Prospects for the UK economy.

Kirby, Simon ; Carreras, Oriol ; Meaning, Jack 等

The production of this forecast is supported by the Institute's Corporate Members: Bank of England, HM Treasury, Mizuho Research Institute Ltd, Office for National Statistics, Santander (UK) plc and by the members of the NiGEM users group.

Introduction

The surprise general election result allowed the introduction of the unsurprising loosening of fiscal policy over the next five years. As Kirby (2015) illustrated before the election, a plausible looser fiscal stance, given the Conservatives' stated fiscal targets, would lead to a projection for marginally higher GDP growth than under the assumption of the implementation of the coalition government's fiscal plans. Indeed, the looser fiscal stance has provided the space for the Conservative government to ease back on implied reductions to government consumption. Overall, the effects of the fiscal plan should increase GDP growth marginally.

The ONS's preliminary estimate of GDP suggests that the softening of GDP growth in the first quarter of this year was merely temporary (see figure 1). It is estimated that the resumption of growth in the second quarter of this year has been driven by consumer spending growth.

The easing of household budget constraints due to the pass-through from oil price declines and the appreciation of sterling is expected to persist throughout this year. Oil prices are expected to remain subdued throughout this year and next. The pass-through from exchange rates to consumer prices is expected to persist into next year. These external developments are expected to support consumer spending growth in 2016 as well. Overall we expect consumer spending growth of around 3 1/4 per cent this year and 335 per cent per annum in 2016.

Gross fixed capital formation is expected to remain relatively buoyant this year and next. A benign funding environment and improving demand prospects in the UK and Europe should support reasonable rates of growth in corporate spending. The UK is not expected suddenly to transition into a higher investment economy, but the growth in business investment over our forecast period is enough to maintain a stable capital-output ratio at the desired level of the corporate sector. The private sector capital stock is expected to grow at around 23A per cent per annum over our forecast period, a rapid acceleration from the miniscule expansion of stock in the years during and immediately after the crisis.

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In the Summer Budget the government announced a major policy intervention in the labour market in the form of a National Living Wage (NLW) applied to those aged 25 and above; to be introduced in April 2016 at an hourly rate of 7.20 [pounds sterling]. This is approximately 11 per cent higher than the National Minimum Wage (NMW) which will be set at 6.70 [pounds sterling] from October 2015 onwards. The Office for Budgetary Responsibility (2015) has estimated that the overall economic impacts will be relatively modest, increasing structural unemployment by 0.2 per cent (around 60,000 people) and reducing the level of GDP by 0.1 per cent by 2020.

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Since the UK economy exited from the great recession in the third quarter of 2009, productivity growth has remained stagnant (see chart A7). Productivity growth is integral to an increasing standard of living for a population. Its resumption is the key assumption underpinning this forecast for the revival of real consumer wage growth and acceleration in per capita GDP. What is behind the UK's large productivity shortfall remains unclear; we discuss some of the recent research on this question in the Supply Conditions section of this chapter. Understanding why there is a shortfall should enable appropriate policy prescriptions to be implemented to boost productivity.

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The government recently published a comprehensive report (HMT, 2015) which outlines a series of reforms that have the ambition of raising productivity growth. The reforms are split along two lines; firstly, methods aimed at securing long-term investment: these include reform of the tax system for business as well as detailing how infrastructure such as transport and digital networks and education could be improved. The second is to promote a "dynamic economy" which deals mainly with economic reforms such as improving the housing system and competitiveness in financial markets, but also seeks a regional rebalancing of the economy. While the former is an admirable aim, it is disappointing that the Summer Budget introduced further, albeit modest, reductions in the capital budget, let alone increasing investment spending. The latter appears to have limited scope for radically improving productivity in the UK, and reads more like an affirmation of existing government economic plans.

However, there is a note of caution over our business investment projections. A Conservative majority government has confirmed a referendum on the UK's continued membership of the EU will be held before the end of 2017. Such a development could lead to a heightened sense of uncertainty, placing downward pressure on irreversible investment decisions. As we note in Box A, there is limited evidence of this to date. We have not factored in any negative effect on our business investment forecasts, but as we approach the day of the referendum, uncertainty may weigh on investment decisions.

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One set of risks that has focused the minds of the economic commentators of late is related to the ongoing saga in Greece. While financial markets outside Greece appear to be relatively sanguine about a possible Greek exit, the risk of contagion effects were Greece to leave the Euro Area and introduce a new currency persists. Were such risks to materialise and cascade through Euro Area economies and their banking sectors, they could have potentially calamitous effects on the UK economy.

A looser path for fiscal policy does not cause us to change our expectation of the public sector reaching an absolute surplus within this parliament. But we have delayed this event by one fiscal year, compared with our forecast published in the May Review. The Summer Budget's focus on an absolute surplus as a potential Fiscal Mandate was not a surprise, given the Chancellor had championed such a rule for a significant time prior to the general election. The government intend to legislate for a new fiscal rule, the third in five years.

The proposed rule removes the obsession with output gaps and cyclical adjustments to public finance aggregates, and introduces a rule that allows for a loosening of fiscal policy in a downturn, defined as a period of growth below 1 per cent per annum. The move away from focussing on point estimates of the 'Great Unobservable' when determining the fiscal stances is welcome. But given the inherent uncertainties that permeate any conjectural analysis, a turning point in the economic process of interest has a significant chance of being mis-identified. The Commentary in this Review, discusses fiscal policy and the proposed Fiscal Mandate in more detail.

Box A. The UK's referendum on EU membership and economic
uncertainty

by Oriol Carreras, Simon Kirby, Rebecca Piggott and James Warren

Introduction

The recently elected Conservative government has announced it will
deliver on its manifesto commitment and hold a referendum on
whether the UK should continue as a member of the European Union.
At the time of writing, the exact timing of the vote is uncertain,
but the government has imposed an upper bound on its timetable,
pledging to hold it before the end of 2017.

The question of the economic impact from a withdrawal from EU has
been raised with perhaps more import than ever before. We do not
focus on this broad question here--a question that currently has
only limited evidence to provide answers. Rather we focus on the
near-term issue of what effect the uncertainty over the outcome of
the referendum has on economic decision making in the UK economy,
and more specifically on investment decisions of firms.

As always, the counterfactual is crucial to any analysis. A
scenario where there is no commitment to a referendum and therefore
no uncertainty about the future position of the UK within the EU is
implausible given the persistence of questions over the UK's EU
membership within domestic political discourse. As such we must be
aware of the risk of over-estimating any increase in uncertainty
that stems from the act of running a referendum.

Uncertainty and investment

In economics the distinction between uncertainty and risk is often
blurred. In order to provide a succinct definition we shall refer
to the seminal work of Knight (1921) who defined risk as an event
in which the probability distribution of the outcome is known.
Conversely, with uncertainty relevant instances are so dissimilar
it is impossible to assign probabilities. Political uncertainty is
commonly defined as uncertainty about future monetary or fiscal
policy, the tax or regulatory regime, or electoral outcomes, as
such this may also incorporate elements of risk rather than pure
uncertainty. The literature typically uses uncertainty and risk
interchangeably. We use the term uncertainty throughout the rest of
this box, but acknowledge that in most instances it is quantifiable
risk that is referred to.

There is an exhaustive literature on the effects of uncertainty on
investment decisions. A standard view in the literature focuses on
the option value of waiting, where a rise in uncertainty leads to
delays in investment because it increases the value of waiting (see
Bernanke, 1983, and Dixit, 1989). Key in all this literature is the
presence of sunk costs. The interaction between uncertainty and
irreversible costs pushes some firms (usually the ones on the
margin between choosing to invest or not) to delay their choice of
investment until the uncertainty is resolved. Recent work includes
Bloom (2009), who finds that higher uncertainty causes firms to
postpone both investment and hiring. Productivity growth falls
because the rate of reallocation of resources from low to high
productivity firms is inhibited. But once uncertainty subsides,
there is a bounce back in economic activity as firms address their
pent up demand for capital and labour. Bloom finds that an
uncertainty shock generates a rapid slowdown and bounce back of
economic activity in contrast to the much more persistent slowdown
that typically occurs in response to a productivity or demand
shock.

