Macroeconomics is the study of how a country’s economic works while trying to discern among good, better and best choices of improving and maintaining the nation’s standard of living and level of economic and societal well-being. Macroeconomic performance relies on measures of economic activity that focuses on variables and data at the national level within a specific period of time. A macroeconomic analysis entails aggregate measurements of national income, national output, unemployment, inflation and economic fluctuations.
A major focus of macroeconomic studies and analysis is the aggregate national output generated within an economy. Similar to firms or households, the national output of a country vary from time to time because of macroeconomic variables that fluctuates based on several invariants specific to a country, a region or the entire global economic system. The analysis of macroeconomics is to measure the rate of economic growth of a country usually done every year for comparative and planning purposes. Besides, planning and forecasting, macro-economic analyses allows for the determination of the employment levels and price adjustments to ensure that economic growth is at pace with general price levels to avert inflations or deflations.
The choice of the United Kingdom, otherwise known as Britain for macroeconomic analysis is because of its current and ongoing peculiarities which have had significant influence on the economy. The desire by the British people to exit the European trading bloc, the European Union, through a referendum has led to a variation in several macroeconomic factors, and could possible get worse or better depending on the perspective one takes. In this study, we take a detail look at GDP growth, the labor market, the productivity, inflation, consumer spending, trade and public finance.
GDP growth
The pace of domestic economic activity in the United Kingdom has been moderate despite a strong exports outlook riding on a faster world trade growth. It has however rebounded from the financial crises of 2008.In the latest reports, the economy has performed better than forecasted. It was robust in the beginning of the second half of the year buoyed by the services sector as well as the both the consumer confidence and the rising Purchasing Managers index. This growth though, will be limping going forward because the temporary factors that sustained the high growth activity begin to subside. Fixed and long haul investments in the country will be greatly hampered by the Brexit uncertainties with the possibility of a reaching a no deal becoming more pronounced than before. Going ahead, it a weaker pound will provide a slight reprieve but a failure to reach an agreement with the EU before the UK ‘crash out’ in March 2019 could be a major downside. So far, GDP estimates for 2018 stands at 1.3% while 2019 estimates stands at 1.4%. However, International Monetary Fund had slashed the 2018 forecasts from 1.3% to 1.1 as the uncertainties of Brexit weighs more on trade, investment and labour logistics. These are heavily reliant on the ongoing negotiations between the UK and the EU on the modalities of relationship after the March 2019 deadline (Partington, 2018).
The labour market
At the moment, the headline unemployment rate, which measures the percentage of British workforce who wants a job but don’t have one fell to a historic low of 4.1%. This marks the second consecutive month of a falling headline jobless rate. The United Kingdom’s low unemployment rate has been one of the major economic success stories in the past years. Initially, the growth in employment was led by part-timers then followed by self-employed people, but at the moment, the growth has broadened to include full time employees. Despite the impressive unemployment decline, there is a challenge with stagnated real wages. After the recession, and as the overall economic growth began to rise, real wages had started to recover as unemployment went down marking a significant period in the UK labour market (Rozario, 2018). However, with the onset of Brexit Vote campaigns and the resultant negotiations, offers and counter-offers, real wage began to fall because of the depreciation of the sterling pound. The current unemployment stands at 4% while regular weekly earnings growth in the three months to July was at 2.9%.
After recession, around 2010, the labor market data across the UK were great. Numbers in employment went up steadily through to 2015 as unemployment rate drastically went declined from a high of 8.5%in 2010 to the current 4%. Further, the number and proportions of people in work remains close to record levels despite some uncertainties that unemployment would rise following the March 2019 UK’s formal withdrawal from the EU bloc. Essentially, the current employment growth has come from all spectrums of the labour market: part-time, full time and self-employed workers. Still, even with Brexit fears palpable, the overall unemployment rate has tumbled over the past four years from eight percent in January 2013 to a 40 year low of 4.1%, however the rate of decline has stagnated presumably from the fears of EU citizens’ resident in the UK fearing for the worst. Real wages have finally started rising faster than prices of basic commodities as the effect of weaker pound start to disappear from the inflation index.
However, growth in pay still lags behind in historical norms. According to reports from the Office of National Statistics, “there is a growing demand for people is now pushing against the capacity of labor market, especially in demand sectors and growing regions. The situation is only exacerbated by continued decrease in the number of EU nationals choosing to work in the UK. For UK business to continue to flourish, it is critical that there is a comprehensive mobility and migration deal with the EU post-Brexit, so firms have the capacity to invest and grow in the United Kingdom.”
In summary, the latest batch of labor market data shows that competition for workers in the United Kingdom economy remain intense with the unemployment rate lowest it has been since mid-1970s.The employment rate is near it’s all time high and job vacancies the highest they have ever been, and growing. Fortunately also, the tight labor market conditions finally appear to be driving up pay growth. In comparing July 2018 and July 2019pay grew 3.1% which was the largest increase in three years. It is expected that in the coming months, pay growth is anticipated to continue to accelerate in conformity with tightening labor market reforms.
Productivity
This is a measure of the how much economic output is generated for a unit of input. The United Kingdom has for long been operating at a low productivity level compared to its peers across Europe and globally. For many decades, before the financial crisis of 2008, UK productivity tended to grow marginally at a stable pace of around 2% annually whether measured by output per worker, output per hour worked or the efficiency of both labour and capital used. According to data from the Office of National Statistics, the UK labor productivity in quarter 1 of 2018 as measured by output per hour grew by 0.9%compared to the same quarter previous year. This is below the pre-crisis average of 2% and continues the productivity puzzle that has continually kept manifest in the UK for long. Interestingly still, new analysis by ONS shows that businesses who trade in goods internationally were on average about 70% more productive than businesses that did not and about 20% more productive after controlling for their size, ownership and industry.
