value Added Industries
• Textiles
• Processed foods
• Farming
• Manufacturing assembly
• Social care
• Contract cleaning services
High Value Added Industries
• Information technology
• Renewable energy
• Precision engineering
• Life sciences
• Aerospace
• Bio-technology
Key Aspects of UK Manufacturing / Industrial Policy
• Key policy themes
• Boosting the
development of 11 key
sectors
• Supporting the
development of eight key
technologies
• Increasing access to
finance for businesses
• Developing the skills of
employees (human
capital) in key sectors
• Using public
procurement to create
opportunities for UK firms
and supply chains
• 11 Key Sectors for
Industrial Renewal
1. Aerospace
2. Agricultural technologies
3. Automotives
4. Construction
5. Information economy
6. International education
7. Life sciences
8. Nuclear
9. Offshore wind
10. Oil and gas
11. Professional and
business services
Eight Key Technologies for UK Competitiveness
•
•
•
•
•
•
•
•
Big data
Satellites
Robotics and autonomous systems
Synthetic biology
Regenerative medicine
Agri-science
Advanced materials
Energy storage
Apprenticeships – Manufacturing and Unemployment
• Extract 1 focuses heavily on manufacturing and unemployment issues
• The Coalition has tried to expand rapidly apprenticeship programmes
What role can UK government policy play in encouraging manufacturers
to offer apprenticeships – and encourage suitable people to apply?
Chart: Output Growth in Different Sectors
Manufacturing
output still lower
than in 2004
Sustained fall in real value added
in finance and insurance since
the start of 2009
Extract 1: Changes in UK Unemployment
Page 4
LFS Unemployment: This measures all those actively seeking and
available for work, whether or not they are claiming benefit
• Unemployment also
moved in the right
direction, falling from
its peak of 2.56
million in January
2013 to 2.51 million
in May 2013.
• Update: UK
Unemployment has
continued to fall since
May 2013 – dipping
below the 2 million
level in the summer
of 2014
Jan 2013
Latest data on UK unemployment can be found here
Video: Changing Pattern of Jobs in the UK economy
http://youtu.be/Yukqo4TaNmA
Extract 1: John van Reenen
Page 4
Sustainable: means 'enduring' and 'lasting' and 'to keep in being'
• “However, some economists
expressed concerns about the
strength of the UK economic
recovery and the extent to which
it could be sustained into the
future.”
• “John van Reenen, Professor of
Economics at the London School
of Economics, was concerned
about trends in the labour
market.”
• John van Reenen is one of the
leading economists at the LSE. He
co-wrote the Growth Commission
Report published in 2013.
• The report recommended several
key issues that needed to be
addressed to achieve sustainable
growth in the future – their report
emphasised the importance of
supply-side competitiveness in
driving macroeconomic
performance.
John van Reenen – LSE Growth Commission (2013)
• “What institutions and policies
are needed to sustain UK
economic growth in the dynamic
world economy of the twentyfirst century?”
• “After years of inadequate
investment in skills,
infrastructure and innovation,
there are longstanding structural
weaknesses in the economy, all
rooted in a failure to achieve
stable planning, strategic vision
and a political consensus on the
right policy framework to
support growth. This must
change if we are to meet our
current challenges and those
that may arise in the future.”
Extract 1: Recovery in the UK Economy
Page 4
Van Reenen identifies structural weaknesses in the UK labour market
• His concerns focused on two
aspects in particular. Since the
peak of the cycle in 2007 he
noted:
1. The continued rise in long term
unemployment, with more than
900,000 unemployed for more
than a year – 36% of the total
number of people unemployed
2. A fall in the employment rate
from 73.1% at the end of 2007
to 71.4% in 2013, despite the
rise in employment.
• The long term unemployed are
those who have been out of work
for at least a year
• Many face structural barriers and
structural disincentives to
successfully get back into formal,
paid work
• The employment rate is defined as
the percentage of the population of
working age that is in full-time or
part-time paid employment
• Reenen is arguing here that longterm unemployment is a lagging
indicator of the economic cycle.
Youth Jobless Rates – A Cross Country Comparison
Country
Youth Unemployment Rates (per cent)
Australia
13.2%
Greece
50.6%
France
25.4%
India
18.1%
Italy
43.9%
Japan
7.2%
Poland
23.2%
South Korea
8.7%
Spain
53.5%
Turkey
19.5%
United Kingdom
16.3%
United States
12.4%
Source: ILO and Trading Economics, Jan 2015
Long Term Unemployment Rates in the UK
John Van Reenen is
right to point out that
high long-term
unemployment is a
serious problem for
the British economy.