Uncertainty in these contexts is typically thought of as relating
to general demand prospects and is drawn from an underlying
continuous distribution. Handley and Limao (2012), within the
context of trade agreements, extend this approach to uncertainty to
a variable that may change at some point in time in a stochastic
manner but once it changes it remains constant for a long period of
time (such as for instance a referendum--the outcome of the vote is
either the persistence of the status quo or the permanent
transition to a new regime) and show that the same results apply.

Beaulieu et al. (2002) analyse four major events between 1990 and
1996 including the second referendum on the question of Quebec's
independence from Canada in 1995. They found a heterogeneous effect
on firms, with those unable to diversify away the political risk
having to generate a higher return in the period of uncertainty in
the run-up to the referendum. Julio and Yook (2012) find that, on
average, firms reduce investment expenditures by 4.8 per cent
during election years relative to non- election years and find
evidence that close elections exacerbate uncertainty for firms,
depressing investment further than the 'normal' uncertainty around
an election does, all else equal.

The lead in to a referendum that has the potential to change
fundamentally the UK's relationship with the EU should have the
potential to increase uncertainty noticeably, depressing the
investment decisions of firms. The political uncertainty index
developed by Baker et al. (2015) suggests that uncertainty in the
UK reached a localised peak in the month of and month prior to the
general election (figure AI). Since the election has passed there
has been a pronounced dissipation in their measurement of
uncertainty in stark contrast to the key Euro Area members, a
phenomenon which is probably related to the Euro Area's continued
existential crisis.

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Recent polling suggests (figure A2) the gap between those with an
opinion on how they would vote if there was a referendum on EU
membership widened as the day of the general election drew closer.
The 'yes' vote has had a significant lead in recent YouGov polls, a
result replicated in the polling of Ipsos MORI, ICM and ComRes.

The literature is suggestive of a negative impact on investment
stemming from the very act of holding an election. Importantly
though, as always, is the counterfactual. In the current political
climate, the question of the UK's continued membership of the EU
would have been intensely debated, even if there were no commitment
to hold a referendum; witness the surge in votes for the UK
Independence Party, who place withdrawal from the EU as their
primary policy aim. However, an interesting measure of policy
uncertainty and recent polling indicating ample support for the
status quo option is not currently suggestive of an economic
environment impoverished by uncertainty over the referendum.

One would expect financial markets to have priced in the
probability of the UK's withdrawal. The appreciation of sterling
does, on the face of it, appear to suggest the referendum has had
little impact on demand for UK assets. However, we should be
cautious with such conclusions since exchange rates move for
various reasons, not least relative changes in monetary policy
expectations.

In constructing this forecast we have not assumed any discernible
softening in investment will occur as a consequence of the
referendum beyond financial markets incorporating information about
the referendum into current asset prices, thus affecting the user
cost of capital. If polling were to become noticeably tighter, we
might need to revisit the assumption concerning firm's investment
decisions in the lead-up to the referendum.

References

Bernanke, B. S. (1983),'Irreversibility, uncertainty, and cyclical
investment',The Quarterly Journal of Economics, 97, I, pp. 85-106.

Bloom, N. (2009),'The impact of uncertainty shocks', Econometrica,
77, pp. 623-85.

Baker, S., Bloom, N. and Davis, S. (2015),'Measuring economic
policy uncertainty', published on http://www.policyuncertainty.com/
index.html.

Dixit, A. (1989),'Entry and exit decisions under uncertainty',
Journal of Political Economy, 97,3, pp. 620-38.

Handley, K. and Limao, N. (2012), 'Trade and investment under
policy uncertainty: theory and firm evidence', National Bureau of

Economic Research, Working Paper No. w 17790.

Julio, B. and Yook, Y. (2012), 'Political uncertainty and corporate
investment cycles', The Journal of Finance, 67, I, pp. 45-83.

Knight, F. (1921), Risk, Uncertainty and Profit, University of
Chicago Press.

Monetary conditions

Markets have brought forward their expectations of when the Bank of England will begin to tighten policy slightly, with the OIS curve fully pricing in a 25 basis point increase in Bank Rate around May 2016, compared with the July 2016 expectations from just three months ago. This has followed a number of speeches by MPC members, but most notably comments by Governor Carney, who stated that he expects the question of interest rate increases to become most pertinent at the "turn of the year".

Our own view remains as it has done since the start of this year; that the most likely path is for policy to turn in February 2016, with rates then increasing at a gradual pace of around 50 basis points a year. This would seem to be in line with the Governor's comments that he expects Bank Rate to be around 2 per cent at the 3-year horizon.

The key questions are unchanged from May, although they are perhaps more acute as the passage of time brings us closer to the point of rate rises. At their heart is the extent to which the current weak inflationary environment is being driven by temporary factors beyond the control of the MPC, such as the oil price and the appreciation of sterling. Whilst the oil price will drop out of the inflation numbers at the turn of the year, the recent appreciation of the exchange rate will complicate the MPC's decision in the near term as it is likely to weigh down on inflation at least until 2017.

The second vital point of debate concerns the amount of spare capacity in the economy, and in particular in the labour market. There is some evidence of building wage pressures and skills shortages in certain sectors which might be indicative of a tightening labour market. What is more, without the increase in productivity that we, and a number of other forecasters, have built into our projections, then what spare capacity there is could be absorbed long before the end of the year and thus inflationary pressure could be about to take off more strongly than the MPC had expected. Were this to be the case, then interest rates would not only have to respond sooner than expected, but perhaps more aggressively, rising at a sharper rate.

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Underpinning our forecast is an assumption that the Bank of England will not look to begin unwinding the large holdings of assets accumulated by its quantitative easing programme until Bank Rate has at least hit 2 per cent per annum (Carney, 2014). On our current projection this occurs in early 2019. We assume that until that point the Bank continues to reinvest the principal payments it receives from the government on maturing bonds so as to maintain the size of the Asset Purchase Facility (APF). 77bn [pounds sterling] of the bonds currently on the APF's balance sheet are due to mature over this period, representing a sizeable re-investment programme. We assume that the Bank does this in such a way that it maintains the characteristics of its current portfolio. From 2019 onwards principal payments are no longer reinvested and the APF begins to unwind itself naturally as bonds mature and the principals are used to reduce the loan to the Bank of England, and in turn to remove central bank reserves from the banking system. Despite this gradual reduction in the Bank's balance sheet, it seems likely that a large part of the expansion over the past six years will be permanent, as structural shifts in the demand for liquid assets and changes to how policy is implemented lead to the need for a larger and more diverse use of central bank balance sheets.

Exiting the current accommodative policy environment presents a number of interesting operational considerations, some of which were highlighted in a recent speech (Salmon, 2015). He discusses the need to withdraw, or at least manage the large quantity of reserves that have been injected into the financial system by quantitative easing, an issue we elaborate on further in Box B. Although perhaps an operational point, it has implications for the conduct of monetary policy over our forecast period, as well as potentially for the profile of cash transfers between the Bank of England and HM Treasury and the eventual fiscal transfer necessary under the government's indemnity. The fiscal implications of the APF are discussed in Kirby and Meaning (2014).

The impending increase in interest rates has not yet fed into mortgage rates, which continued to fall. The quoted rate on a 2-year fixed rate mortgage with 95 per cent loan-to-value (LTV) fell by over 30 basis points between March and June 2015, with similar reductions at other LTVs and terms. There is however anecdotal evidence of fixed rate offers beginning to rise in the past few weeks, which may be reflected in the official data over the coming months.

Prices and earnings

Consumer price inflation has been weak in the first half of this year. Since February, consumer prices have effectively stagnated. We expect this pattern to persist throughout the remainder of this year, before a modest pick-up to around 1 per cent per annum, on average, in 2016. Further out, we forecast a rate of inflation more consistent with the Bank of England's mandated target over the medium term.

The fall in oil prices at the turn of the year currently still weighs on the headline inflation figure. But commodity price movements are volatile. The outlook for oil prices has softened considerably since our forecast in May. The possibility of Iran's re-integration into global markets, and what seems like a strategy by OPEC members to increase market share, has led to an upward revision to expectations for short-term global oil supply. Coupled with the ongoing softening of global demand, the EIA has removed an expected rebound in oil prices this year and next from their forecast. Figure 7 compares the EIA projections incorporated into our current and previous two forecasts. These show the present flat level for oil prices which now rise to $54.7 a barrel by the end of 2015 and average $59.7 a barrel in 2016. This will limit the re-inflationary offset we had expected to see pass through to consumer prices over this period.

