英国宏观经济分析 2015年

Course: Business Economics Module: Macro Economics Reg. No: 23036792

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The Macroeconomic Fundamentals of the UK & Suggestions for Policies to

Improve Economics

Table of Contents

Introduction........................................................................................................... 2 Main Body .............................................................................................................. 3

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Section A. Recent trends and the current state of the economy................. 3 1. The Real GDP of UK............................................................................... 3 2. The Unemployment Rate........................................................................ 5 3. The Inflation Rate ................................................................................... 6 4. The Interest Rate..................................................................................... 7 5. The level of Stock Market ...................................................................... 8 6. The Exchange Rate ................................................................................. 9

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Section B. Predictions for the nearest future ............................................. 10 1. Raising interest rates .......................................................................... 10 2. The European Union............................................................................. 11 3. The Taxation ........................................................................................ 12 4. The Unemployment ............................................................................. 13

Conclusion ............................................................................................................ 14 Reference ............................................................................................................... 14

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Introduction

The British economy overcame the effects of the world economic recession and sustained a steady economic growth with high employment, low prices and welfare improvement in the last 10 years. As the fifth biggest economy in the world and the second largest economy in the European Union, and it also becomes an only Western power for no sliding into recession. Therefore, the British economy was enjoying its longest period of sustained growth over the past 200 years. In the News Media survey, UK is likely to have a prolonged period for higher debt, deficit-cutting and high tax rate after the election, although the economy resumes a normal rate of growth (BBC NEWS, 2015). The British economy is at a key stage of stabilizing the economic recovery. The economic achievements should be attempted to keep, and the highlighting problems and contradictions also should be handled properly for next stage of the economy running smoothly. If the macroeconomic policies of its time, intensity and focus should be managed well, the policy will be improved continuously and specifically according to the new situation. This report is investigated to express and discuss economic policy and the economy of the United Kingdom. Moreover, the report is separated into two sections which are section A and section B. The majority contents of section A are recent trends and the current state of the UK economy and then the predictions for the nearest futures are discussed in section B. In addition, the report will end by a conclusion and a recommendation for the future research.

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Main Body  Section A. Recent trends and the current state of the economy 1. The Real GDP of UK 3.532.521.510.51 0.6 0.7 0.4 0.9 1.7 2.4 2.9 2.7 3 2.8 1.6 0201220132014Figure 1. UNITED KINGDOM GDP ANNUAL GROWTH RATE (Office for National Statistics, 2015) For a given country's economy, the gross domestic product (GDP) is a measurement of national net income and output. In addition, the Gross Domestic Product (GDP) is also one of the most significant indicators to measure the growth of countries’ economy (Trading Economics, 2015).

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Table 1. UNITED KINGDOM GDP ANNUAL GROWTH RATE (Trading Economics, 2015) Calendar 2015-01-27 GMT 09:30 AM 09:30 AM 09:30 AM Event GDP Growth Rate YoY Prel Q4 GDP Growth Rate YoY 2 Est Q4 GDP Growth Rate YoY Final Q4 Actual 2.7% Previous 2.6% Consensus 2.8% Forecast 2.91% 2015-02-26 2.7% 2.6% 2.7% 2.7% 2015-03-31

3.0% 2.8% (R) 2.7% 2.7% The UK had 2522.26 billion US dollars of the Gross Domestic Product (GDP) in 2013, with 4.07% of the world economy. (Trading Economics, 2015) The UK GDP Annual Growth Rate has been growing steadily over three years. In 2012 and 2013 the annual growth was 0.68% and 1.65% respectively. In 2014, the annual growth grew rapidly to 2.85%, and in the fourth quarter of 2014 the growth was even expanded to 3% which over the same quarter of 2013. From 1956 to 2014, the GDP Annual Growth Rate averaged 2.45% without any booms and busts. (Trading Economics, 2015) GDP growth has significantly declined from 3.0% (2014Q4, 03.2015) to 2.7% (01.2015 & 02.2015), and a further slowdown is expected in the third quarter of 2015.

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2. The Unemployment Rate

76.86.66.46.265.85.65.45.2504/201407/201410/201401/20156.8 6.6 6.5 6.4 6.2 6 6 6 5.8 5.7 5.7 5.6 Figure 2. UNITED KINGDOM UNEMPLOYMENT RATE (Office for National Statistics, 2015) The consumer spending and overall economic growth will be influenced significantly by Employment, which is one of the most important sources of personal revenue. Generally, a higher rate of unemployment represents the economy is performing a poorly or keeping a falling off Gross Domestic Product (GDP) (Mankiw, 2005). The statistics in Figure 2 represent that the rate of unemployment falls sharply during the last 12 years, from 6.8% (03.2014) to 5.7% (01.2015). Over the last three-quarters, the unemployment rate had small fluctuations about its average rate of 6.1% and the Unemployment Rate in the United Kingdom averaged 7.24% from 1971 to 2015 (Trading Economics, 2015). The Office for National Statistics (ONS) stated that the number of citizens in work reached the peak point, and the total number of jobless reduced by 102,000 to 1.86 million in one season to January (BBC NEWS, 2015). The Trading Economics shows the unemployment rate will decrease to 5.6% in the second quarter of 2015 (Trading Economics, 2015).

