Prospects for the UK economy.

Kirby, Simon ; Barrell, Ray ; Whitworth, Rachel 等

The production of this forecast is supported by the Institute's Corporate Members: Abbey plc, Bank of England, Barclays Bank plc, HM Treasury, Nomura Research Institute Europe Ltd, and the Office for National Statistics.

Introduction

The UK economy has now enjoyed four consecutive quarters of expansion. Indeed GDP growth reached 1.2 per cent in the second quarter of this year, the fastest rate of growth in over a decade. The National Institute's estimate of monthly GDP suggests that the economy continued to expand in the third quarter of this year, but at a more modest pace of 0.5 per cent (see figure 1). Such a slowdown should not have come as a surprise. Persistently strong growth is unlikely in an economy where household balance sheets are still undergoing repair, funding channels to business remain impaired and the public sector is embarking on a significant programme of fiscal consolidation. However, we continue to think the chances of negative output growth in 2011 are about one in five and hence a double dip recession is unlikely.

Recent economic growth appears to have been largely driven by the inventory cycle. The corporate sector has returned to a period of stockbuilding, following the aggressive de-stocking undertaken in 2008 and 2009. As we discuss in the demand section, once the quarterly alignment adjustment is removed from the official figures the contribution of the change in inventories to strong growth in the second quarter is even more pronounced than it appears to be in the raw numbers. The inventory cycle appears to have turned far more rapidly than we had previously projected. The strength of demand in the first half of this year had led us to revise our forecast for GDP growth from 1.3 to 1.6 per cent per annum this year. Given that the inventory cycle is less drawn out in this forecast than the previous one, some of the upward adjustment to our projection for this year is at the expense of economic growth in 2011 and 2012. We have revised down our forecast for GDP growth in 2011 and 2012 by 0.1 and 0.2 percentage points respectively. While these numbers can not be deemed significantly different from our previous forecast, the pattern of a weak recovery remains. Growth of 1.6 per cent next year and 2 per cent in 2012 means that we expect the UK economy to record a further two years at or below trend growth of 2-2 1/4 per cent a year, implying a widening rather than narrowing output gap.

The weakness in demand over the short-term projection is due to both the household and public sectors simultaneously addressing the weakness of their balance sheets. GDP growth in the first half of this year had been supported by household and government spending, but we expect that this positive contribution to GDP growth has probably stopped, given the impact of the cutback in government spending planned for this year. Indeed real government investment has already started to shrink, falling by 9.6 per cent in the second quarter of this year. Consumer spending this year has been more buoyant than expected, but given weak income growth this has been at the expense of household saving. We do not expect this to persist. Our forecast shows the saving ratio rising over the forecast horizon as households continue to retrench through a combination of increased saving and reduced dis-saving.

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At their September meeting, the Monetary Policy Committee (MPC) voted to maintain the Bank's base rate at 0.5 per cent. The MPC have kept the base rate at this level for 20 months. Given that the full effect of changes in interest rates takes around two years, in normal times, the MPC must expect demand to remain weak with a degree of spare capacity persisting for some time, such that inflation will fall back sharply once the effect of temporary measures on prices has disappeared. The point at which the MPC is expected to enter a cycle of policy tightening has been pushed back by financial markets. In comparison to market expectations at the time of our July forecast, the MPC is expected to raise the Bank of England's base rate at a more gradual pace. GDP growth in the first half of this year should lead one to propose the opposite policy prescription. The MPC have also voted to keep the stock of assets (predominately gilts) purchased through the programme of quantitative easing (QE) at 200 billion [pounds sterling] (14 per cent of money GDP). Given the strong growth we have seen so far this year the case for further QE has weakened in the past three months.

An inflation rate currently above target (3.1 per cent in September) would appear to lend support to a policy of tighter monetary policy. However, as we discuss in the earnings and prices section, the inflation rate is currently above target mainly due to temporary factors. Looking at the two-year horizon (figure 2) we expect inflation to have fallen back below target. Although some of this fall is due primarily to the effect of the 2011 hike in VAT falling out of the calculation, the pattern beyond that is one of inflation around target. Further QE would appear to be unjustified at present, especially as there is a risk that fiscal policy cannot be tightened as quickly as the government would wish, as we discuss in Barrell and Kirby in this Review. However, there are uncertainties around our inflation forecast, as there are for any forecast. Figure 2 reports the 80, 85 and 90 per cent confidence intervals around our CPI inflation forecast, which have been derived from stochastic simulations using our global econometric model, NiGEM. (1)

One of the major uncertainties associated with our forecasts for both output and inflation is the impact of the exchange rate on the economy. Between the last quarter of 2007 and the second quarter of 2010, sterling depreciated by 20 per cent on a trade-weighted basis, with most of that taking place in the first few quarters. A weaker exchange rate should boost net exports and put some upward pressure on prices, but the extent to which this happens depends on why the exchange rate fell and how people react to it. The impact on inflation, often referred to as the degree of pass-through of the exchange rate to prices, will depend in part on events outside the UK. If there is no reason to believe that the fall in the exchange rate represents a change in the equilibrium real exchange rate, which is the relative price of domestic and foreign goods, then equilibrium can be achieved either with faster inflation at home or lower inflation abroad. If sterling fell because monetary policy was being tightened elsewhere, then it is possible the pass-through to UK prices would be limited. Indeed, one might say that on average pass-through is about 50 per cent as the causes of the shift are as likely to be foreign as domestic.

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Our output forecast is more muted than we might have expected given the fall in the exchange rate. Although the effect on exports and net trade volumes normally comes through quite slowly, it appears to have been slower in the past two years than in the early 1990s. Exporters have been maintaining their prices rather than expanding volumes, and hence output has grown more slowly than expected. Firms have been using the exchange rate depreciation to help rebuild their cash balances, which is not surprising given the severity of the recession and reported problems with bank lending over the same period. This balance between price and volume may change sharply as the economy recovers, and hence it adds to uncertainty over output growth. The recent slight appreciation of sterling is unlikely to impact on export volume growth significantly

Earnings and prices

Over the course of the recession unit labour costs have risen, and in 2009 they increased by 5.5 per cent a year. Labour costs should be expected to rise during a recession if the labour input and wages do not adjust in line with the fall in output. Labour input clearly fell during the course of this recession, but by the third quarter of 2009 the 4.1 per cent decline was significantly less than the 6.5 per cent fall in real GDP from its peak in the first quarter of 2008. Unit labour cost growth was moderated by the adjustment of nominal wages during the course of the recession. While there have been many reports of employees accepting wage freezes and even pay cuts, the response of nominal wages will be limited by some downward rigidity, especially for those employees whose pay is close to the National Minimum Wage. Even so, as Holland et al. (2010) have documented, the adjustment of real product wages has been fundamental to minimising the fall in employment in the UK.

We do not expect the growth rate of unit labour costs to remain so buoyant. In the first half of this year the growth rate has moderated sharply as the level of productivity has increased and wage growth has continued to be contained. The Average Weekly Earnings estimate of regular pay growth, a measure of underlying earnings growth, suggests this pattern of low nominal wage growth (falling real wages) has continued into the third quarter of this year, helped by a moderation in the growth of public sector pay. As figure 3 shows, we expect unit labour costs effectively to stagnate this year and next before returning to a path more consistent with the remit of monetary policy.

Figure 3 also reports the annual rate of growth of the GDP deflator. This measures final prices in the economy and can be viewed as a measure of the final price of goods and services produced by firms (as discussed in Solomou and Weale in this Review). Periods where unit labour costs grow at a rate above that of the GDP deflator suggest that it is possible that corporate profits might be squeezed. (2) Indeed, between 2008 and 2009 the profit share in the economy declined by 1 percentage point to 25.2 per cent. As table A6 shows, we expect this to be a temporary phenomenon and for corporate profitability to rise, as a share of GDP, over the next five years. We would expect such developments, given that the re-pricing of risk during the recent financial crisis should lead to higher rates of return from the financing of firms.