This possibly foretells of challenging times ahead for the UK businesses, if an amicable solution is not found EU companies and nationals currently working in UK. This is because companies engaged in international trade will most likely relocate to other European countries that will avert them the need to pay cross-border tax within the European Union. In which case, national productivity levels for the UK will further drop compared to their peers in Europe. As a measure of national macroeconomic performance, productivity is supposed to be used as a benchmark by countries within the same trading bloc to assess their efficiency and the wellbeing of their productive assets and capital.
Most intriguing and of importance is the relationship between trade and productivity. According to data from the Office of National Statistics, businesses that declare trade in goods were on average about 70% more productive than those that did not, and about 20%more productive after controlling for size, ownership and industry. Businesses with some trade in goods accounted for around 40% of all employment in 2017.
Considering that Brexit is becoming a reality, manufacturing and service enterprises across UK have been challenged to match their productivity their peers especially in France and Germany. This will allow their goods to compete favorably with those from across EU as well as retain top talents. Low productivity has an influence on wages and jobs growth because less productive enterprise mostly suffer overheads related to the inefficiencies which eats into their margins and eventually net income. This translates to a small workforce that can be sustained during challenging economic times.
Since 2007, there has been a huge shift from growth in output underpinned by improved efficiency of the workforce towards an all additional growth coming from more workers employed for longer hours. Despite a number of false dawns, there is no sign of the recovery in productivity growth that is needed for sustainable rise in living standards. Most of the other advanced economies have experienced slowdown in productivity growth since the financial crisis. But this has been more pronounced in the UK than elsewhere. To resolve the puzzle, policymakers are now trying to find solutions to the slowdown whether through industrial strategy or expanding the remit of the Bank of England.
Inflation and interest rates
This refers to the rate of increase in prices for goods and services. Measures of inflation and prices include consumer price inflation, producer price inflation, the house price index, index of private housing rental prices and construcuition output prices. In the United Kingdom, the most important categories in the consumer price index are Transport (16%) and Recreation and Culture (15%). Housing, water, electricity, gas and other fuels account for 13%, restaurants and hotels account for 12%, food and non-alcoholic beverages account for 10%.
In 2018, consumer price inflation rose at an annual rate of 2.5per cent in July after holding at 2.4%previously. In average, earnings including bonuses rose an annual 2.4%in the three months to June thereby extending a long-run of pay rises below the pre financial crisis levels. It is however noted that the inflationary behavior was largely contributed to by one-off factors such as the increase in the prices of computer games and transport fare. The Bank of England has set a target forecast of inflation at 2% in two years’ time, but this is subject to the pertinent of Brexit and fears its portents going ahead. The retail price index rose by 3.2% the weakest it has attained since March 2017 occasioned by variety of factors including the oil price pressure, manufacturing costs as well as housing market prices. For instance the house prices have risen 3% annually since 2013.
In 2014 and 2015, the exceptionally low inflation driven largely by falling oil prices, supermarket price wars and the dwindling strength of the sterling keeps down the cost of imports has been a boon for households’ finances. But the sharp fall in the value of sterling since the vote to leave the EU means that imports have become more expensive and inflation has risen well above the Bank of England’s 2 percent target.
The Bank of England increased interest rates above the 0.5 per cent ‘emergency levels’ they were cut to in 2009 for the first time in 2018. The markets are currently speculating whether the central bank’s decision was prudent enough considering the Brexit process is underway and anything is possible.
Initially the Central Bank of England cut interest rates in the wake of the Brexit referendum but the cut has since been reversed as the economy has been stronger than the Central bank initially expected. In 2018 though, the monetary policy committee unanimously voted to raise interest rates in Augist 2018 on concerns that inflation pressures may soon begin to pick up. Households in position to buy property can enjoy the benefits of low interest rates as it lasts. Those who can afford to make big deposits are currently able to borrow cheaply.
Trade and public finances
Despite numerous attempts by successive governments, imports have weighed in on exports for a long time. The current account deficit has however not been reflected in the financial market that has been relaxed throughout. There is a lingering vulnerability to external shocks, though, and this need be addressed to avoid projecting the country to unforeseen vagaries of global economic windfalls. Specifically, the UK exports more services than imports but reverse is true for goods which drags down the UK’s net trade position in comparison the rest of the world. In 2016, the current account deficit deteriorated sharply because of fall in receipts from investments overseas and the increase in payments from UK to foreign investors. This situation has been put under control by recovery of earnings by UK’s overseas investments as well as favorable movements in the exchange rates after the Brexit vote. In regional perspective, the UK’s balance of payment deficit with the EU widened significantly after 2010 but has begun narrowing as growth in the euro zone has picked up and sterling has devalued against the euro.
Public spending cuts have been core theme since 2010 but the government is still struggling to contain the budget deficit. It has been greatly hampered by continuing weaknesses in economic growth and tax receipts. During and after the financial crisis of 2008/9, the UK experienced a sharp rise in public borrowing. Among the G7, large and advanced economies, only the US borrowed more as share of the national income than at the peak of the crisis than the UK did. But significant cuts to public spending and some tax increases since then have helped reduced public borrowing. The International Monetary Fund forecasted that the UK will borrow less than US, Japan and France but more than Canada and, Italy and Germany. Unfortunately though, the accumulated debt burden is still above 80 per cent of the GDP, the highest peacetime in a century. On a slightly positive note though, tax receipts have grown more strongly than the Office for Budget Responsibility had expected but fear lurks that this trend could be sluggish in future if productivity growth fails to keep up or the dynamics of the Brexit turns ugly leading to an unceremonious exit of the European Union trading bloc.