Sterling has evolved broadly as we expected it to back in May. There has been a continued appreciation against the euro, although marginally stronger than we had forecast. Between the end of our last forecast round and the time of writing sterling has gained around 3 per cent on the euro, driven mainly by a deterioration of the situation in the Euro Area with regard to Greece and a tightening of markets' expectations for monetary policy in the UK. This appreciation will level off in the third quarter at around 1.42 [euro] and remain stable around that value throughout 2016.

Having depreciated against the dollar since the middle of 2014, the past three months have seen sterling pull back some ground, rising by 2 per cent since our last forecast. This looks to be a consequence of a slight softening in US data and a relative narrowing of the timing of interest rate rises between the two economies. Despite this, sterling remains roughly 8 per cent down on where it was twelve months ago, and although we expect a slight further appreciation to the end of the third quarter it should finish the year at around $1.56, representing an average depreciation for the year as a whole of just over 6 per cent.

Positive revisions to the outlook for the price of sterling relative to its two largest trading currencies results in an upward revision to our forecast for the nominal effective exchange rate, which we now expect to rise by 6.9 per cent in 2015, rather than the 4.3 per cent we presented in May. This amplifies the disinflationary pressure facing the UK and extends the period over which the exchange rate is expected to bear down on prices by roughly a year, to 2017.

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Box B: The reserve management implications of an expanded central
bank balance sheet and policy normalisation

by Jack Meaning

The ability to control short-term money market rates effectively
lies at the heart of monetary policy. In the UK, exactly how this
is done on an operational level is determined by the Sterling
Monetary Framework as outlined in the Bank of England's Red Book.
This has been subject to a number of important changes since 2009,
the implications of which merit further consideration. Until 2009,
the Bank of England employed a system of reserves averaging under
which commercial banks submitted the quantity of reserves they
expected to require on average over the month ahead, given current
interest rates. The Bank then supplied reserves equal to the
aggregate demand from all banks. On any given day some banks would
find themselves long reserves relative to their desired holdings,
and some would be short. Those holding excess reserves could leave
them on deposit with the Bank of England, but crucially only
received interest on balances that were not significantly above
their target level. For banks finding themselves short their
demanded reserves, they could either borrow additional reserves
directly from the Bank of England at the Bank Rate, or from another
bank in the money market. This effectively kept the money market
rate close to Bank Rate as banks short of reserves would be willing
to pay up to, but not above what it cost them to obtain funds from
the Bank of England, and banks long reserves would be prepared to
lend the excess funds out rather than hold them and receive no
income.

As the financial crisis of 2007-2008 intensified, the Bank of
England was concerned that the banking system was not holding
sufficient liquidity, and so provided reserves in excess of the
aggregate demand. In order to ensure this did not lead to a fall in
money market rates that was inconsistent with the monetary policy
objective, the quantity of excess reserves that would be
remunerated at Bank Rate was expanded, Fisher (2009). The
introduction of quantitative easing in 2009 caused the supply of
reserves to increase dramatically and meant that banks were forced
to hold reserve balances far in excess of what they might otherwise
demand. Without intervention this oversupply would have led to
money market rates falling below the level targeted by monetary
policy. To avoid this, the Bank had to change its institutional
framework and begin remunerating all excess reserves deposited with
it by commercial banks at a positive rate of interest. This rate was
intended to create a floor on money market rates, regardless of the
quantity of reserves supplied, as banks could always deposit
reserves with the central bank and receive Bank Rate, so should not
be incentivised to lend them on the money market for less than this
(see figure BI). Under this 'floor' system, the key policy rate was
then the rate of interest paid on reserves.

The floor system has been largely successful at controlling money
market rates over the past six years, whilst allowing the Bank to
expand its balance sheet massively. The overnight LIBOR rate has
consistently traded close to 50 basis points, although there has
been a slight but persistent negative wedge of around 4 basis
points (see figure B2).

As we note in the UK chapter of this Review, the MPC appears to be
close to the moment when it will want to raise interest rates; we
currently expect the first rate rise to occur in February 2016.
Under the floor system they can achieve this in one of three ways.
The first would be to actively unwind the quantitative easing
programme and sell assets back to the market, simultaneously
withdrawing reserves. If this is done in sufficient quantity then
the floor will become non-binding as the money market once again
becomes short of reserves in aggregate (a movement from S1 to S2 in
figure 3). However, the MPC have stated that they intend to
increase Bank Rate before they start to sell government bonds back
to the market. What seems more likely then is that they will
increase the rate of interest paid on reserve balances. As can be
seen by the red line in figure 3, this would raise the floor on the
money market and tighten policy independently of supply.
Disconnecting the quantity of reserves and the stance of monetary
policy in this way is an idea explained well by Goodfriend (2002).
Raising the floor in this way has the potential to widen the
negative wedge currently observed between Bank Rate and the
prevailing money market rate. Were this to happen, the ability of
monetary policy to control market rates and thus stabilise the
economy could be hampered. As explained in Salmon (2015), in this
situation the Bank would look to reduce the supply of reserves via
the issuance of Bank of England bills. This amounts to a reverse
quantitative easing (quantitative tightening?) as the central bank
sells an asset to the private sector and receives reserves in
payment, reducing the quantity left available. In principle it is
similar to the unwinding of quantitative easing through sales of
gilts. Importantly though, by selling Bank of England bills, which
will likely have a maturity of around one week, this option will
not introduce significant additional maturity on to the private
sector, nor will it have a substantial effect on long rates in gilt
markets, other than through the traditional term structure effect
of moving short rates.

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Even if the issuance of central bank bills is effective in mopping
up excess liquidity and the central bank retains control of money
market rates, the large quantity of reserves and the fact that the
central bank must pay interest on them in order to clear the money
market at their target policy rate is not without
consequence. Whether paid on reserves or bills, these interest
payments represent a cost to the Bank of England of maintaining an
expanded balance sheet. As detailed in McLaren and Smith (2012),
the Asset Purchase Facility (APF) has a loan from the Bank of
England, on which it pays Bank Rate. The Bank of England has
financed this loan by issuing reserves, on which it also pays the
policy rate. So, when the level of interest paid on reserves
consistent with the monetary policy objective increases, either the
Bank of England has to pass this on to the APF, or face a loss
itself. If it chooses the former and increases the interest on the
APF's loan in line with Bank Rate, this will worsen the profit and
loss position of the APF as its income stream from its government
bond holdings is relatively fixed. As described in Kirby and Meaning
(2015), this will have direct fiscal implications by increasing the
fiscal transfer required to close out the APF under the
government's indemnity.

All in all, the floor system of reserve management has been an
effective framework while interest rates have been close to their
perceived lower bound and the central bank has wanted to largely
oversupply the money market. However, as the policy cycle moves
into its tightening phase, the adequacy of a floor requires at
least some consideration, along with its wider implications for
monetary and fiscal policy. What appears to be a technical issue
about the Bank's conduct of open market operations, may well start
to become a topic of intense debate in close to half a year.

REFERENCES

Fisher, P. (2009), The Bank of England's balance sheet: monetary
policy and liquidity provision during the crisis', Speech to the
Professional Pensions Show.

Goodfriend, M. (2002), 'Interest on reserves and monetary policy',
Economic Policy Review, Federal Reserve Bank of New York, issue
May, pp. 77-84.

Kirby, S. and Meaning, J (2105), The impacts of the Bank of
England's asset purchases on the public finances', National
Institute Economic Review, 232, May.

McLaren, N. and Smith, T. (2013), The profile of cash transfers
between the Asset Purchase Facility and Her Majesty's Treasury',
Bank of England Quarterly Bulletin, 53(I), pp. 29-37.

Salmon, C. (2015), speech to the Money Markets Liaison Committee,
13 July.