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3. The Inflation Rate 21.8 1.9 1.6 1.81.61.41.210.80.60.41.5 1.5 1.2 1.3 1 0.5 0.3 0 04/201407/201410/201401/20150 0.20Figure 3. UNITED KINGDOM INFLATION RATE (Office for National Statistics, 2015) Rising inflation would affect economic growth, in the long run; therefore it also can inhibit investment and decisions of consumption expenditures. For the future revenue and costs of firms, it would cause uncertainty and confusion (Mohanty, 2012). Rising inflation would affect the wage-price spiral effect and income redistribution, as the demands of higher salaries increased, hence moderate inflation can helpful to control the situation. From BBC News (2015), the official figures illustrate the UK inflation rate decreased to zero which is the lowest percentage since records began in February 2015. The inflation rate was recorded at 0% in March of 2015. From 19 to 2015, the inflation rate averaged 2.73%. The food, fuel, furniture & furnishings and a range of recreational goods caused a slowdown of the inflation rate (Anna, 2015). The inflation rate will keep 0% in the second quarter of 2015 (Bank of England, 2015).

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4. The Interest Rate Table 2. UNITED KINGDOM INTEREST RATE (X-Rates, 2015) Dates Interest Rate 07/14 0.5 08/14 0.5 09/14 0.5 10/14 0.5 11/14 0.5 12/14 0.5 01/14 0.5 02/14 0.5 03/14 0.5 The household wealth, investment, stock decisions, and lending will be affected by Interest rates in everyday life and business decision-making. Thus, lower interest rates and raising the price of shares will bring households wealthier. The citizens can also borrow more money and have seen repayments at their income. The consumption expenditures could be affected by all these aspects. That is the importance of setting interest rates to pursue an inflation target (Bjornland and Hungnes, 2006). According to the Bank of England’s Monetary Policy Committee voting, the Bank Rate at 0.5% was maintained at its April 9th, 2015 meeting. The Interest Rate in the United Kingdom never changed from 2011 and averaged 8.025% from 1971 to 2014. Current Bank rate is 0.5% (Taborda, 2015).

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5. The level of Stock Market

Figure 4. UNITED KINGDOM STOCK MARKET (FTSE 100) (Bank of England, 2015)

An index of expectations depends on the level of the stock market (Polk and Sapienza, 2008). Further, it proves to be a profitable way that relies on a rapid economic growth of investors’ expectation, high profits and low unemployment rate. The FTSE 100 is the main indicator used in UK stock market and it is also very convictive to analyze the general figure of the index fluctuations based on the constant changes (Emery, 2012).

This graph shows the FTSE 100 index fluctuations over the past five years. 6994.63 Index points were increased in April from 6773.04 Index points in March of 2015. Stock Market reached an all-time high of 7096.78 Index points in April of 2015. According to Trading Economics, the Stock Market will decrease in the second quarter of 2015.

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6. The Exchange Rate 0.650.0.630.620.607354 0.603888 0.601291 0.5925 0.597333 0.593831 0.60.591197 0.585723 0.590.639733 0.634134 0.622355 0.613578 0.610.580.570.560.55Figure 5. UNITED KINGDOM EXCHANGE RATE (Bank of England, 2015) Based on macroeconomic perspective, the exchange rate is a remarkable character in devoting to the economy balance of trade; hence a powerful sterling will cause UK exports-prize higher than before in abroad target markets adversely imports cheaper. The international investment will be influenced by fluctuations in exchange rates significantly. Furthermore, the foreign debt will be affected by exchange rates, but if the foreign debt is refer to USD, a weaker dollar exchange rate can help the debtors better-off (Arkolakis, 2011). The exchange rate fluctuations of last year are in the range of 0.56 ± 0.05, and the exchange rates was a steady increase from July 2014. The latest rate is 0.668340 on 17 April 2015.

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Section B. Predictions for the nearest future

1. Raising interest rates

In 2014, the Bank of England determined to remain the interest rate at 0.5% after the last MPC meeting (Trading Economics, 2015). Conversations around the Bank of England deciding whether to increase interest rates had begun to take place and lasted to December 2014. Some analysts believe that the tipping point will probably come to some time later in 2015. But many of them express it won't raise rates until the end of 2015.

The Bank of England slashed interest rates to 0.5% in March 2009 to combat the global financial crisis and the European debt crisis. At the same time, they carried out quantitative easing (QE). At present, the British economic growth has achieved the good effect. Nonetheless, a survey reveals that the Eurozone as the UK primary exports, their economy down slow posed downside risks to the British economy. John Longworth (2014), director-general of the British Chambers of Commerce (BCC), said the British economy is dependent on consumption and mortgage rates which mean it is interest-sensitive. Razing interest rate early would bring the significant risk for the British economy and hit trade investment. The BCC predicted the first interest rate rise would increase to 0.75% in the third quarter of 2015, and then the interest rates would reach 1.75% by the end of 2016.

Whereas, owing to the low inflation rate, weak export, and pressure of election, in fact, there are many views of no interest rate rise in 2015.