However, since 2013
that rate has fallen a
little to less than 35%
- and it is noticeably
lower than in the
recession of the early
1990s when it
peaked at nearly 45%
Consumer Price Inflation – A Cross Country Comparison
Country
Latest annual rate of consumer price inflation (%)
Australia
2.3%
Chile
4.6%
China
1.5%
France
0.1%
Greece
-2.6%
India
5.0%
Italy
0.0%
Japan
2.4%
Mexico
4.1%
Poland
-1.0%
Singapore
-0.2%
South Korea
0.8%
Spain
-1.0%
Turkey
8.2%
United Kingdom
0.5%
United States
0.8%
UK Employment and Unemployment Rates
At the end of 2007
the UK employment
rate was close to
73% and the
unemployment rate
was 5.3%
After the end of the
recession, the
employment rate
had dropped to
70.1% with LFS
unemployment
peaking at 8.6%
Employment rate now
back at 73% although
unemployment remains
higher than in 2007
Unemployment and the Risk of Hysteresis
• Van Reenen warned that these
trends could adversely affect the
future potential growth rate of the
economy.
• This section of the extract focuses
on the concept of hysteresis
• Hysteresis effects happen when a
sustained period of low aggregate
demand can lead to permanent
damage to the supply side of the
economy
Page 4
• The future potential growth rate is
measured by the estimated trend
growth of potential real GDP
• Potential national output is
determined largely by supply-side
factors including many linked to
the performance of the labour
market
• So a key analysis question is
• “How can high long-term
unemployment and a low
employment rate affect potential
GDP?”
Chart: Unemployment and Estimated UK Trend Growth
“Structural reforms need to be accelerated to
improve the UK economy’s skills base,
infrastructure, and competitiveness.”
(Source: IMF, June 2013)
Longer Term Economic & Social Effects of a Recession
Main effects of recession depend on its causes and how long it lasts
Long Term Economic
Consequences
Long Term Social Consequences
Rising structural long-term
unemployment rates
Falling real wages hits average living
standards
Low investment can reduce the
size of the capital stock
Widening inequality of income and
wealth
Persistent budget (fiscal) deficit
and rising national debt
Social costs / problems arising
from rising relative poverty
Recession and the Risk of Hysteresis
• The dictionary definition of hysteresis is “the lagging of an effect behind its
cause.” In macroeconomics it has become common to explain hysteresis as a
problem caused by a deep recession and persistently high unemployment.
1. Long-term unemployed workers can lose skills and motivation and may
become economically inactive, leaving the labour market
2. Businesses failing / closing down leaving depressed areas and regions
3. Other businesses making deep cuts in capital investment spending to a level
insufficient to replace worn out plant and machinery, as a result the capital
stock may decline – as a result, the rate of growth of labour productivity
suffers – we have seen this in the UK recently
4. Commercial banks that lose money in a recession become stricter with their
lending to businesses and households – leading to a significant contraction in
loan finance for the business sector – holding back much needed growth
5. A deep recession can cause lower tax revenues which might then result in
less investment in and maintenance of key public services and a drop in the
quality of a nation’s infrastructure. It also makes it much harder for the
Chancellor to control the size of the fiscal deficit
Causes of Shifts in the Production Possibility Frontier
Cause of an outward shift in the
Production Possibility Frontier
Comment on the shift in the PPF
• Higher productivity / efficiency
of factor inputs
This increases output per unit of
input used in production
• Better management of inputs
Improved management reduces
waste and improves quality
• Increase in the total stock of
capital and labour supply
e.g. from inward labour migration
/ capital investment
• Innovation and invention of
new products and resources
Improved production processes
again helps to boost efficiency
• Discovery / extraction of new
natural resources (land)
Discovery of viable land inputs is
important for many countries
Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Damaging effects of natural
disasters such as drought, a
tsunami and floods
Destruction / loss of factor inputs
caused by civil war and other
forms of conflict that last for
many years
Causes of an
inward shift of the
a nation’s PPF
Large scale net outward labour
migration e.g. due to a
depression that leads to a brain
drain of skilled workers
A trend decline in the
productivity of inputs perhaps
caused by a persistent economic
recession
Understanding: Structural Unemployment
Structural unemployment occurs when the demand for labour is
less than the supply of labour in an individual labour market
Decline of heavy
manufacturing
Occupational
immobility
Geographical
immobility
Robotics
replacing jobs
Foreign
competition –
rising imports
Long term
regional decline
Disincentives
e.g. the Poverty
Trap
Outsourcing of
production
overseas
“Labour Scarring Effects” from Unemployment
Loss of work experience
• Reduced employability from a depreciation of skills
• Gaps in people’s CVs may influence potential employers
• Decline in the quality of human capital / motivation