Core inflation, which excludes more volatile components such as energy, food and alcoholic beverages, is a useful proxy for underlying inflationary pressures. In recent months it has fallen below 1 per cent per annum, registering 0.8 per cent per annum in the twelve months to June 2015 after averaging at a stable 1.3 per cent in 2014. The likely drivers of this disinflationary pressure are the second-round effects of the oil price drop and the continued pass-through of movements in sterling since March 2013 to the imported component of the basket of goods (see Kirby and Meaning, 2015). Neither of these factors are expected to be permanent, though if they were to persist for a more prolonged period than our current central forecast suggests, there is the possibility that they may adversely impact on inflation expectations. Currently, expectations at medium term horizons remain relatively stable, though there has been some softening in the near term, as one would expect given the current outlook.

The divergence of goods and services inflation which began last year has widened further in recent months. The services component of the consumer price basket has held up well and the 12-month change has been consistently around 2-2 1/2 per cent for over a year. However, goods prices are now contracting heavily, falling by 2 per cent in the twelve months to June.

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There is evidence of underlying wage pressure beginning to build. The regular pay component of average weekly earnings (excluding bonuses) has strengthened considerably since the beginning of the year. Comparing the three months to May with the same period last year it has risen 2.8 per cent per annum, significantly more than the 1.2 per cent per annum it averaged in 2014. The increase is most stark in the private sector where nominal earnings have grown by over 3 per cent year on year since March. Public sector wage growth has remained muted around 1 per cent. Given that in his Summer Budget the Chancellor announced that increases in the public sector wage bill will continue to be limited for the duration of this parliament, we expect the public sector, which currently makes up around 17 per cent of the workforce, to weigh down on economy-wide wage growth over our forecast horizon. This is borne out in the settlements data where the median pay award in the twelve months to May was 1.5 per cent in the public sector, whilst in the private sector it was 2 per cent, according to XpertHR's monthly series.

Wages as calculated from the National Accounts actually softened in the first quarter of the year compared to where we had expected them to be back in May, contracting 0.8 per cent over the quarter. We forecast that this will come back into line with the settlements and AWE data for the remainder of the year, but it does weigh down on our forecast for wage growth in 2015. We therefore forecast a relatively weak 0.3 per cent growth in nominal wages this year, but aided by the weak profile for prices this translates to an average increase in real consumer wages of 0.5 per cent per annum. This will accelerate though 2016 as, despite the bounce back in inflation, real consumer wages will rise by an average of 1.2 per cent on the back of increasing productivity and a diminishing degree of slack in the labour market. There will be a more rapid increase for these on low hourly wages since the NLW will rise from 7.20 [pounds sterling] in April 2016 to 60 per cent of median wages from 2020.

Demand conditions

The ONS' Preliminary Estimate of GDP suggests that the economy grew by 0.7 per cent in the second quarter of 2015; this is in line with our nowcast for this quarter, publishedatthestart of July. These quarterly developments support our view that the softening of growth in the first quarter of this year was temporary, more to do with the natural volatility in quarterly movements in GDP, rather than the start of a more pronounced slowdown in the economy. Our understanding of recent GDP growth may well change when the next set of National Accounts is published in September, due to the annual overhaul of economic statistics. Box C highlights some of these forthcoming impacts. The effects are expected to be relatively modest, but nonetheless we cannot rule out a re-evaluation of the performance of the UK economy in recent quarters.

Our GDP growth forecast for 2015 is for 2.5 per cent per annum. In the short term we expect GDP growth to be around 2 1/2 per cent per annum primarily driven by strong growth in consumption and investment. Over the longer time horizon we expect growth rates to remain in excess of long-run potential which we estimate to be around 2 per cent per annum as the negative output gap continues to close, with growth becoming balanced between domestic and external sectors.

For the first quarter of 2015 consumption grew by 3.4 per cent up year-on-year from 3 per cent in the final quarter of 2014. Retail sales provide a useful indicator in order to assess the immediate outlook for household consumption. It is published in a more timely manner than total consumer spending. However, as Dolling et al. (2005) note, it accounts for only around one third of consumer spending. In the second quarter retail sales grew by 4.4 per cent when compared with the same period a year previously. This suggests that consumption will remain strong in the second quarter, growing 3.1 per cent on a year-on-year basis. For 2015 as a whole we expect consumption growth to contribute around 2 percentage points to overall economic growth this year, increasing to 2 1/4 percentage points in 2016, largely as a result of an increase in household real disposable incomes. These are further supported by temporary disinflationary developments: the 2.2 per cent appreciation of the effective exchange rate in the second quarter of 2015, and the softer outlook for oil prices. Further ahead, as the disinflationary pressure dissipates and inflation returns towards the Bank of England's mandated inflation target, household's real disposable income growth is forecast to ease, leading to a moderation in consumption. From 2017 onwards consumption is expected to contribute between 1 and 1 1/2 per cent to GDP growth.

Investment growth in 2014 was revised up to 8.6 per cent from 7.8 per cent per annum as a result of methodological improvements. This implies that firms are likely to be closer to their desired long-run capital stock levels than previously estimated. Consequently, we have softened our forecast for private investment growth. In the near term, we still expect the GDP growth contribution from investment to remain above its historic average of 0.4 percentage point for the period 1992 to 2007 as firms capitalise on the buoyant domestic demand conditions to expand their productive capacities. In 2015 we forecast that private investment will contribute 1 percentage point to GDP growth, increasing slightly to 1 1/2 percentage point in 2016, after which the contribution of investment gradually eases throughout our forecast period. By 2020 we expect investment to contribute around 0.4 percentage point to GDP growth. As highlighted in Box A, the very act of holding a referendum on the UK's continued membership of the EU represents a key downside risk to our near-term forecast for business investment volumes. As of yet, there is little indication of the referendum leading to firms delaying investment decision. However, in the very near term it is the persistent Greek crisis that could very well weigh on investment decisions by the UK's corporate sector.

Underpinning our fiscal forecasts is an assumption that government consumption and investment evolve broadly as planned by the government. In the absence of specific spending envelopes these are based on the assumptions of the Office for Budget Responsibility (OBR)'s latest Economic and Fiscal Outlook, published alongside the Summer Budget. Before the election we noted the likelihood of a continuation of a fiscal consolidation programme, but that the main parties' plans implied a process of consolidation that was significantly less austere than the coalition's plans (see Kirby, 2015). The key uncertainty was over the pace of any further fiscal consolidation.

Box C. Forthcoming changes to the Quarterly National Accounts

by Simon Kirby and James Warren

Each year the ONS publishes the Blue Book. Alongside the annual
benchmarking exercise and movement to a new reference year for
constant price estimates, the ONS also incorporates a variety of
additional information sources to help refine the measurement of
the UK economy, for example annual figures from HMRC to refine
estimates of household and corporate incomes. The Blue Book is also
used by the ONS to introduce methodological changes, which can
potentially lead to significant revisions to our perceptions of
historical economic statistics. The adoption of the European System
of National Accounts 2010 in 2014 is perhaps an extreme example of
this, when the level of current price GDP was revised by 2.3 per
cent of GDP (see Box C in the August 2014 Review).

This September will see the release of Quarterly National Accounts
(QNA) data consistent with Blue Book 2015. While many changes are
planned, the magnitude of the combined impact on GDP (either
current or constant price) is estimated to be modest (ONS 2015a,
2015b).

A number of methodological improvements to gross fixed capital
formation (GFCF) will be implemented. The most significant are
changes to the survey used to collect the underlying data. This
includes a simplification of the survey as well as a re-definition
of GFCF. The lower bound for recording of investments (currently a
value of 500 [pounds sterling]) will be removed, while small tools
will now be classified as GFCF (Duff, 2015).

There are also changes in the way repairs to buildings will be
incorporated into GCFC. Previously the costs associated with land
transfer were double counted and this is now to be eliminated.
Furthermore, the costs of land transfer series will be estimated
with real data rather than modelled estimates (Duff, 2015).

Network rail has been reclassified to central government from the
private non-financial corporate sector, while Transport for London
has been reclassified to local government from a public
non-financial corporation. However, these changes will have a
minimal impact on overall GDP.

The ONS has updated the price series used for smuggled tobacco and
alcohol with the primary aim of increasing coherence with HMRC
data, this is likely to impact on both the current price and chain
volume measures of consumption and imports and therefore both
measures of GDP.