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The annual rate of CPI inflation has remained stable at 3.1 per cent in each of the three months to September 2010. While the rate of inflation has fallen back from its recent peak of 3.7 per cent per annum in April of this year, it is somewhat surprising that it has remained more than 1 percentage point above the target rate through the whole period since the third quarter of last year. The strength of price inflation this year is not a strong sign of general underlying inflationary pressure, but rather of temporary movements in relative prices. Import price inflation due to the depreciation of the sterling effective exchange rate since the end of 2007 along with the rise in oil prices during the course of last year are two such temporary factors that have pushed up inflation. The increase in the rate of inflation due to the return of the standard rate of VAT to 17.5 per cent has perhaps been more important. The Office for National Statistics (ONS) produces an inflation rate excluding indirect taxes which shows the annual rate of inflation on this basis was only around 1 1/2 per cent in the third quarter of this year, and has not been above the target rate of 2 per cent for the first nine months of this year. (3)

As figure 2 shows, we expect the rate of inflation to remain elevated next year, due to the planned increase in VAT to 20 per cent. By 2012 these temporary factors will have fully passed through and we expect the rate of consumer price inflation to drop below target to around 1.4 per cent. A consistent response by policymakers, given the remit of the Bank of England, would be to loosen monetary policy if they expect the inflation rate to dip below target in two years' time, (4) but given that the dip in prices is at least in part due to a base effect from the increase in VAT falling out of the calculation we would caution against loosening policy further (in the form of a further expansion of the Bank of England's balance sheet). This is especially crucial if government spending plans are to be 're-profiled' such that fiscal consolidation proves to be less of a drag on the economy than current plans would suggest, as discussed in Barrell and Kirby in this Review.

Demand

UK domestic demand grew by 1.2 per cent in both the first and second quarter of 2010, the most robust rates of growth since the third quarter of 2007. While domestic demand has surged ahead since the end of last year, the external sector's performance has disappointed, posing a drag on growth over this period. We do not expect the buoyancy in domestic demand to persist. The government spending cuts planned over the coming years are likely to have a retarding effect on demand in the short run. The future dynamics of domestic demand are forecast to be driven by private sector components. Both consumer spending and private investment growth have contributed positively to domestic demand growth, but the main driving force this year has been the contribution from the change in inventories. Our forecast for the components of demand is set out in table A3.

The inventory cycle was a major contributor to the sharp contraction of output in the UK over the period from the second quarter of 2008 into early 2009. The rate of destocking began to slow from mid-2009. By the second quarter of 2010 firms, in aggregate, had begun to replenish stock levels. The ONS includes the quarterly alignment adjustment for the whole of GDP into the figures for stockbuilding. It varies by quarter and as such can distort the contribution to GDP growth from the change in inventories. Figure 4 reports the contribution of the change in inventories to GDP growth, where the change in inventories both includes and excludes the adjustment. If we exclude the adjustment then it is clear that the inventory cycle had turned by the second quarter of last year, providing a positive contribution to GDP growth in each subsequent quarter. By the second quarter of 2010, the cumulative contribution to GDP growth from the change in inventories reached 2.1 percentage points. This has almost offset the negative contribution from the change in inventories since the onset of recession in the second quarter of 2008. The inventory cycle has turned more sharply than we had assumed in our July forecast, and this has led us to revise upwards GDP growth this year by bringing forward the contribution of stockbuilding to GDP growth we had previously projected in 2011 and 2012. The nature of recent strong growth has meant that we have not, so far at least, revised up cumulated growth over the years 2010-12. However an early increase in stocks may indicate borrowing constraints have weakened more rapidly than we had anticipated.

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UK exports have experienced a gradual recovery over the past year, however their performance in light of exchange rate and export demand movements has been poor. In the August 2010 Statistical Bulletin for UK Trade, the ONS notes that the UK trade deficit in goods closed from 8.7 billion [pounds sterling] in July to 8.2 billion [pounds sterling] in August. However this reduction took place entirely within exports to the EU, as net exports to non-EU countries remained unchanged from their July figures. Figure 5 plots the course of UK goods exports to EU and non-EU economies since the pre-recession peak in output, as a monthly cumulative percentage change. Interestingly, although in the past month exports to the EU have driven the reduction in the UK trade deficit, this is clearly not representative of developments in the recent past. Figure 5 shows that exports to non-EU countries have in fact performed more strongly. This is perhaps unsurprising given that the category of non-EU countries includes those non-industrialised countries such as China and India that avoided the recession that infected much of the developed world. Moreover, since the final quarter of 2009, exports to non-EU countries have recovered to above their pre-crisis levels, signifying a net improvement overall. Exports to the EU, on the other hand, declined more gradually over the recessionary period, hitting a low in mid-2009. Although they have been growing again since then, in the three months to August 2010 they were, on average, 7.7 per cent lower than their pre-recession levels. This shift of trade towards non-EU economies is most likely to be permanent as output in the non-OECD world does not appear to have been permanently scarred by the crisis. However, the EU remains the UK's main export market and an increase in the strength of demand there is fundamental to a more balanced economic recovery over the next few years.

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The recovery in exports to both EU and non-EU countries over the past year is most likely to be attributable to the gain in competitiveness that the UK experienced over the recession into early 2009, as the pound depreciated against both the dollar and the euro. This is captured by the change in the effective exchange rate, which depreciated by almost 25 per cent between early 2007 and 2009. There has however been a minor loss of competitiveness more recently, particularly against the euro in the third quarter of this year. Nevertheless, despite the gain in potential competitiveness over the recessionary period, prices for UK non-commodity exports relative to competitor export prices have fallen less than might be expected, experiencing only a 13.4 per cent drop, as can be seen from figure 6. This suggests that the price competitiveness has not been channelled through into goods prices, but rather that firms have absorbed this as profits. Consequently UK firms will not have gained the additional market share that they would otherwise have done following the increase in price competitiveness. But assuming that the depreciation of the effective exchange rate is permanent and markets are efficient, the necessary adjustment in relative export prices and gain in market share will take place eventually. We expect the potential price competitiveness gains eventually to feed through to the performance of the external sector. Our forecast is for net exports to switch from depressing GDP growth by 1 percentage point this year to supporting growth by 1.2 and 1.4 percentage points in 2011 and 2012, respectively. Our forecast for the external sector is set out in table A4.

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Household sector

Real disposable income proved to be relatively robust throughout the course of the recession, growing by 1.1 per cent per annum in 2008 and 2009. One of the main contributors to this growth was net property income. Net property income is the receipts of households as a result of activities pertaining to property ownership such as the lending or renting of assets, less the costs of borrowing. One of the major components of property income is the net interest received by households. In the UK net interest received has been negative for the past two and a half decades. Figure 7 illustrates this and also reports net interest payments as a per cent of gross disposable income. Net interest payments were stable at around 4 billion [pounds sterling] (or around 1 per cent of gross disposable income) up until 1998. Over the course of the house price boom in the UK the increase of mortgage debt held by the household sector resulted in an increasing proportion of household income being used to service household debt. Net interest payments increased to around 14 billion [pounds sterling] (6 per cent of gross disposable income) in 2008. Net interest payments shrank from the start of 2009 due to the aggressive reduction in interest rates at the end of 2008 and start of 2009, boosting household income growth in 2009.

Real disposable income declined by 1.6 per cent in the second quarter of this year, the sharpest decline observed since the first quarter of 2009. With the interest rates faced by households more likely to rise than fall, net interest payments are unlikely to fall further, suggesting that the contribution to income growth from net interest payments is likely to be reversed. This is a factor behind our forecast for relatively weak nominal income growth over the next couple of years. Income growth next year will also be depressed due to the planned increases in National Insurance Contributions from April. Direct taxes for higher earners will also rise. With the rate of consumer price inflation elevated over this year and next in large part because of increases in VAT, we expect real disposable income for the year as a whole to decline in 2010 and 2011. Real disposable income is expected to increase in line with GDP growth from 2013, at around 2 1/2 per cent per annum as labour compensation growth picks up and the rate of inflation eases back.

