UK Perspectives 2016: Trends in the UK economy

This article presents some key data on the UK economy and UK economic policy from 1980 until the present day, and covers three themes – economic output and trade, inflation and interest rates and public sector finances (deficits and debts).

Other economic aspects have been covered elsewhere in the UK Perspectives series, which presents an overview of the social and economic changes that have occurred in the UK over the last three decades.

Economic output and trade

Gross Domestic Product (GDP) is a measure of economic output produced within a country in a given period. Real GDP is a measure of economic output adjusted for price changes.

The UK economy is growing

Real GDP growth year-on-year, UK, 1980 to 2015

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Real GDP in the UK has typically increased every year. Over the period 1980 to 2015, real GDP growth has averaged 2.2% per year, although there have been three downturns in the economy since 1980. After the downturn in the early 1990s, the UK economy experienced 16 consecutive years of growth before output fell in 2008 and 2009. From 2010, output has been growing again – regaining pre-downturn levels in the third quarter of 2013. Real GDP grew by 2.3% between 2014 and 2015, down from a 2.9% growth rate between 2013 and 2014.

Real GDP per head, UK, 1980 to 2015

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The rate of growth in UK real GDP has exceeded the rate of growth in UK population since 1980, with real UK GDP per head 91% higher in 2015 than in 1980. In 2015, real GDP per head reached £27,505, which was the first time it was above the pre-economic downturn level (£27,183) in 2007.

UK productivity levels remain subdued

Productivity is one of the most important drivers of economic growth. Productivity measures how efficiently inputs, such as labour, are being used in the economy to produce a level of output. When productivity increases, more is produced with the same amount of inputs. This section focuses on labour productivity defined as output per hour worked.

Output per hour worked growth year-on-year, UK, 1980 to 2015

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Labour productivity has grown on average by 1.8% per year between 1980 and 2015. However, since the economic downturn in 2008 and 2009, productivity growth has increased much more slowly compared with its pre-downturn peak, fluctuating between -1% and 1% per year.

This recent weakness of UK labour productivity relative to its longer term trend has been labelled the ‘productivity puzzle’ and is likely to be caused by a number of factors, including weak consumer demand and businesses deciding to retain staff until demand picks up.

Exports and imports continue to increase, but the UK has run a trade deficit since 1998

Trade balance equals exports minus imports. A country has a trade surplus if it exports more than it imports (positive trade balance). A trade deficit occurs if a country imports more than it exports (negative trade balance).

Imports, exports and trade balance, UK, 1980 to 2015

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International trade can benefit consumers and producers, providing them with a wider range of goods and services.

In the UK imports and exports have been growing over time, both increasing by almost 90% since 2000. However, imports have been higher than exports since the late 1990s – meaning the UK has been running a trade deficit. The last time the UK ran a trade surplus was in 1997.

The UK balance of trade can be looked at in more detail by breaking it down into goods and services. The UK tends to run a deficit on its trade in goods (imports of goods exceed exports of goods), but a surplus on its services (exports of services exceed imports of services) balance of trade.

Inflation and interest rates

The Bank of England is responsible for price stability (inflation) in the UK. The inflation rate measures the rate at which the average prices of goods and services change, and the Bank of England’s goal is to maintain this rate close to the 2% target. The Bank of England inflation target is based on the Consumer Prices Index (CPI). The CPI is calculated using the prices of a specific “shopping basket” of items that is representative of consumer spending patterns on items such as energy, food and clothing.

Prices rose 0.3% in the year to April 2016

Inflation rate, January 1989 to April 2016

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Consumer prices rose 0.3% in the year ending April 2016, compared with a 0.5% increase in the previous month.

Interest rates are at record low levels

The Bank of England is responsible for maintaining price stability (controlling inflation) – it does so primarily by setting the 'base' interest rate.

Bank of England interest rates, 1 January 1980 to 12 May 20161

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The primary method that the Bank of England uses to maintain price stability is the interest rate at which it lends to financial institutions. This rate affects the rates set by other financial institutions, including lending rates offered to businesses and individuals.

The official bank rate has been 0.5% since March 2009, which is very low compared with historic trends. A low interest rate reduces the cost of borrowing and makes savings less attractive – so people invest and consume more.

Public sector finances (deficits and debts)2

If government spending is higher than income, it’s operating what is known as a deficit. Public sector net borrowing excluding public sector banks (PSNB ex) is the most widely accepted measure of the overall government deficit (or surplus).

The UK has typically been in deficit since 1980

UK government net borrowing (‘deficit’), financial year ending 1981 to financial year ending 2016

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Government expenditure has been larger than government income for most years since 1980, which is why the UK has typically been in deficit since 1980. Indeed, the UK Government has been in deficit in most years since the Second World War, when current records began.

In the financial year ending 2009, the deficit rose sharply following the global financial shock, peaking the following financial year at £154.7 billion. Since then the deficit has reduced to £74.0 billion (first estimate) in the financial year ending 2016.

UK government debt as a percentage of GDP has been rising

The level of government debt indicates how much the government owes in total. It's broadly speaking an accumulation of each year’s deficit, and the government must pay interest payments on this debt. Government mainly raises money through issuing bonds (also known as 'gilts'). Bond interest rates are mostly fixed for the lifetime of the bond, the level at which that interest is set will reflect a number of factors, including market interest rates and the perceived ability of the government to pay back and service its debt. Interest rates on new UK government debt are currently very low.

UK government debt as a percentage of GDP, financial year ending 1980 to financial year ending 2016

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The government has operated a deficit most financial years since the financial year ending 1981. As a consequence, the total level of debt has also risen in almost every year since that time. In the financial year ending 2008, prior to the economic downturn, the level of debt was £562bn. By the financial year ending 2016, it had risen to £1,594 bn.

The level of debt is often expressed as a percentage of GDP. Debt ranged between 24.2% and 45.6% of GDP over the period financial year ending 1981 to financial year ending 2008. In the financial year ending 2016, it reached 83.5% of GDP.

Interest payments on public sector debt as a percentage of government expenditure, UK, financial year ending 1981 to financial year ending 2015 

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The size of the government debt affects the size of government interest repayments. As with other types of debt, the cost of interest repayments is affected both by the size of the debt and the interest rate. The interest to be paid on some government bonds is linked to inflation. The current relatively low inflation partly explains why debt interest payments as a share of government expenditure since financial year ending 2009 have remained below the share seen in the mid to late 1990s, despite the higher levels of the overall debt. Public sector debt interest as a percentage of total current expenditure in the financial year ending 2015 was 5.4%.

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