The ONS had, incorrectly, allowed the price series used to
re-inflate estimates of the volume of narcotics imports and
consumption to remain in US$. This will be corrected and, depending
on the value of the exchange rate for the relevant year, will lead
to GDP revisions either upwards or downwards. However, the
revisions are of a small magnitude, with the maximum impact on
annual GDP of +/- 0.1 percentage points in any year between 1997
and 2010 (ONS, 2015b).

The treatment of local government pensions has been refined,
increasing the imputed cost of employer contributions. Given how
local government output is measured (inputs equal outputs), this
will also translate into an increase in local government output and
consumption.

The ONS estimates that the cumulative effect of these revisions
will lead to lower nominal GDP--by 0.2 per cent by 2010. However,
there will be no discernible impact on growth rates between 1997
and 2010. For real GDP the average growth rate is estimated to be
revised downwards by on average 0.2 percentage points per annum for
the period 1998 to 2010 (ONS, 2015a and b).

References

Duff S. (2015), Methodological Improvements to National Accounts
for Blue Book 2015:Gross Fixed Capital Formation (1997 to 2010),

ONS. ONS (2015a), Impact of Blue Book 2015 changes on Chained Volume
Measure Gross Domestic Product Estimates, 1997 to 2010.

--(2015b), Impact of Blue Book 2015 changes on Current Price Gross
Domestic Product Estimates, 1997 to 2010.

As Pope (2013) notes, around two thirds of government consumption is measured on an output basis, for example, the number of pupils taught or the number of operations carried out. As a result, in the absence of the volume of goods and services government consumes falling, fiscal consolidation will manifest in the price deflator. Figures 10 and 11 show the current and historic OBR forecasts for nominal and real government consumption; in the most recent projections both nominal and real government consumption are expected to grow throughout the forecast period.

The direct impact of annual changes in the volume of government consumption on GDP growth are presented in table A3. With the exception of 2015, when we expect general government consumption to contribute 0.3 percentage point to GDP growth, contributions based on implied plans from the Economic and Fiscal Outlook are now expected to be close to zero. This is a sharp upward revision from our May forecast, which was based on the last coalition Budget in which government consumption was expected to subtract 0.2 percentage point from GDP growth in 2017 and 2018. These figures, however, provide only a small amount of information with regard to changes in the fiscal stance. Restraint in general government consumption is evident in the estimate of the price deflator, which since 2011 has, on average, been flat; this compares with the 1998-2010 period, where growth averaged 33A per cent per annum. This is not to say it does not have short-term implications for the volume of final demand real output in the economy; for example, the Chancellor's announcement that the public sector wage bill will be constrained to a rate of growth of 1 per cent per annum has significant implications for the future evolution of the purchasing power of public sector employees.

[FIGURE 10 OMITTED]

[FIGURE 11 OMITTED]

The external sector is expected to subtract around 1/2 and 1 percentage point from GDP growth in 2015 and 2016, respectively. Import growth is supported by the recent appreciation of sterling against the euro and the UK's strong domestic demand performance. At the same time, the rise of sterling does have some competitiveness implications for exporters, but the fundamental constraint on this sector remains the weakness of total final expenditure in the Euro Area. As consumer spending growth moderates from 2017 onwards, we expect import growth to follow suit. Import volumes are expected to subtract around 1 3/4 percentage point from GDP in 2017 and just 1 1/4 percentage point in 2018.

As table 2 highlights, for both goods and services, the Euro Area remains the most important trading partner for UK exports. It is reasonable to expect that the performance of the export sector will be inextricably linked to the performance of the Euro Area economies. As explained in the 'World Section' of this Review, we expect the Euro Area to recover gradually with growth peaking in 2017. Our forecast is for acceleration in the rate of growth in UK export volumes to coincide with this profile. Export growth is expected to peak at 6.5 per cent in 2017. As a result we expect net trade to provide a positive contribution from 2017 onwards. The recent appreciation of sterling does provide a downside risk to our forecast for export volumes. We assume that firms can reduce their margins in order to maintain market share, evidence from the Bank of England's July Agent Summary of Business Conditions suggests that this process is already occurring.

Household sector

During the first quarter of 2015 spending growth was stronger than growth in real personal disposable income (real income henceforth) leading to a fall in saving. As a consequence, the household debt to income ratio marginally increased and seems to be stabilising at a historically relatively high level. House prices are rising but the evidence on price growth deceleration, pointed out in the last two editions of the Review, has become somewhat mixed.

Real income is forecast to grow in 2015 by 4 percentage points, driven primarily by strong growth in total personal income, but this constitutes a downward revision from our previous Review, which forecast real income growth to grow by 4.7 percentage points. In our last Review we had increased our forecast for 2015 from 3.6 to 4.7 per cent after factoring in a weaker evolution of prices which pushed real income up. Here we have maintained our inflation forecast but reduced the growth rate of total personal income. The expected deceleration is driven by a reduction in the rate of growth of nominal wages, which we have slashed from 1.1 to 0.3 per cent following a very weak outturn in the first quarter of 2015 as well as a moderate decline in the rate of growth of employment. After peaking in 2015 we expect real income to grow at around 2 1/2 per cent over the medium term as inflation returns to normal levels.

Consumer spending has increased by 0.9 per cent quarter-on-quarter, at the start of this year. This is the fourth quarter in a row of strong spending growth from a historical perspective. The largest increases in spending have been within the housing (including rental payments, utility bills and housing goods), recreation and culture and restaurants and hotels sectors. Decomposing the array of goods between durables, semi-durables and non-durables, we observe an even contribution to spending growth among the three categories. One positive indicator is that motor vehicles explain around half the total increase in durables over this last quarter. Net tourism deducts from domestic consumption as UK households spend on aggregate more abroad than foreigners spend in the UK. The pick-up in nominal income growth, combined with the temporary disinflationary effects from the recent effective exchange rate appreciation plus subdued oil prices, are expected to support growth in consumption during the current and following year. We expect consumption to grow at 3.3 and 3.5 per cent in 2015 and 2016, and to ease to around 2 1/2 per cent over the medium term following the path of real incomes.

[FIGURE 12 OMITTED]

The result of real income growth outstripping consumption growth in 2015 is that the saving rate is forecast to rise by 0.7 percentage point in 2015, only to fall back again by 0.7 percentage point in 2016 as the process reverses. From then onwards we see households slowly accumulating savings. The corollary to this is that we expect the household debt to income ratio to hover at around 142 per cent until 2018, at which point it will slowly decrease until reaching 140 per cent at around 2021. After deleveraging from a peak of 166 per cent in 2008, UK households seem to have stabilised at a ratio below the peak but still well above the levels observed historically (see figure 12).

Activity in the housing market has increased during the second quarter of 2015. According to the Bank of England's Money and Credit report for May 2015, mortgage approvals have picked up since February growing a total of 4.2 per cent over the three months between March and May. HMRC property transactions data suggest a similar picture. After a modest decline between March and April 2015, property transactions have rebounded. This pick-up does not seem to be led by the resolution of the uncertainty surrounding the general election in early May as transactions had already begun to increase during the month running up to the election. From a historical perspective, the number of transactions have been rising since reaching a trough in 2009, but are still around 25 per cent below the number of transactions recorded in 2007. The relation between approvals and transactions is consistent if we consider that approvals lead transactions.

The data on the evolution of house prices is mixed. On the one hand, according to our preferred measure of house prices, the seasonally and mix-adjusted index from the ONS, prices in the UK have increased by 6.8 per cent on the three month average to May 2015. These are much smaller figures when compared to previous years (see figure 13). The Nationwide house price index, a leading indicator of the ONS measure as it is derived earlier in the house purchase process, also supports the view of a softening housing market: during the second quarter of 2015 compared to the same quarter the year before prices have increased by 4.1 per cent, way below the peak reported by Nationwide of 11.5 per cent in the second quarter of 2014. Nationwide also reports a slowdown in prices in eleven out of thirteen regions in the UK. In particular, London reported a quarter-on-quarter growth rate of 7.3 per cent in the second quarter of 2015, down from 12.7 per cent in the first quarter. On the other hand, the house price index from Halifax and the survey data from the Royal Institute of Chartered Surveyors (RICS) that reports the headline price balance--the proportion of respondents reporting a rise in prices minus those reporting a fall--portray instead a picture of house price inflation gathering momentum. Halifax reported a mild quarter-on-quarter growth rate of 0.3 per cent during the last quarter of 2014 followed by a much more vigorous figure of 2.7 per cent in the first quarter and 3.3 per cent in the second quarter of 2015; very similar numbers to the ones recorded in early 2014 when house prices were growing fastest. RICS survey data for the second quarter of 2015 also display the headline price balance increasing to an eleven month high of 40 per cent, the product of strong demand and constrained supply.