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In the first half of this year, consumer spending remained relatively robust, particularly in contrast to its behaviour through 2008 and 2009. Figure 8 illustrates this by plotting the residual from our estimated consumption function (see Barrell et al., 2003). Observations below zero represent an over-prediction of consumption, whereas positive observations represent an under-prediction. Throughout 2008 and 2009, actual consumption was consistently and significantly below its expected value, to an extent that was last observed in 1991. This forecasting error coincides with the onset of the financial crisis and the consequent tightening of credit availability. But despite the over-prediction of consumption for the past two years, the consumption residual for the last quarter began to return towards zero. This may indicate that credit rationing has begun to decline in importance. However, given the outlook for real income and wealth movements, we do expect the rate of growth of consumer spending to ease back next year. In particular, the announced increase in VAT is expected to cause an intertemporal substitution of consumption out of 2011 into late 2010. We forecast zero consumption growth over the next year and growth of 0.7 per cent from 2011-12, reflecting the impact of fiscal consolidation on household incomes. The prospects for the longer term are more positive; we project consumption growth to rise to 2.2 per cent by 2014-15.

Recent data from the Bank of England suggest that households have continued to be net repayers of unsecured credit. Furthermore, although net consumer credit flows turned positive in July, credit conditions appear to remain somewhat constrained, indicating that both demand and supply forces are at work. The reduced availability of credit, as well as the apparent reluctance of households to accumulate more debt, may explain in part why households are choosing to smooth their consumption by reducing saving. Nevertheless, the Bank of England Credit Conditions Survey notes that conditions for unsecured credit are expected to ease slightly in the last quarter of this year.

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The market for mortgages for house purchase also remains weak, with loan approvals declining by around 2 per cent in the last quarter of the data according to the latest lending data from the Bank of England. Moreover, housing equity withdrawal data show it is no longer being used to fund consumption (see figure 9).

As a whole the housing market appears to be softening further. The Halifax and Nationwide house price indices report moderating house price growth. Data from the Royal Institute of Surveyors suggest this softening of the market is due to a lack of demand, in the face of rising supply. Figure 10 plots new instructions and new buyer enquiries as measures of supply and demand. Over 2009 the demand indicator rose to a recent historical peak, but over 2010 this trend has been reversed, and demand has fallen below supply, which may be the driving factor behind the recent moderation in house prices. We expect the housing market to continue to soften. The strength of house price growth at the end of last year and in the first half of this year has pushed the average level for this year 7.3 per cent above the average level in 2009, and we suspect that this has been an indirect effect of QE. But, as mentioned, we expect the housing market to soften, with real house prices falling by around 1 per cent per annum over the period 2011-15. This implies a gradual correction of the housing market from its current overvalued state. There is the clear risk that any house price falls could gain momentum, as has been the experience of previous corrections from a house price bubble. But we should bear in mind that the last correction was induced by a sharp rise in mortgage rates, a scenario that currently does not look likely. Our forecasts for house prices, and for the rest of household income and expenditures, are detailed in table A5.

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Supply

The recent expansion of business investment softened into the second quarter of this year. Business investment growth is volatile from quarter to quarter and we do expect it to pick up again in the second half of this year. Corporate profitability remains high, given that we have just experienced the sharpest contraction in output since the interwar years, and the cost of raising funding has improved from the dramatic increase seen following the collapse of Lehman Brothers in September 2008. Furthermore, the Bank of England's Credit Conditions Survey for the third quarter of this year shows credit availability has begun to increase. However, there are reasons to be cautious about future business investment growth. Concerns about future demand could stay firms' investment decisions over the short term, especially given that public sector spending cuts have yet to take hold. More importantly, the dramatic fall in investment last year was probably not all cyclical. The permanent increase in the user cost of capital that follows from a reevaluation of risk after the crisis is expected to have reduced the equilibrium capital stock. This implies a downward adjustment of investment in order for this to happen. Consequently we do not expect rapid rates of investment growth over the next five years. Rather, we expect growth of around 5 per cent per annum on average (approximately half that expected by the OBR) over the period to 2015. At this rate of growth, we do not expect the pre-recession peak in business investment to be recovered until 2014, as we can see from table A6.

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Our forecast for the labour market is set out in table A7. The positive movements in employment over 2009-10 have been concentrated in part-time employment. Figure 11 illustrates the growth rates in both full-time and part-time employment. The full-time employment rate displays a marked decline, reaching a trough in mid-2009, improving thereafter but nevertheless remaining negative until August. But the change in part-time employment has been positive for large periods of time since the crisis, and has increased sharply since the start of 2010. Therefore, it appears that recent improvements in the outlook for labour markets are due to firms reassigning employees and the newly-employed to part-time instead of full-time contracts.

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The ability of firms to offer more part-time rather than full-time contracts depends on the willingness of employees to accept shorter hours. It also highlights the more tentative steps firms may be taking in expanding employment at the beginning of what is likely to be a weak recovery. We can see that the rise in part-time work cannot be explained by the demand for part-time work from jobseekers. Figure 12 reports the proportion of total employment taken up by those working part-time because they could not find full-time work. This is typically reported as a share of part-time workers only. Reporting it as a share of total employment removes the variation in part-time employment patterns and provides a useful indicator of the lack of available full-time work. The rise in part-time employment has been steep since the first part of 2008. Indeed, by the third quarter of this year almost 4 per cent of those in employment were in part-time work because they could not find full-time work.

The Labour Force Survey based measure of unemployment has continued to moderate in the three months to August, declining to 7.7 per cent which represents a total of 2.45 million people unemployed. In contrast, September estimates of the claimant count indicate that the number of people seeking Jobseeker's allowance has started to rise again. We do not expect employment to continue to rise and unemployment to continue to fall in the short term, as output growth is likely to weaken and we expect this to be reflected in a little more labour shedding.

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Long-term unemployment is also rising; recent data from the ONS record the number of persons aged 16 and over that have been unemployed for over 12 months as having risen from 612 thousand as of June-August 2009 to 821 thousand over June-August 2010, representing a 34.2 per cent increase over the past year. Figure 13 illustrates movements in both overall and long-term unemployment rates (where the latter is calculated as those that have been unemployed for more than twelve months as a percentage of the labour force). Clearly the two series move in parallel to each other, though the long-term unemployment rate exhibits less volatility due to the inherent inertia in this series. There is a risk that long-term unemployment will continue to rise even if the overall unemployment rate does not, as noted by Elsby and Smith in this Review.

We expect the rate of unemployment to start rising again at the end of this year as the slow growth we project will not be able to sustain strong enough employment demand. Concerns about future growth will weigh on firm's hiring decisions. Our forecast is for the rate of unemployment to rise to 8.7 per cent by the end of next year, a 1 percentage point rise from the current rate. The OBR expect 1/2 million jobs (a fifth of the public sector workforce) to be lost over the course of the next four years. The private sector will also experience considerable job loss as a result of the public spending cuts. Robust net job creation is therefore only going to come from an expanding private sector that does not rely on the public sector for final demand. As we have discussed in the introduction, the recovery over the next few years is liable to be weak, such that by 2013 the unemployment rate will have just returned to the average level of 2009. Of course, if spending cuts were less severe, and taxes were to rise more, as we suspect may happen (see Barrell and Kirby in this Review), unemployment may not rise as rapidly as we project.

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Accumulation and the longer term

The longer-term evolution of output and income depend in part upon the accumulation of income earning assets by UK residents at home and abroad and by foreigners in the UK. Output is the result of the accumulation of capital in the UK along with labour, the skills of the labour force and technical progress or knowledge that is not directly embodied within labour. The income flows for UK residents depend upon their own saving and that of the government. Prospects for the public sector and its borrowing are discussed in Barrell and Kirby in this Review, and the forecast is set out in table A8 in the Appendix. We discuss it only briefly here.

Over the past decade or so the UK has been running a current account deficit, and the net stock of foreign assets has been decumulating. In the five years to 2009, net property income paid abroad (the net income on gross assets less gross liabilities) represented about 1.7 per cent of nominal output. In normal circumstances the ballooning of the public sector deficit that we have seen over the past three years would have led to a deterioration of the current account and the asset position as the public sector absorbed more of the relatively stable level of private sector saving. However, the recession was accompanied by a noticeable rise in private sector net saving, and the current account did not deteriorate.

The combination of a rise in the saving rate of households and a decline in the investment rate of companies (see table A9) are likely to be large enough to ensure that there is space for the effects of the real devaluation of sterling we have seen since 2008 to feed through to an improvement in the balance of payments. As a consequence, by 2014 we expect the UK to be in surplus on this account. This improvement, along with minor changes in rates of return, should see net property income paid abroad fall below 1 per cent of GDP in 2015. Over the period 2010 to 2015 we therefore expect income growth to be about 0.2 per cent higher than output growth. Given the age structure of the population and current retirement ages, along with increases in expected lives that are anticipated over the next decade, it is reasonably clear that a further improvement in the net savings balance of the nation is needed to ensure we can pay our pensioners at the rate they have been promised. However, as alternatives, it is possible to either renege on these promises or to raise the age at which retirement takes place.