Loss of current and future income
• Vulnerability to consumer debt at very high interest rates
• Decline in physical health and increase in psychological stress
– much less likely that someone will find work again
Changing pattern of jobs in the economy
• New jobs in the recovery stage often different from lost ones
• Structural unemployment – i.e. occupational immobility –
makes it significantly harder to get people into the new jobs
Policies to Reduce Unemployment – Labour Demand
Macro Stimulus Policies (+ Multiplier Effects)
• Low interest rates and policies to increase business lending
• Depreciation in the exchange rate (to help exports)
• Infrastructure investment projects (fiscal policy)
Cutting the cost of employing workers
• Reductions in national insurance contributions (tax)
• Financial support for apprenticeship programmes
• Extra funding for regional policy – business grants
Supply-side Competitiveness Policies
• Reductions in corporation tax (to increase investment)
• Tax incentives for research / innovation spending
• Enterprise policies to lift the rate of new business start-ups
Policies to Reduce Unemployment – Labour Supply
Reducing occupational mobility
• Better funding for and more effective training
• Teaching new skills e.g. Coding for gaming, languages
• An expansion of apprenticeship / internship programmes
Improving geographical mobility
• Rise in house-building will help to keep property prices
lower and encourage more affordable rents
• Active regional policy to create new jobs and businesses
Stimulate stronger work incentives
• Higher minimum wage or a living wage
• Reductions in income tax / national insurance
• Welfare reforms to reduce the risk of the poverty trap
Evaluation: Key Barriers to Lowering Unemployment
• High levels of long-term structural unemployment in the UK
• There are pockets of exceptionally high unemployment and
low economic activity rates, high youth unemployment
• Hard to overcome the disincentive effects of
• A complex welfare benefits and tax system
• An unaffordable housing sector (both to buy and to rent)
• Low-paid jobs that keep families in relative poverty
• High costs and uneven availability of quality child care
• High rates of public sector dependency in some areas
• Many people are under-employed, stuck in part-time jobs
• Skills shortages, creaking infrastructure, + huge variations in
educational performance and opportunities
• Weak demand in domestic & export markets e.g. EU
Extract 1: Views of David Blanchflower
• I see little prospect that this
growth rate will be sustained
into the future, despite what
George Osborne says.
• There is scant evidence that any
of the four components of
growth – investment,
consumption, net trade or
government expenditure – are
at ‘blast-off stage’ and net
business lending continues to
fall.
Page 4
• David Blanchflower is a Keynesian
economist who has been fiercely
critical of the economic policies of
the Coalition Government
• He was a member of the UK
Monetary Policy Committee for
three years and widely regarded
as a “doveish” member
• This meant that he feared the risks
of deflation and semi-permanent
recession and thus wanted to keep
policy interest rates low + expand
the BoE programme of
quantitative easing (QE)
Explore: Read David Blanchflower in regular articles in the Independent newspaper
Extract 1: Views of David Blanchflower
• “We need to remind
ourselves that the (UK)
economy has only grown
1.8% in total over the past
11 quarters and, of that,
0.7% is due to investment
in the Olympics.”
• “In contrast, over the same
period, both Canada and
the United States of
America grew by 5%.”
• “Most forecasters are not
expecting much, if any,
growth in the second half
of the year.”
Page 4
• How might the 2012 London Olympics
have provided a boost to economic
growth?
1. Investment in constructing the
Olympic Park and other venues
2. Investment in extra traffic capacity
3. Injections into the circular flow from
tourist and business visitors
4. Legacy effects including post
Olympics FDI projects attracted into
the UK
• The multiplier effects of events such as
the Olympic Games are contested
• Not least whether the Olympics has
benefitted regional balance
Extract 1: Views of David Blanchflower
• The economy that Osborne
inherited was also growing
at 0.6% per quarter, and
that continued for a couple
more quarters until his
reckless austerity policy
and talking down of the
economy took effect. Plus
he still has no growth plan.
• Moreover, the last time
there was growth of 0.6%
was in the third quarter of
2011 which was followed by
–0.1%, zero and –0.5%
growth in the following
three quarters.
Page 4
“Talking down of the economy”
• This reflects a Keynesian view that
consumer and business confidence (or
Keynesian animal spirits) can have a
significant effect on household spending
and business investment.
“Reckless austerity policy”
• Ahead of the exam, be clear on some of
the key aspects of the Coalition’s fiscal
policy since they came into office in May
2010. Their main aim has been budget
deficit reduction through a mixture of
tax rises and cuts in the real level of
government spending in some areas.
• The last section on the left refers to risks
of a double-dip recession in 2011-12