According to Halifax, which uses wages of full-time male employees as a measure of earnings, and our own database which uses a broader measure of earnings taken from the ONS, the house price to earnings ratio has continued to increase during the first quarter of 2015 and to approximate historical highs. This has been possible partially because of low mortgage rates in the market driven by the low Bank Rate. However, the high degree of household indebtedness and the fact that income gearing has recently started increasing (see figure A5) is worrisome. Interest rate spreads have increased in every quarter since the last quarter of 2014, but most of this has been due to the fall in the rate of return on deposits, as borrowing rates have remained fairly constant. If households rely on income rather than return on savings to repay loans and mortgages then the increase in the spread does not pose a risk at this juncture. However, as soon as borrowing rates increase following a rise in the Bank Rate, income gearing will peak and weigh down on the consumption prospects of households.

[FIGURE 13 OMITTED]

Supply conditions

The ONS estimates that business investment increased by 2 per cent in the first quarter of 2015 compared to the previous quarter to 46.5 billion [pounds sterling], in 2011 prices, the highest volume of investment since 2005. The funding environment for the UK corporate sector remains relatively benign, with user cost of capital at historically low levels in 2012 to 2015, while confidence has improved. The CBI's business optimism index--which ranges from -100 to +100, where 0 represents neutrality--rose to 15 in the first quarter of 2015, up from 8 in the previous quarter but below a peak of 33 in the second quarter of 2014. This is compared to the long-run average of -6.9 since 2000. Perhaps driven by uncertainty surrounding the general election and the situation in Greece, business optimism as measured by the CBI index fell to 3 in the second quarter of 2015. Despite this, the Bank of England's Credit Conditions Survey 2015 Q2 reports that demand for lending by small businesses increased in the second quarter of 2015, for medium sized businesses remained unchanged, and for large businesses increased slightly. Demand from across the size distribution of businesses is expected to increase in the third quarter. The availability of credit to small businesses was reported to have increased in the second quarter, while the supply to medium and large businesses was unchanged. The Bank predicts supply to the corporate sector as a whole to increase slightly over the next three months. We expect business investment growth to remain buoyant throughout 2015 and 2016, but to ease further out into the forecast horizon as capital stocks adjust to levels desired by the corporate sector.

Housing investment increased by 8.6 per cent in the first quarter of 2015 compared to the same quarter one year earlier. This is a slight slowdown in the growth rate which averaged 13.1 per cent in 2014. We forecast housing investment to grow by around 7 1/2 per cent in 2015 and 11 1/2 per cent in 2016 before the growth rate starts to slow somewhat.

The unemployment rate fell to 5.5 per cent in the first quarter of 2015, its lowest level since the three months to July 2008. 509,000 unemployed people found employment on a seasonally adjusted basis in the first quarter of 2015. At 27.6 per cent, this is the highest rate of movement from unemployment to employment since 2008. The number of employed people who became unemployed has been around 340,000, or 1.1 per cent of the total number of employed people since the third quarter of 2014. This is the lowest rate of movement from employment to unemployment since early 2008 and compares to a peak of 551,000 people or 1.9 per cent in the second quarter of 2009. In the three months to May 2015, the unemployment rate increased to 5.6 per cent from 5.5 per cent in the three months to April 2015. This is the first increase in over two years but can be largely attributed to sampling effects (see Rush, 2015 for details). The cohort that left the survey in May had the lowest unemployment rate in the sample (4.5 per cent) and was replaced by a cohort with the highest unemployment rate (6.1 per cent). Therefore we expect this increase in the unemployment rate to be a temporary blip rather than the start of an upward trend.

The unemployment response to the recession has been muted (see figure 14 for a comparison of unemployment rates in the UK and selected OECD countries) and the employment rate of people aged 16-64 is currently above the highest rate that prevailed prior to the recession. This has come at the expense of real consumer wage growth, with real wages falling by 2.2 per cent per year between the first quarter of 2010 and the second quarter of 2013 before starting to rise gradually (see figure 15). Reasons for this may include loss of union bargaining power over the last few decades and welfare labour market reform focused on increasing labour market participation, such as the introduction of Jobseeker's Allowance in 1995, which might encourage workers to accept jobs at lower wages than they would have previously and improve the labour market matching process. However, wage growth has recently started to pick up. ONS data show that average total weekly earnings, seasonally adjusted, 'jumped up' by 3.2 per cent, year-on-year in the three months to May, with particularly strong growth in the construction sector and wholesaling, retailing, hotels and restaurants (both 4.9 per cent per annum over the same period). Since the inflation rate was zero on average in the three months to May, these figures represent real changes in wages. There is some evidence of a tightening labour market, and accelerating wage growth may be indicative of this.

[FIGURE 14 OMITTED]

However, we need to put recent developments into context. The Bell-Blanchflower underemployment index measures the excess supply of hours in the economy--the hours that the unemployed would work if they could find a job and additional hours that those in employment wish to work--expressed as a percentage of the sum of hours worked and surplus hours. Unemployment and underemployment diverged at the start of the recession with underemployment rising faster than unemployment. While both measures have come down, as of the fourth quarter of 2014 underemployment is still 1.4 percentage points above unemployment. It is unlikely that employment growth can continue in the long term if the labour force is not equipped with the necessary skill sets. The CBI/Pearson Education and Skills Survey 2015 shows that more than half of businesses fear that they will not be able to recruit enough workers with the required skills.

[FIGURE 15 OMITTED]

The announcement of the introduction of a National Living Wage in the Summer Budget bypassed the Low Pay Commission which is charged with recommending levels of the national minimum wage which do not lead to significant adverse impacts on employment. Unlike the NMW, the NLW has no provision to limit negative effects on employment as a result of uprating to the target of 60 per cent of the median wage by 2020.

There exist some risks to employment around this policy; firstly, we would expect the largest impact of the introduction of the policy would fall on sectors whose production is labour intensive and relies on low paid employees. This could possibly lead to a fall in employment in such sectors if firms chose to adopt a more capital intensive approach. However, there is a question over how plausible capital substitution is in low wage, labour intensive industries. Riley and Rosazza Bondibene (2015) find that with the introduction of the minimum wage and subsequent upratings, the increase in labour cost was matched by an increase in labour productivity, or alternatively, rather than a switch in the composition of production, firms utilised their existing labour force more effectively. A second area of concern would be regarding adverse impacts of the policy over employment across the age distribution, Riley (2013) suggests that the introduction of the NLW could lead to a fall in the conditional labour demand 1 of 15-29 year olds of around 300,000 while the aggregate figure would be around half of this, as firms substitute for older more experienced workers.

We expect real producer wages, which include employer's national insurance contributions but not pensions or other benefits, to fall by 0.9 per cent in 2015 before picking up in 2016 and continuing to increase in the medium term. A related indicator is labour cost per unit of output produced, which we expect to fall by 0.3 per cent in 2015, before rising by 0.7 per cent in 2016, and grow by around 1.5 per cent in the medium term. We predict that the unemployment rate will continue to fall over the next few years.

Labour productivity in terms of output per worker decreased by 0.3 per cent in the first quarter of 2015, while output per hour increased by 0.3 per cent, suggesting the UK's weak productivity performance has persisted into the start of yet another year. Output per worker and output per hour still remain below their prerecession levels, by 0.2 and 0.8 per cent, respectively. This poor productivity performance remains somewhat of a puzzle. Bryson and Forth (2015) find some, albeit limited, evidence in favour of the hypothesis that faced with uncertainty of future hiring and firing costs, firms have retained labour, especially skilled labour. They found an increase in the proportion of employees who were in skilled occupations, especially in firms that had reduced the size of their workforce. This suggests that firms were retaining skilled labour, perhaps because of the difficulty of replacing the firm specific human capital that these workers had acquired. Another possible reason for sluggish productivity growth is reduced capital investment. Gregg et al. (2014) point out that low wage growth in recent years has led to firms substituting labour for capital, limiting labour productivity and therefore wage growth in a vicious circle.