Longer- term projections for output growth after such a severe recession are inevitably clouded by projections for the speed with which the economy returns to capacity and also by estimates of the long-term damage to potential output from the impact of the crisis on the sustainable capital stock and the productivity of the labour force. (5) Financial crises in the UK between 1900 and 2000 had no lasting impact on the equilibrium level of output, as Barrell, Holland and Liadze (2010) show. However systemic crises, such as that we have just gone through, raise risk premia and cause equilibrium output to be lower than it would otherwise have been. Barrell, Davis, Liadze and Karim (2010) and the literature cited therein suggest that systemic crises reduce equilibrium output by 4 per cent or so in a sustained way, which is around the estimate contained in our forecast. This would lead us to think that we have a long-run structural output gap of around 4 per cent at present. As we expect this to close over the next decade it would not be surprising if output growth were to average around 0.4 percentage points more than the underlying trend over that period. This calculation affects the interpretation of the figures in table A10.

In the decade between 1997 and 2007 hourly productivity growth in the UK was robust, and it was bettered only by the US, Finland and Sweden in the group of countries (which includes the US, Canada, Germany, France, and Spain) studied by Barrell, Holland and Liadze (2010). They attribute this relative improvement in performance to three factors. Improvements in the skills of the workforce were probably the most important, especially the increase in the number of graduates which allowed the UK to take advantage of the product innovations associated with biotechnology and computing. (6) The Competition Act of 2000 and the previous improvements in the regulatory architecture from 1995 also appear to have accelerated the rate of growth in productivity over this period. Finally, potentially spurious productivity gains of perhaps 0.2 per cent a year were made in financial intermediation. These spurious gains from non-retail banking activity were larger in some other countries, such as Spain, but smaller in Germany. Productivity growth going forward is likely to be slower than over this period. We would expect the introduction of more stringent controls on immigration to restrict the growth of the supply of labour to below that seen over the earlier period. Given these factors, it is hard to see that over the next decade trend growth in the UK will be much above 2 per cent a year unless an effort is made to increase the supply of labour by raising retirement ages.

DOI: 10.1177/0027950110389771

Appendix--Forecast details

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Table A1. Exchange rates and interest rates

 UK exchange rates FTSE
 All-share
 Effective Dollar Euro index
 2005 = 100

2005 100.00 1.82 1.46 2587.6
2006 100.75 1.84 1.47 3022.6
2007 102.89 2.00 1.46 3306.3
2008 90.70 1.85 1.26 2728.0
2009 81.16 1.57 1.12 2326.0
2010 80.85 1.55 1.16 2791.0
2011 80.63 1.59 1.15 2873.3
2012 81.37 1.59 1.16 2868.9
2013 82.29 1.59 1.17 2947.2
2014 83.11 1.59 1.18 2973.6
2015 83.81 1.59 1.19 2965.8

2009 Q1 78.55 1.43 1.10 2031.4
2009 Q2 81.90 1.55 1.14 2173.4
2009 Q3 83.39 1.64 1.15 2417.6
2009 Q4 80.82 1.63 1.11 2681.6

2010 Q1 80.04 1.56 1.13 2778.8
2010 Q2 80.39 1.49 1.17 2765.9
2010 Q3 82.47 1.55 1.20 2740.2
2010 Q4 80.49 1.59 1.15 2879.2

2011 Q1 80.49 1.59 1.15 2880.6
2011 Q2 80.49 1.59 1.15 2879.3
2011 Q3 80.69 1.59 1.15 2867.9
2011 Q4 80.86 1.59 1.15 2865.3

Percentage changes

2005/2004 -1.6 -0.7 -0.9 15.0
2006/2005 0.7 1.3 0.4 16.8
2007/2006 2.1 8.6 -0.4 9.4
2008/2007 -11.9 -7.4 -14.0 -17.5
2009/2008 -10.5 -15.5 -10.6 -14.7
2010/2009 -0.4 -1.1 3.4 20.0
2011/2010 -0.3 2.5 -1.2 2.9
2012/2011 0.9 0.0 0.9 -0.2
2013/2012 1.1 0.1 1.2 2.7
2014/2013 1.0 0.0 1.1 0.9
2015/2014 0.8 -0.1 0.9 -0.3

2009Q4/2008Q1 -3.9 4.1 -6.9 25.6
2010Q4/2009Q1 -0.4 -3.0 3.5 7.4
2011Q4/2010Q1 0.5 0.0 0.4 -0.5

 Interest rates

 3-month Mortgage 10-year World (a) Bank
 rates interest gilts Rate (b)

2005 4.7 6.5 4.4 3.1 4.50
2006 4.8 6.5 4.5 4.1 5.00
2007 6.0 7.4 5.0 4.7 5.50
2008 5.5 6.9 4.5 3.5 2.00
2009 1.2 4.0 3.7 1.1 0.50
2010 0.7 4.0 3.5 1.0 0.50
2011 0.7 4.1 3.1 1.3 0.75
2012 0.9 4.3 3.4 1.7 1.00
2013 1.4 4.6 3.6 2.2 1.75
2014 2.1 4.9 3.9 2.7 2.25
2015 2.7 5.3 4.1 3.1 1.75

2009 Q1 2.1 4.4 3.5 1.5 0.50
2009 Q2 1.4 3.9 3.6 1.1 0.50
2009 Q3 0.8 4.0 3.8 1.0 0.50
2009 Q4 0.6 4.0 3.8 1.0 0.50

2010 Q1 0.6 4.1 4.1 1.0 0.50
2010 Q2 0.7 4.0 3.7 I.0 0.50
2010 Q3 0.8 3.9 3.3 1.0 0.50
2010 Q4 0.7 3.9 3.0 1.0 0.50

2011 Q1 0.6 3.9 3.1 1.1 0.50
2011 Q2 0.6 4.0 3.1 1.3 0.50
2011 Q3 0.9 4.3 3.2 1.3 0.75
2011 Q4 0.9 4.4 3.2 1.4 0.75

Percentage changes

2005/2004
2006/2005
2007/2006
2008/2007
2009/2008
2010/2009
2011/2010
2012/2011
2013/2012
2014/2013
1015/2014

2009Q4/2008Q1
2010Q4/2009Q1
2011Q4/2010Q1

Notes: We assume that bilateral exchange rates for the fourth quarter
of this year are the average of the first week of October. We then
assume that bilateral rates remain constant for the next first half
of 2011 before moving in-line with the path implied by the
backward-looking uncovered interest rate parity condition based on
interest rate differentials relative to the US. (a) Weighted average
of central bank intervention rates in OECD economies. (b) End of
period.

Table A2. Price indices

 Unit Imports Exports Whole- World
 labour deflator deflator sale price oil price
 costs index(-) ($) (b)

2005 97.7 97.1 97.2 98.2 51.8
2006 100.0 100.0 100.0 100.0 63.4
2007 102.7 100.2 101.6 101.8 70.5
2008 105.1 112.1 113.7 106.7 95.7
2009 110.9 116.2 116.9 108.7 61.8
2010 111.5 118.2 117.9 113.1 75.7
2011 111.8 123.4 118.7 112.1 79.0
2012 114.1 126.6 122.0 111.3 86.1
2013 116.4 129.3 125.1 117.1 93.4
2014 118.5 131.2 127.8 115.5 97.4
2015 120.7 132.6 130.0 117.8 99.7

Percentage changes

2005/2004 2.6 3.7 1.0 0.9 44.4
2006/2005 2.4 2.9 2.8 1.8 22.4
2007/2006 2.7 0.2 1.6 1.8 11.2
2008/2007 2.3 12.0 12.0 4.7 35.7
2009/2008 5.5 3.7 2.8 1.9 -35.4
2010/2009 0.5 1.7 0.9 4.0 11.5
2011/2010 0.2 4.4 0.7 -0.9 4.3
2011/2011 2.1 2.6 1.8 -0.7 9.0
2013/2012 2.0 2.1 2.6 1.6 8.5
2014/2013 1.8 1.4 2.1 2.2 4.2
2015/2014 1.9 1.1 1.7 2.0 2.4

