Tutor2u UK economy update May 2018

Tutor2U study notes on key areas

Full page with many more study note sections at the bottom is here.

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.

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)
• 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

Unemployment for 16-24 year olds in UK is 12%, down from 20% in 2010
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

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:

• 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

Cyclical vs Structural Budget Deficits - revision video

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AS Revision videos

Follow the link for an extensive list of revision videos from tutor2u:

AS revision videos - various

An idea on building evaluation points for any topic:

A relatively simple method to help you memorise evaluation points.

Marginal gains - are you:

AS/A2 UK Economy 2015 update and more:

tutor2u: A recording of last night's UK Economy in 2015 - Exam Revision Webinar is now available to view on the tutor2u Economics Channel here: UK Economy in 2015 - Exam Revision Webinar To support the topics covered during the webinar, you might also want to make use of this new series of Macro study notes: AS Macro Study Notes In the run-up to the AS Macro exam on Tuesday, don't forget to follow Geoff on Twitter and also the main tutor2u Economics account.

Revision webinars from tutor2u

please use the link to check dates and times for different topics; all units will be covered:

http://beta.tutor2u.net/economics/blog/economics-revision-webinars-with-geoff-riley