Riley et al. (2015) find some evidence to support the idea that inefficiencies in resource allocation associated with the contraction in credit supply led to stagnation in productivity growth between 2008 and 2013. They conclude that the UK's poor productivity performance was mainly due to loss of productivity within firms rather than a reduction in allocative efficiency between firms. The authors claim that this is likely to be due to lack of cost pressures including low nominal wage growth which enabled firms to survive under conditions of low demand. They conclude that a significant component of productivity growth is pro-cyclical and possibly reversible once output growth recovers.

Public finances

The election of a Conservative majority government has brought with it the second budget of this fiscal year. The Summer Budget 2015 introduced significant discretionary policy changes for this parliamentary term. Overall the Summer Budget introduced a looser fiscal stance than in our baseline published just three months ago, but some form of relative loosening has been expected (see Kirby, 2015 for example).

Table 3 presents a summary of the discretionary policy changes to tax and public sector spending from the perspective of the Exchequer. The loosening of the fiscal stance has occurred primarily through upward adjustments to the path for government consumption (broadly equivalent to current Resource Department Expenditure Limits (RDEL) in the UK public finances). This increase in the allocation of finance for the delivery of public sector services is to be funded partly through cuts to the welfare budget for those of working age, and partly through a net increase in taxes. One note of disappointment is in the minor downward revision to expected net investment over the next five years. The remainder of this additional consumption is expected to be funded through extra borrowing.

We have incorporated these policy changes into our forecast for the public finances presented in table A8. Changes in tax policy are introduced as adjustments in effective tax rates for the relevant broad income or expenditure category. The magnitude of any revenue adjustment is then endogenously determined, for this given tax rate, by our projections for nominal incomes and expenditure within the economy. We also make an allowance for fiscal drag over much of this parliamentary term, consistent with average earnings growing in excess of consumer prices during this parliamentary term.

[FIGURE 16 OMITTED]

We expect the effective tax take in the UK to rise by almost 1 per cent of GDP between 2014-15 and 2020-21, reaching around 36 1/2 per cent of GDP, at least partly attributable to the robust increase in consumer spending this year and next. The components of nominal demand are an essential determinant of the evolution of the overall tax take; as Barrell et al. (2007) show, consumer spending is relatively tax rich in comparison to both business investment and export led growth. While recent economic growth may not have been balanced in the fashion that the government would have preferred, the dependence on consumer spending suggests recent nominal GDP has been more tax rich than would have been the case with export led growth.

The OBR's forecasts for government consumption of goods and services is a residual category that is determined by the difference between the government's announced plans for total managed expenditure and the OBR's projections for annually managed expenditures (AME) such as welfare and government interest payments. These assumptions are utilised by the OBR due to the absence of any detailed spending envelope, a situation that will change with the publication of the Comprehensive Spending Review for the period 2016-17 to 2020-21.

Where we differ is that we assume government consumption and investment broadly evolves inline with the OBR's projections, which are implicitly assumed to be the government's current plan for RDEL spending over the next five fiscal years. As table 3 shows, these assumed plans have changed significantly since the Budget published in March 2015. This has removed the "rollercoaster of government consumption profile" from the implied plans (OBR, 2015). Figure 16 shows this by plotting the implied plan published in the March and July Budgets.

The remainder of public sector spending, predominantly welfare payments to people of working age and the retired, and government interest payments are endogenously determined with our global econometric model, NiGEM. As table 3 shows, a significant element of the Chancellor's fiscal strategy is the curtailment of expenditures on transfers to households, and in particular households of working age. This occurs through a significant reduction in the generosity of tax credits, which alone are expected to save the Exchequer around 4 - 5 1/2 billion [pounds sterling] per annum. Working age benefits generally are not to be uprated with inflation from 2016-17, implying real reductions in incomes for those dependent on benefits. By 2020-21, the OBR expects this measure alone to save around 4 billion [pounds sterling] per annum. Additionally, reform of housing benefit, real terms reductions on subsidised rent in the social sector and requiring housing tenants to pay market rates for their rental property are expected to raise close to 2 billion [pounds sterling] by 2020-21. Overall, it is expected that these measures will save the Exchequer around 12 billion [pounds sterling] by 2020-21. Reducing the welfare budget by two thirds of GDP is not without significant effect on the budget constraints of certain households in the income distribution. (2)

As a consequence of this fiscal loosening, we have revised up our projections for the magnitude of public sector net borrowing. We expect borrowing to ease from 83.8 billion [pounds sterling] (4.6 per cent of GDP) in 2014-15 to 76.6 billion [pounds sterling] (4.1 per cent of GDP) in 2015-16. Borrowing is expected to narrow in each and every subsequent year. In contrast to our pre-election forecast, we now expect the public sector to remain a net borrower in 2018-19, albeit marginally, and only to achieve an absolute surplus in 2019-20. In the final two years of the parliamentary term, the annual absolute surplus is expected to be just over 10 billion [pounds sterling] (around 1 1/2 per cent of GDP).

With the public sector's net cash requirement dropping below nominal GDP growth from this fiscal year, we expect debt dynamics to evolve in a standard stock-flow framework. As such, public sector net debt is expected to be on a downward trajectory over the entire forecast period, falling from a peak of 81 per cent of GDP in 2014-15 to just under 70 per cent of GDP in 2020-21.

We expect the Chancellor to achieve a decline in public sector net debt, as a per cent of GDP, in 2015-16, thus meeting the secondary target of his original Fiscal Mandate, published in 2010. This outcome looks to have been achieved largely through asset sales, priced at 32 billion [pounds sterling] by the OBR, rather than by bringing borrowing under control as the original fiscal consolidation plan had envisaged.

However, if achieved, this successful hitting of a target could be short-lived due to the Chancellor's own intervention in the operation of housing associations. A feature of the Budget was significant intervention in the governance of housing associations. If the ONS concludes this amounts to significant control of housing associations' general corporate policy then these would be reclassified as public sector institutions. This change would occur at the point at which the transition happens and so impact on 2015-16. The gross debt of the housing associations equals 59 billion [pounds sterling] in March 2014 (Homes and Communities Agency, 2015). Liquid assets need to be netted off before we can estimate the magnitude of the increase in public sector net debt. Cash and other investments as of March 2014 amounted to around 2.9 billion [pounds sterling], suggesting an increase in public sector net debt of around 56 billion [pounds sterling] (3.2 per cent of GDP). At the stroke of a statistician's pen, the Chancellor could once again be on course to miss his redundant secondary debt target.

Saving and investment

In table A9 we disaggregate the saving and investment position of three broad sectors of the economy: household, corporate and general government. If a sector's investment is greater than saving then it is a net borrower and must fund this deficit from the rest of the economy. This relationship can be aggregated to the level of the economy as a whole, where investment greater than saving requires net financing from the rest of the world. It is not possible to draw an inference about optimal levels of investment from the balance of payments on the current account, rather just the immediate funding requirements of the economy.

In the first quarter of 2015, household saving fell to 3.3 per cent of GDP, the lowest level since the first quarter of 2008 and below our May forecast of 5.1 per cent of GDP. This was driven by both a greater than expected increase in consumption and a weaker outturn for real consumer wages than we had expected in our May forecast, increasing the relative proportion of real personal disposable income consumed. We forecast that the saving rate will average around 4.2 per cent of GDP in 2015 as households maintain their propensity to consume, despite weak growth in real consumer wages in the absence of meaningful productivity growth. We expect a further drop in 2016, although we believe this will be temporary. From 2017 onwards the saving rate should increase gradually as consumption growth declines towards its long-run levels and real wage growth picks up in line with our underlying assumption of the return of productivity growth. By 2020 we expect the household saving rate to reach 5.9 per cent of GDP.

The outlook for the household investment rate is little different from that published in the May 2015 Review. We expect household investment to increase throughout our forecast period as the levels of housing stock remain well below optimal levels and growth of housing transactions remains strong. In 2015 we predict housing investment to be 5 per cent of GDP, gradually increasing to 6.9 per cent by 2020. If the path of household saving and investment evolves as our forecast suggests, this implies that households will be net borrowers from the rest of the economy: requiring net borrowing of around 1% per cent of GDP in 2015, increasing to 1.6 per cent in 2016. In the longer term we expect the borrowing needs of the household sector to average around 1-1 1/2 per cent of GDP.