 2006=100
 Retail price index
 GDP
 Consump- deflator All Excluding Consumer
 tion (market items mortgage prices
 deflator prices) interest index

2005 97.4 97.0 96.9 97.1 97.7
2006 100.0 100.0 100.0 100.0 100.0
2007 102.9 103.0 104.3 103.2 102.3
2008 106.1 106.1 108.4 107.6 106.0
2009 107.4 107.5 107.9 109.8 108.3
2010 112.4 110.8 112.6 114.8 111.7
2011 116.1 113.3 116.6 118.7 114.8
2012 117.9 115.0 118.8 120.9 116.3
2013 120.2 117.4 112.0 123.6 118.4
2014 121.8 120.2 125.9 126.8 121.0
2015 125.4 123.0 129.9 130.1 123.5

Percentage changes

2005/2004 2.4 2.0 2.8 2.3 2.1
2006/2005 2.7 3.0 3.2 2.9 2.3
2007/2006 2.9 3.0 4.3 3.2 2.3
2008/2007 3.1 3.0 4.0 4.3 3.6
2009/2008 1.2 1.4 -0.5 2.0 2.2
2010/2009 4.6 3.1 4.4 4.6 3.1
2011/2010 3.3 2.2 3.5 3.4 2.8
2011/2011 1.5 1.6 1.9 1.8 1.4
2013/2012 1.9 2.1 1.7 2.3 1.8
2014/2013 2.1 2.4 3.2 2.6 2.1
2015/2014 2.1 2.3 3.1 2.6 2.1

Notes: (a) Excluding food, beverages, tobacco and petroleum products.
(b) Per barrel, average of Dubai and Brent spot prices.

Table A3. Gross domestic product and components of expenditure

 Final consumption Gross capital
 expenditure formation

 Households General Gross Changes in
 & NPISH (a) gov't fixed inventories Domestic
 investment (b) demand

2005 836.6 281.3 213.6 4.6 1336.6
2006 852.0 285.2 227.2 5.5 1369.9
2007 870.8 288.8 245.1 7.4 1412.0
2008 874.5 293.5 232.8 1.4 1402.2
2009 845.6 296.3 197.5 -14.2 1325.2
1010 852.7 301.1 103.1 1.9 1359.0
2011 852.7 297.9 208.6 4.8 1364.0
2012 858.4 292.0 216.8 4.8 1371.9
2013 872.8 285.1 227.7 4.8 1390.4
2014 890.5 276.4 242.0 4.8 1413.7
2015 910.4 270.5 256.7 4.8 1442.4

Percentage changes

2005/2004 2.2 2.0 2.4 2.1
2006/2005 1.8 1.4 6.4 2.5
2007/2006 2.2 1.3 7.8 3.1
2008/2007 0.4 1.6 -5.0 -0.7
2009/2008 -3.3 1.0 -15.1 -5.5
2010/2009 0.8 1.7 2.8 2.6
2011/2010 0.0 -1.1 2.7 0.4
2012/2011 0.7 -2.0 3.9 0.6
2013/2012 1.7 -2.3 5.1 1.4
2014/2013 2.0 -3.0 6.3 1.7
1015/2014 2.2 -2.1 6.1 2.0

Decomposition of growth in GDP

2005 1.4 0.4 0.4 -0.1 2.2
2006 1.2 0.3 1.1 0.1 2.6
2007 1.4 0.3 1.3 0.1 3.2
2008 0.3 0.3 -0.9 -0.4 -0.7
2009 -2.1 0.2 -2.6 -1.1 -5.6
2010 0.6 0.4 0.4 1.2 2.6
2011 0.0 -0.2 0.4 0.2 0.4
2012 0.4 -0.4 0.6 0.0 0.6
2013 1.1 -0.5 0.8 0.0 1.4
2014 1.3 -0.6 1.0 0.0 1.7
2015 1.4 -0.4 1.0 0.0 2.0

 [pounds sterling]
 billion, 2006
 prices

 Total GDP
 Total final Total at
 exports expendi- imports Net market
 (c) ture (c) trade prices

2005 340.3 1676.8 384.5 -44.2 1292.3
2006 378.0 1747.9 419.6 -41.5 1328.4
2007 368.3 1780.3 416.3 -48.0 1364.0
2008 372.1 1774.3 411.1 -39.0 1363.1
2009 330.8 1656.0 360.7 -29.9 1295.2
1010 348.1 1707.1 391.1 -43.0 1315.6
2011 380.9 1744.9 408.2 -27.4 1336.2
2012 409.6 1781.5 418.6 -9.0 1362.4
2013 438.5 1829.0 432.1 6.3 1396.3
2014 462.7 1876.4 445.5 17.1 1430.4
2015 486.5 1928.9 462.3 24.2 1466.2

Percentage changes

2005/2004 7.9 3.2 7.1 2.2
2006/2005 11.1 4.2 9.1 2.8
2007/2006 -2.6 1.9 -0.8 2.7
2008/2007 1.0 -0.3 -1.2 -0.1
2009/2008 -11.1 -6.7 -12.3 -5.0
2010/2009 5.2 3.1 8.4 1.6
2011/2010 9.4 2.2 4.4 1.6
2012/2011 7.6 2.1 2.5 2.0
2013/2012 7.1 2.7 3.2 2.5
2014/2013 5.5 2.6 3.1 2.4
1015/2014 5.1 2.8 3.8 2.5

Decomposition of growth in GDP

2005 2.0 4.2 -2.0 0.0 2.2
2006 2.9 5.5 -2.7 0.2 2.8
2007 -0.7 2.4 0.2 -0.5 2.7
2008 0.3 -0.4 0.4 0.7 -0.1
2009 -3.0 -8.7 3.7 0.7 -5.0
2010 1.3 3.9 -2.3 -1.0 1.6
2011 2.5 2.9 -1.3 1.2 1.6
2012 2.2 2.7 -0.8 1.4 2.0
2013 2.1 3.5 -1.0 1.1 2.5
2014 1.7 3.4 -1.0 0.8 1.4
2015 1.7 3.7 -1.2 0.5 2.5

Notes: (a) Non-profit institutions serving households. (b)
Including acquisitions less disposals of valuables and quarterly
alignment adjustment. (c) Includes Missing Trader Intra-Community
Fraud. (d) Components may not add up to total GDP growth due to
rounding and statistical discrepancy included in GDP.

Table A4. External sector

 Net
 Exports Imports trade
 of of in Exports Imports Net
 goods goods goods of of trade in
 (a) (a) (a) services services services

 [pounds sterling] billion, 2006 prices (b)

2005 218.6 289.7 -71.1 121.7 94.8 27.0
2006 243.6 319.9 -76.3 134.4 99.6 34.8
2007 218.5 311.3 -92.8 149.8 105.0 44.8
2008 221.5 305.7 -84.1 150.6 105.5 45.1
2009 194.2 267.3 -73.0 136.6 93.5 43.1
2010 114.4 293.5 -79.0 133.6 97.6 36.0
2011 236.6 307.8 -71.2 144.3 100.5 43.8
2012 253.3 315.7 -62.4 156.3 102.9 53.4
2013 270.2 326.1 -55.9 168.3 106.1 62.1
2014 284.0 336.0 -52.0 178.7 109.5 69.1
2015 297.9 348.6 -50.7 188.6 113.7 74.9

Percentage changes

2005/2004 8.9 7.0 6.3 7.3
2006/2005 11.5 10.4 10.4 5.1
2007/2006 -10.3 -2.7 11.5 5.4
2008/2007 1.4 -1.8 0.5 0.5
2009/2008 -12.3 -12.6 -9.3 -11.4
2010/2009 10.4 9.8 -2.2 4.4
2011/1010 10.3 4.9 8.0 2.9
2011/2011 7.1 2.6 8.3 2.4
2013/2011 6.7 3.3 7.7 3.1
2014/2013 5.1 3.0 6.2 3.2
2015/2014 4.9 3.8 5.5 3.8

 Export
 price World Terms
 competitive- trade of trade Current
 ness (c) (d) (e) balance