According to the relevant data, the UK consumer price index (CPI) rose 1.0% and reached the lowest record from September 2002. Therefore, it was lower than 2% of the Bank of England's target. Nordine Naam (2015) said that the interest rate would be hiked before the start of 2016, because of the UK weakness inflation rate less than 1%.

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Ross Walker, a senior analyst at Royal Bank of Scotland, expressed the first Bank of England rate would be hiked in February 2016. Therefore, the inflation rate and export demand had been falling in 2015 with the pressure of election. Thus, the Bank of England (BoE) would push back on the rate hike.

Most home-buyer can cope with the rate hike, and then the household expenditure would be affected by the interest rate rise, the Bank of England (BoE) said (MILLIKEN, 2014).

It can be perceived that the Bank of England (BoE) has a significant change in the problem of influence on family finances with a rate hike. It also should step up the pace to increase the interest rate. In spite of that the Bank of England (BoE) turbid signaled on the rate hike. 2. The European Union

The British policy will be affected by the forthcoming election in 2015. The Conservatives win this election; a controversy of EU referendums will achieve in the future. The British Prime Minister David Cameron (2015) indicated, if the Conservatives win this election, EU referendums will hold on 2017. He emphasized, if the profit of EU is inconsistent with UK, Britain has opted out of EU. In reality, it is a double-edged sword for UK and EU.

In EU sense, the UK economy occupies the second position in the Members of EU. Out of the EU will leaving EU to contend with heavy losses, and then the economic and political power will become severely weakened. In the total annual budget, the British contribution ranked third after Italy and France, they also make up 12.5% of the budget. Hence, if the Britain opts out of EU, the EU will lose one of the pillars. The UK will become a dreadful potential precedent, and EU would not be an attractive organization. These member states will lose confidence in EU, and it will become an obstacle to European integration. The process of European integration

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could without UK, because of the British political advantage, geographical location, and history.

Notwithstanding, UK also should pay a high price for withdraw EU. Once UK opts out of EU, it will lose a kind of protection measures from EU. Furthermore, UK could not enjoy equal position to have trade negotiations with outside organizations as other membership of EU. EU referendums are going to discourage confidence of business and unwilling to invest lead to the British stricken financial industry. London is the financial capital of Europe which will be shaken. Thus, UK also could not enjoy the diplomatic and political influence of EU, and the British influence could be diluted. 3. The Taxation

Before the election, the British political parties make the changes and promise for the housing policies.

The British shadow chancellor Ed Balls (2014) said, if the British Labour party wins the votes, the property owners will be faced with paying \"mansion tax\". The property owners on home worth more than 2 million pounds That means it may devote increased revenue about 1.2 billion pounds per year to helping NHS. The core of financial budget is improving NHS. Additionally, if the Labour comes to power, Ed Balls hopes the Labour will solve practical problems in the first year.

In accordance with analysts, \"mansion tax\" has a significant influence on productive people, and they should pay more money about £250 per month. However, the poor can put off to sell a house. It’s a statistical fact that 88% of the house property will face \"mansion tax\" in the London area. In conclusion, high-end markets of the house property will stagnate before the election.

In comparison on Conservatives, the British Prime Minister David Cameron had promised that if the Conservatives win the election, there are 20% discount at below

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the market price for under 40-year first-time buyers in England. The program is only for young people in England to help them buy houses within the UK.

The stamp duty has attracted the most attention in recently. According to BBC News, the stamp duty had cut 98% of homebuyers, but for those buyers who purchase the mansion, they need to pay more taxes. On the surface, the British government encourages and meets the general demand for housing, and then it also attack speculative home purchases.

However, some analysts point out that the new tax system is designed to protect the benefits of people who intend to invest on houses. It will cause the rise of the house price. That means the house prices depends on taxes.

Nevertheless, other critics indicate that the suppressive growth of house price returns to nothing about George Osborne’s tax reform. 4. The Unemployment

Since 2010, the UK government endeavored to cut public sector spending and controlled social welfare system on a large scale, and then they encouraged jobless to work.

Naturally, the British Prime Minister David Cameron (2015) indicated, if migrants have not found work, they should leave UK after six months. The new EU migrants will get welfare only after four years to keep UK’s benefits lead to less attractive. German Chancellor Angela Merkel (2015) said, she would rather see the British withdraw from the EU than unwilling to compromise on the principle of freedom of movement for EU workers.

Thus, the government should provide support and help for youth employment, and then it also offer financial and technical support for self-employed. In particular, the

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government should encourage participating in various training for job seekers, so that improve the success rate of employment.

Conclusion

In conclusion, the British economy has to recover fully from the failure, and then the British economic growth has achieved the good effect. In the course of this analysis, the government should keep carrying out quantitative easing (QE). Loosening monetary, stimulating supply side economics and fiscal policies should support to prevent and out of an economic recession. Furthermore, this election has brought confidence to the citizen. Additional research should focus not only upon rate hike because it depends on the trend of the inflation rate. Especially, the British influence could be diluted withdraw EU. Conversely, a new UK will infuse new blood into the Europe Union when some countries of EU membership faced a European debt crisis. This information should require further research.

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