 2006=100 % of GDP

2005 98.0 92.4 100.1 -2.6
2006 100.0 100.0 100.0 -3.4
2007 104.1 107.0 101.4 -2.6
2008 101.1 109.6 101.4 -1.6
2009 94.7 97.2 100.6 -1.3
2010 92.6 107.4 99.8 -3.1
2011 89.8 116.2 96.2 -2.7
2012 89.9 121.9 96.3 -0.7
2013 91.0 126.7 96.7 -0.2
2014 91.5 132.0 97.4 0.4
2015 91.6 137.9 98.1 0.7

Percentage changes

2005/2004 -2.5 7.6 -2.6
2006/2005 2.1 8.3 -0.1
2007/2006 4.1 7.0 1.4
2008/2007 -2.8 2.4 0.0
2009/2008 -6.3 -11.3 -0.8
2010/2009 -2.2 10.5 -0.8
2011/1010 -3.1 8.1 -3.6
2011/2011 0.2 4.9 0.1
2013/2011 1.2 3.9 0.4
2014/2013 0.6 4.2 0.7
2015/2014 0.2 4.4 0.7

Notes: (a) Includes Missing Trader Intra-Community Fraud. (b)
Balance of payments basis. (c) A rise denotes a loss in UK
competitiveness. (d) Weighted by import shares in UK export
markets. (e) Ratio of average value of exports to imports.

Table A5. Household income and expenditure

 Average (a) Compen- Total Gross
 earnings sation of personal disposable
 employees income income

 2006=100 [pounds sterling] billion,
 current prices

2005 95.7 677.5 1081.1 817.6
2006 100.0 713.0 1133.0 853.1
2007 105.0 752.2 1179.8 881.5
2008 106.6 769.2 1230.3 919.5
2009 108.8 771.0 1239.3 940.8
2010 111.4 787.3 1280.1 975.7
2011 113.9 801.5 1317.1 1002.5
2012 117.7 834.6 1372.7 1042.2
2013 121.3 872.5 1436.0 1088.3
2014 124.8 909.6 1504.0 1137.2
2015 118.6 949.8 1578.6 1192.0

Percentage changes

2005/2004 3.6 4.8 5.3 4.5
2006/2005 4.5 5.2 4.8 4.3
2007/2006 5.0 5.5 4.1 3.3
2008/2007 1.5 2.3 4.3 4.3
2009/2008 2.1 0.2 0.7 2.3
2010/2009 2.4 2.1 3.3 3.7
2011/2010 2.2 1.8 2.9 2.7
2011/2011 3.4 4.1 4.1 4.0
2013/2012 3.0 4.5 4.6 4.4
2014/2013 2.9 4.3 4.7 4.5
2015/2014 3.0 4.4 5.0 4.8

 Final
 Real consumption Saving House
 disposable expenditure ratio (c) prices
 income(b) Total Durable (d)

 [pounds sterling] billion, per cent 2006=100
 2006 prices

2005 839.3 836.6 85.8 3.9 94.1
2006 853.1 852.0 91.7 3.4 100.0
2007 856.6 870.8 97.9 2.6 110.9
2008 866.3 874.5 100.8 2.0 109.9
2009 875.6 845.6 99.6 6.2 101.3
2010 868.2 852.7 104.4 4.0 108.7
2011 863.3 852.7 102.9 3.6 108.3
2012 883.9 858.4 104.5 5.2 108.3
2013 905.6 872.8 107.3 6.0 109.2
2014 926.3 890.5 109.9 6.3 110.4
2015 950.7 910.4 112.3 6.7 112.2

Percentage changes

2005/2004 2.0 2.2 6.3 5.5
2006/2005 1.6 1.8 6.9 6.3
2007/2006 0.4 2.2 6.7 10.9
2008/2007 1.1 0.4 3.0 -0.9
2009/2008 1.1 -3.3 -1.2 -7.8
2010/2009 -0.8 0.8 4.8 7.3
2011/2010 -0.6 0.0 -1.4 -0.4
2011/2011 2.4 0.7 1.6 0.0
2013/2012 2.5 1.7 2.8 0.8
2014/2013 2.3 2.0 2.3 1.2
2015/2014 2.6 2.2 2.2 1.6

 Net
 worth to
 income

 ratio (e)

2005 6.6
2006 7.0
2007 7.1
2008 6.0
2009 6.6
2010 6.6
2011 6.4
2012 6.1
2013 6.0
2014 5.9
2015 5.7

Percentage changes

2005/2004
2006/2005
2007/2006
2008/2007
2009/2008
2010/2009
2011/2010
2011/2011
2013/2012
2014/2013
2015/2014

Notes: (a) Average earnings equals total labour compensation
divided by the number of employees. (b) Deflated by consumers'
expenditure deflator. (c) Includes adjustment for change in net
equity of households in pension funds. (d) Department for
Communities and Local Government, mix-adjusted. (e) Net worth is
defined as housing wealth plus net financial assets.

Table A6. Fixed investment and capital

 Gross fixed investment (a) User
 cost
 Private of
 Business housing General Total capital
 investment (b) government (%)

2005 122.1 67.2 23.7 213.6 17.1
2006 127.9 73.9 25.4 227.2 16.6
2007 144.0 74.1 27.0 245.1 16.5
2008 142.4 56.7 33.6 232.8 16.1
2009 115.6 41.4 40.5 197.5 14.6
2010 119.8 44.8 38.6 203.2 15.1
2011 126.8 50.5 31.3 208.6 16.7
2012 132.6 55.5 28.6 216.8 16.9
2013 139.5 61.5 26.7 227.7 16.7
2014 146.9 68.1 26.9 242.0 16.6
2015 154.0 75.3 27.4 256.7 16.6

Percentage changes

2005/2004 4.5 -4.8 10.9 2.4
2006/2005 4.8 10.0 7.3 6.4
2007/2006 12.5 0.2 6.4 7.8
2008/2007 -1.1 -23.4 24.5 -5.0
2009/2008 -18.8 -27.0 20.4 -15.1
2010/2009 3.6 8.1 -4.6 2.8
2011/2010 5.9 12.7 -19.0 2.7
2012/2011 4.6 10.0 -8.5 3.9
2013/2012 5.2 10.6 -6.6 5.1
2014/2013 5.3 10.8 0.6 6.3
2015/2014 4.8 10.5 2.0 6.1

 [pounds sterling]
 billion, 2006 prices

 Corporate Capital stock
 profit
 share of Private Public
 GDP (%) (c)

2005 24.2 2163.9 554.1
2006 25.0 2219.2 564.1
2007 25.2 2301.2 577.1
2008 26.2 2370.7 593.2
2009 25.2 2401.3 612.2
2010 24.7 2412.7 632.0
2011 25.2 2433.7 644.0
2012 25.3 2463.5 653.0
2013 25.9 2503.5 659.9
2014 26.7 2554.4 666.7
2015 27.3 2615.6 673.9

Percentage changes

2005/2004 2.4 1.9
2006/2005 2.6 1.8
2007/2006 3.7 2.3
2008/2007 3.0 2.8
2009/2008 1.3 3.2
2010/2009 0.5 3.2
2011/2010 0.9 1.9
2012/2011 1.2 1.4
2013/2012 1.6 1.1
2014/2013 2.0 1.0
2015/2014 2.4 1.1

Notes: (a) Fixed investment figures exclude the effect of the
transfer of BFNL nuclear reactors to central government in 2005Q2.
(b) Includes private sector transfer costs of non-produced assets.
(c) Including public sector non-financial corporations.

Table A7. Productivity and the labour market

 Employment Population
 Total ILO Labour of
 Employees (a) unemploy- force working
 ment (b) age

2005 24929 28775 1466 30241 37419
2006 25096 29027 1672 30699 37708
2007 25209 29225 1653 30878 37916
2008 25408 29441 1781 31221 38090
2009 24939 28978 2394 31372 38236
2010 24875 29022 2472 31494 38395
2011 24778 28947 2692 31640 38711
2012 24952 29142 2648 31790 38935
2013 25321 29533 2422 31955 39169
2014 25659 29893 2228 32121 39406
2015 26001 30258 2029 32287 39638

Percentage changes

2005/2004 1.2 1.0 2.9 1.1 0.9
2006/2005 0.7 0.9 14.1 1.5 0.8
2007/2006 0.5 0.7 -1.2 0.6 0.6
2008/2007 0.8 0.7 7.7 1.1 0.5
2009/2008 -1.8 -1.6 34.5 0.5 0.4
2010/2009 -0.3 0.2 3.3 0.4 0.4
2011/2010 -0.4 -0.3 8.9 0.5 0.8
2012/2011 0.7 0.7 -1.6 0.5 0.6
2013/2012 1.5 1.3 -8.5 0.5 0.6
2014/2013 1.3 1.2 -8.0 0.5 0.6
2015/2014 1.3 1.2 -8.9 0.5 0.6

 Thousands

 Unemployment, %
 Productivity
 (2006=100) ILO unem-
 Manufact- Claimant ployment
 Per hour uring rate rate

2005 97.7 95.4 2.7 4.8
2006 100.0 100.0 3.0 5.4
2007 102.0 102.6 2.7 5.4
2008 101.4 102.4 2.8 5.7
2009 99.5 98.4 4.7 7.6
2010 100.5 104.6 4.7 7.8
2011 102.1 110.8 5.3 8.5
2012 103.2 115.7 5.1 8.3
2013 104.1 120.0 4.4 7.6
2014 105.1 123.8 3.9 6.9
2015 106.5 127.6 3.3 6.3

Percentage changes

2005/2004 1.1 4.6
2006/2005 2.4 4.9
2007/2006 1.9 2.6
2008/2007 -0.5 -0.3
2009/2008 -2.0 -3.8
2010/2009 1.1 6.3
2011/2010 1.6 5.9
2012/2011 1.1 4.4
2013/2012 0.8 3.7
2014/2013 1.0 3.2
2015/2014 1.3 3.0

Notes: (a) Includes self-employed, government-supported trainees
and unpaid family members. (b) Employment plus ILO unemployment

Table A8. Public sector financial balance and borrowing requirement

 2008-9 2009-10

Current receipts: Taxes on income 355.1 337.4
 Taxes on expenditure 167.7 168.9
 Other current receipts 11.5 15.1

 Total 534.3 521.5
 (as a % of GDP) 37.3 37.2

Current expenditure: Goods and services 319.5 329.8
 Net social benefits paid 171.5 187.7
 Debt interest 32.3 31.5
 Other current expenditure 43.1 50.9

 Total 566.3 600.0
 (as a % of GDP) 39.5 42.8

Depreciation 19.0 19.6

Surplus on public sector current budget (a) -51.0 -98.1
(as a % of GDP) -3.6 -7.0

Gross investment 65.7 75.8
Net investment 46.8 56.3
(as a % of GDP) 3.3 4.0

Total managed expenditure 632.1 675.8
(as a % of GDP) 44.1 48.2

Public sector net borrowing 97.8 154.3
(as a % of GDP) 6.9 11.0

Financial transactions 26.9 10.7
Public sector net cash requirement 70.9 143.6
(as a % of GDP) 5.0 10.2
Public sector net debt (% of GDP) 44.1 53.7

GDP deflator at market prices (2006=100) 106.6 108.4
Money GDP 1432.9 1402.6

Financial balance under Maastricht (% of GDP) (b) -5.0 -11.4
Gross debt under Maastricht (% of GDP) (b) 52.1 68.2

 2010-11 2011-12

Current receipts: Taxes on income 345.8 360.7
 Taxes on expenditure 192.5 203.3
 Other current receipts 13.3 14.2

 Total 551.6 578.1
 (as a % of GDP) 37.4 37.9

Current expenditure: Goods and services 341.4 343.1
 Net social benefits paid 199.3 204.7
 Debt interest 49.0 52.6
 Other current expenditure 48.8 49.5

 Total 638.4 649.9
 (as a % of GDP) 43.3 42.6

Depreciation 20.6 21.4

Surplus on public sector current budget (a) -107.4 -93.2
(as a % of GDP) -7.3 -6.1

Gross investment 56.2 48.6
Net investment 35.6 27.3
(as a % of GDP) 2.4 1.8

Total managed expenditure 694.7 698.5
(as a % of GDP) 47.1 45.8

Public sector net borrowing 143.0 120.4
(as a % of GDP) 9.7 7.9

Financial transactions 11.8 -3.1
Public sector net cash requirement 131.2 123.5
(as a % of GDP) 8.9 8.1
Public sector net debt (% of GDP) 58.9 65.4

GDP deflator at market prices (2006=100) 111.4 113.6
Money GDP 1474.1 1523.9

Financial balance under Maastricht (% of GDP) (b) -10.2 -8.7
Gross debt under Maastricht (% of GDP) (b) 77.0 82.8

 2012-13 2013-14

Current receipts: Taxes on income 379.7 400.6
 Taxes on expenditure 208.1 215.0
 Other current receipts 14.7 15.4

 Total 602.5 631.0
 (as a % of GDP) 38.0 38.0

Current expenditure: Goods and services 341.4 342.1
 Net social benefits paid 209.7 216.9
 Debt interest 55.3 57.5
 Other current expenditure 50.8 52.6

 Total 657.3 669.1
 (as a % of GDP) 41.5 40.3

Depreciation 22.0 23.0

Surplus on public sector current budget (a) -76.8 -61.0
(as a % of GDP) -4.9 -3.7

Gross investment 47.1 46.1
Net investment 25.1 23.2
(as a % of GDP) 1.6 1.4

Total managed expenditure 704.4 715.2
(as a % of GDP) 44.5 43.1

Public sector net borrowing 101.9 84.2
(as a % of GDP) 6.4 5.1

Financial transactions -1.6 -13.7
Public sector net cash requirement 103.5 97.9
(as a % of GDP) 6.5 5.9
Public sector net debt (% of GDP) 69.1 71.7

GDP deflator at market prices (2006=100) 115.6 118.1
Money GDP 1584.4 1658.6

Financial balance under Maastricht (% of GDP) (b) -7.2 -5.8
Gross debt under Maastricht (% of GDP) (b) 87.3 89.5

 [pounds sterling]
 billion, fiscal
 years

 2014-15 2015-16

Current receipts: Taxes on income 422.1 446.5
 Taxes on expenditure 223.1 232.3
 Other current receipts 16.2 17.0

 Total 661.4 695.8
 (as a % of GDP) 38.0 38.1

Current expenditure: Goods and services 337.7 340.2
 Net social benefits paid 225.7 236.9
 Debt interest 60.4 63.8
 Other current expenditure 54.5 56.5

 Total 678.2 697.4
 (as a % of GDP) 39.0 38.2

Depreciation 24.0 25.0

Surplus on public sector current budget (a) -40.8 -26.6
(as a % of GDP) -2.4 -1.5

Gross investment 46.6 48.0
Net investment 22.5 23.0
(as a % of GDP) 1.3 1.3

Total managed expenditure 724.8 745.4
(as a % of GDP) 41.7 40.8

Public sector net borrowing 63.4 49.6
(as a % of GDP) 3.6 2.7

Financial transactions -7.2 -7.6
Public sector net cash requirement 70.6 57.2
(as a % of GDP) 4.1 3.1
Public sector net debt (% of GDP) 72.4 72.1

GDP deflator at market prices (2006=100) 120.9 123.7
Money GDP 1740.2 1825.0

Financial balance under Maastricht (% of GDP) (b) -4.4 -3.3
Gross debt under Maastricht (% of GDP) (b) 90.0 89.3

Notes: These data are constructed from seasonally adjusted national
accounts data. This results in differences between the figures here and
unadjusted fiscal year data. Data exclude the impact of financial
sector interventions. (a) Public sector current budget surplus is total
current receipts less total current expenditure and depreciation.
(b) Calendar year.

Table A9. Accumulation

 Households Companies General government

 Invest- Invest- Invest-
 Saving ment Saving ment Saving ment

2005 2.7 5.3 12.9 10.1 -1.1 1.7
2006 2.3 5.6 12.0 10.2 -0.2 1.7
2007 1.7 5.8 14.3 10.8 -0.4 1.6
2008 1.3 4.6 15.0 9.8 -1.3 2.2
2009 4.4 3.4 14.4 7.5 -6.4 2.6
2010 2.8 3.4 15.4 8.9 -6.7 2.3
2011 2.4 3.8 14.9 9.1 -5.6 1.6
1012 3.6 4.2 14.5 8.9 -4.3 1.4
2013 4.1 4.6 13.5 8.8 -3.1 1.2
2014 4.3 5.0 12.9 8.8 -1.8 1.1
2015 4.5 5.4 12.3 8.8 -0.8 I.1

 As a percentage of GDP

 Whole economy Finance from abroad

 Invest- Total Net factor
 Saving ment income (a)

2005 14.5 17.1 2.6 -1.8
2006 14.1 17.5 3.4 -0.7
2007 15.6 18.2 2.6 -1.5
2008 15.0 16.7 1.6 -2.0
2009 12.3 13.6 1.3 -2.2
2010 11.5 14.6 3.1 -1.8
2011 11.8 14.5 2.7 -1.9
1012 13.8 14.5 0.7 -2.4
2013 14.5 14.6 0.2 -1.6
2014 15.4 14.9 -0.4 -1.2
2015 16.0 15.3 -0.7 -0.7

Note: (a) Negative sign indicates a surplus for the UK.

Table A 10. Long-term projections

 2007 2008 2009 2010

GDP (market prices) 2.7 -0.1 -5.0 1.6
Average earnings 5.0 1.5 2.1 2.4
GDP deflator (market 3.0 3.0 1.4 3.1
 prices)
Consumer Prices Index 2.3 3.6 2.2 3.1
Per capita GDP 2.0 -0.7 -5.6 1.0
Whole economy 1.9 -0.5 -2.0 1.1
 productivity (a)
Labour input (b) 0.8 0.4 -2.9 0.5
ILO unemployment rate (%) 5.4 5.7 7.6 7.8
Current account (% of GDP) -2.6 -1.6 -1.3 -3.1
Total managed expenditure
 (% of GDP) 40.8 42.6 47.9 47.7
Public sector net
 borrowing
 (% of GDP) 2.5 4.6 10.9 10.2
Public sector net debt
 (% of GDP) 36.7 38.8 48.7 56.0
Effective exchange rate
 (2005=100) 102.9 90.7 81.2 80.8
Bank Rate (%) 5.5 4.7 0.6 0.5
3 month interest rates (%) 6.0 5.5 1.2 0.7
10 year interest rates (%) 5.0 4.5 3.7 3.5

 All figures percentage change unless
 otherwise stated

 2011 2012 2013 2014 2015 2016-20

GDP (market prices) 1.6 2.0 2.5 2.4 2.5 2.6
Average earnings 2.2 3.4 3.0 2.9 3.0 4.1
GDP deflator (market 2.2 1.6 2.1 2.4 2.3 2.1
 prices)
Consumer Prices Index 2.8 1.4 1.8 2.1 2.1 2.0
Per capita GDP 0.9 1.4 1.9 1.9 1.9 1.9
Whole economy 1.6 1.1 0.8 1.0 1.3 2.0
 productivity (a)
Labour input (b) 0.1 1.0 1.7 1.5 1.2 0.5
ILO unemployment rate (%) 8.5 8.3 7.6 6.9 6.3 5.5
Current account (% of GDP) -2.7 -0.7 -0.2 0.4 0.7 0.1
Total managed expenditure
 (% of GDP) 46.1 44.8 43.4 42.0 41.0 40.4
Public sector net
 borrowing
 (% of GDP) 8.3 6.8 5.4 4.0 2.9 1.9
Public sector net debt
 (% of GDP) 61.6 66.9 70.2 72.1 72.4 69.1
Effective exchange rate
 (2005=100) 80.6 81.4 82.3 83.1 83.8 85.3
Bank Rate (%) 0.6 0.8 1.3 2.0 2.6 3.6
3 month interest rates (%) 0.7 0.9 1.4 2.1 2.7 3.7
10 year interest rates (%) 3.1 3.4 3.6 3.9 4.1 4.5

Notes: (a) Per hour. (b) Total hours worked.

ACKNOWLEDGEMENTS

The forecast was completed using the latest version of the National Institute Global Econometric Model (NiGEM). Thanks to Dawn Holland for helpful comments and suggestions.

The forecast was completed on 13 October 2010.

REFERENCES

Barrell, R., Choy, A. and Riley, R. (2003), 'Consumption and housing wealth in the UK', National Institute Economic Review, 186, pp. pp.53-6.

Barrell, R., Davis, E., Liadze, I. and Karim, D. (2010), 'The effects of banking crises on potential output in OECD countries', NIESR Discussion Paper no. 358.

Barrell, R. and Holland, D. (2010), 'Fiscal and financial responses to the economic downturn', National Institute Economic Review, 186, pp. R51-R62.

Barrell, R., Holland, D. and Liadze, I. (2010), 'Accounting for UK economic performance 1973-2009', NIESR Discussion Paper no. 359.

Holland, D., Kirby, S. and Whitworth, R. (2010), 'A comparison of labour market responses to the global downturn', National Institute Economic Review, 211, pp. F38-F42.

Reinhart, C.M. and Rogoff, K. (2009), This Time Is Different." Eight Centuries of Financial Folly, Oxford, Princeton University Press.

NOTES

(1) Historical shocks to all equations on the model are repeatedly applied to produce alternative paths for the future given policy responses and rational expectation. The distribution for inflation outturns is currently similar to that given by inspecting historical forecast errors, but we can change the stochastic simulation distribution to take account of any changes in the policy framework.

(2) It is always possible that unit labour costs are rising because of public sector wage increases and this would not lead to an immediate squeeze on profits.

(3) This assumes 100 per cent pass-through of the tax increase to prices.

(4) The Bank of England's latest forecast for inflation is similar to our forecast published here and in our July Review.

(5) Standard crisis-dating studies have the UK with crises in the financial sector in 1890, 1975, 1984, 1991 and 1995--see Reinhart and Rogoff (2009), and Barrell, Holland and Liadze (2010), in a study for the European Commission, test for long-run output effects from the postwar crises after factoring out other drivers of trend output such as oil crises and R&D and they find no lasting scar.

(6) Barrell, Holland and Liadze also discuss the role of elite universities and their role in technological revolutions. The UK is fortunate to have fourteen of the 100 best universities in the world, and this is probably another reason for recent improvements in relative performance.

Table 1. Summary of the forecast

 2007 2008 2009 2010 2011

GDP 2.7 -0.1 -5.0 1.6 1.6
Per capita GDP 2.0 -0.7 -5.6 1.0 0.9

CPI Inflation 2.3 3.6 2.2 3.1 2.8
RPIX Inflation 3.2 4.3 2.0 4.6 3.4

RPDI 0.4 1.1 1.1 -0.8 -0.6

Unemployment, % 5.4 5.7 7.6 7.8 8.5
Bank Rate, % (a) 5.5 4.7 0.6 0.5 0.6
Long Rates, % 5.0 4.5 3.7 3.5 3.1
Effective exchange rate 2.1 -11.9 -10.5 -0.4 -0.3

Current account as % of GDP -2.6 -1.6 -1.3 -3.1 -2.7

PSNB as % of GDP(b) 2.3 6.9 11.0 9.7 7.9
PSND as % of GDPM 36.4 44.1 53.7 58.9 65.4

 Percentage
 change

 2012 2013 2014 2015

GDP 2.0 2.5 2.4 2.5
Per capita GDP 1.4 1.9 1.9 1.9

CPI Inflation 1.4 1.8 2.1 2.1
RPIX Inflation 1.8 2.3 2.6 2.6

RPDI 2.4 2.5 2.3 2.6

Unemployment, % 8.3 7.6 6.9 6.3
Bank Rate, % (a) 0.8 1.3 2.0 2.6
Long Rates, % 3.4 3.6 3.9 4.1
Effective exchange rate 0.9 1.1 1.0 0.8

Current account as % of GDP -0.7 -0.2 0.4 0.7

PSNB as % of GDP(b) 6.4 5.1 3.6 2.7
PSND as % of GDPM 69.1 71.7 72.4 72.1

Notes: RPDI is real personal disposable income. PSNB is public sector
net borrowing. PSND is public sector net debt. (a) End of period.
(b) Fiscal year, excludes the impact of financial sector intervention.