Theory would suggest that the corporate sector should be a net borrower from the rest of the economy; however since 2003 the corporate sector has been a net lender. The estimate for corporate saving in 2014 was revised down from 10.7 to 10.2 per cent of GDP and therefore the view of the corporate sector's financial position has switched from net lender to net borrower for this year. Current estimates suggest net borrowing amounted to 0.4 per cent of GDP. This suggests the corporate sector has become a net borrower from the rest of the economy one year earlier than we had expected just three months ago. We expect this to be the start of a sustained general trend pattern. Investment is expected to remain buoyant in the short term as the robust domestic demand conditions lead firms to increase their productive capacity. Corporate investment is expected to reach 11 per cent of GDP this year and to increase slowly to 11 1/2 per cent of GDP by 2018. Once the corporate sector has achieved its desired capital stock level, the magnitude of investment is expected to fall back marginally. Throughout our forecast period, corporate saving gradually shrinks, from just under 10 per cent of GDP in 2015 to 7.8 per cent of GDP by 2020.

Underlying our forecast is a set of assumptions based on the discretionary fiscal policy introduced by the newly elected Conservative majority government in their Summer Budget. As discussed in previous Reviews, we were aware that the spending plans were likely to change after the general election. As a result of the Summer Budget we have revised our forecast for government dis-saving to 1.2 per cent of GDP from 1.7 per cent of GDP in our May forecast. However, the general trend is expected to be the same, with the general government sector returning to a positive saving position by the start of 2017. By the end of our forecast we expect the general government sector to save 3 per cent of GDP.

We expect government investment to decline throughout our forecast period reaching 2 per cent by 2020. If fiscal policy evolves broadly as in our forecast, this implies that in the near term the government will remain a net borrower from the rest of the economy, requiring financing of 3.5 per cent of GDP. This deficit continues to shrink throughout our forecast. In 2019 the government sector is projected to become a net lender to the rest of the economy. By 2020 we expect the government sector to lend around 1 per cent of GDP to the rest of the economy.

The aggregate of these three sectors indicates that the UK economy will require funding from the rest of the world of around 5.6 per cent of GDP in 2015 and 2016. From 2016 onward, we expect the current account deficit to shrink gradually both through improvements in the trade balance and the balance on net factor incomes. However, throughout our forecast period the UK is set to remain a net borrower from the rest of the world. By 2020 we expect the UK to require external financing of around 3 1/2 per cent of GDP.

Figure 17 shows the decomposition of the current account balances for EU and non-EU regions. This highlights that the sharp deterioration which occurred from 2013 onwards is predominantly a result of the balance with the Euro Area. As stressed in previous Reviews, the main driver behind this has been a widening of the deficit on the primary income account as a result of a sharp fall in credits. Underlying our forecast is the assumption that this phenomenon is transitory, and that as the Euro Area economies recover this deficit will shrink. This assumption is a key downside risk to our forecasts for the balance of payments on the current account. If this represents a structural change, then we should expect the current account deficit to be significantly larger throughout our forecast period and the UK will be far more dependent on capital inflows from abroad.

[FIGURE 17 OMITTED]

The medium term

Table A10 presents our view of the how the economy will evolve from its current disequilibrium. The exact evolution of the economy depends on future shocks, which are by definition unpredictable. As such, we are aware that such shocks will cause the economy to deviate, at times, from the expected path we present. There are factors that are largely known and which do influence the outlook. These include the size and composition of the population and policy regimes likely under different possible governments. Examples of the known evolution of the factors include such future events as increases in the state pension age, which should induce the further extension of working lives within the economy.

Over the forecast horizon we present, we project that GDP growth will remain in excess of its long-run potential (around 2 per cent per annum) in order for the negative output gap to continue to close. Over the period 2021-4 we expect the economy to grow at around 2.3 per cent per annum. Output spending over such an extended period of time is suggestive of an economic cycle of pronounced length, compared to the typical view of the length of economic cycles pre-crisis. Comparing a variety of filtering techniques, Massman et al. (2003) concluded that economic cycles in the UK typically lasted around seven years. Our current forecast implies an economic cycle that will last almost double that.

[FIGURE 18 OMITTED]

Despite the reporting of point forecasts in the tables, we must not forget that in a stochastic world, the future is inherently uncertain. As noted above, unpredictable events, such as economic shocks, can move the economy away from its equilibrium path. Additionally, other factors such as the use of structural models which seek to simplify and explain economic adjustments combined with forecaster judgement and data uncertainty, may reduce the accuracy of point forecasts. We choose to illustrate this uncertainty using fan charts. Figure 18 suggests that there is around a 10 per cent probability that in 2025 GDP growth will be below zero per cent per annum and a one in ten chance that GDP growth will be above 4 3/4 per cent per annum.

A key assumption underlying our forecasts is the resumption of meaningful productivity growth; this has important implications for both the future path of real average consumer wages and per capita GDP. A key downside risk to our forecast is if productivity growth were to remain at its current subdued rates; if such a scenario were to occur we would not expect to see improvements in the standard of living. We forecast whole economy productivity growth to accelerate gradually throughout our forecast period, rising from 1.1 per cent per annum in 2015 to, on average, 2 per cent per annum over the period 2021-5. However, this remains below the average for the pre-great recession period of 1997 to 2007 in which productivity growth averaged 2.4 per cent per annum. We expect the profile of nominal wages to mirror that of productivity, picking up from 0.3 per cent growth in 2015 to 2.1 per cent in 2016, before reaching around 3.5 per cent per annum from 2018 onwards. In the short term consumer price inflation is expected to remain subdued due to both the global oil price shock and the appreciation of sterling introducing temporary disinflationary pressures into the economy. This implies that real consumer wage growth begins to accelerate this year and next, growing at 0.5 and 1.2 per cent per annum. Once the disinflationary impacts dissipate we expect consumer price inflation to return to the Bank of England's mandated target of 2 per cent per annum from 2018 onwards, while real consumer wage growth averages approximately 1 1/3 per cent per annum between 2021 and 2025.

The growth of labour input is expected to continue to fall from its peak of 2.7 per cent per annum in 2014. We forecast that labour input will grow on average 1.3 per cent in 2015, and slow further to 1 per cent per annum in 2016. Underlying this decline are various causes, for example the aging demographic and the resumption of meaningful productivity growth, leading to wage increases.

The impressive performance of the labour market in recent years has led to a sharp fall in the unemployment rate from its peak of 8.4 per cent in the third quarter of 2011 to its current level of 5.6 per cent in the second quarter of 2015. We expect a further, albeit slower, reduction in the unemployment rate in 2015 and 2016, to 5.6 and 5.4 per cent, as the UK economy reaches and settles around its equilibrium level. For the period 2021-5 we expect the unemployment rate to have settled around its long-run level of just under 5V2 per cent, around the same levels as the period before the Great Recession.

Discretionary fiscal policy is assumed to be implemented on the basis of the recent announcements in the Summer Budget. As a result it is expected that the public sector becomes a net lender to the rest of the economy in 2016. Our forecast for government net borrowing is a gradual decrease throughout our forecast period, with the government returning to surplus in 2019, before returning to, on average, a small deficit of 0.2 per cent of GDP for the period 2021-5. Under this policy assumption, and given our forecasts for the determinants of public finances, we expect gross debt to peak in 2015 at 88.4 as a percentage of GDP, before falling throughout our forecast period. The fiscal policy assumptions which underlie our forecast extend to the first quarter of 2021, after which a solvency rule which adjusts the tax rate such that the government will achieve its budgetary target is active. As a result, by 2025 we forecast the gross debt will fall to around 60 per cent of GDP.

The MPC has stressed that the evolution of Bank Rate should be expected to be "slow and gradual". We expect the turning point in the monetary policy cycle to occur in February 2016 with a 25 basis point rise, after which we expect the interest rate to increase gradually as the negative output gap closes and the Bank of England seeks to control inflationary pressures in the economy. Over the period 2021-5 we expect the interest rate to average 3.6 per cent; this would however remain well below the pregreat recession average for the period of 1997-2007 of 5.2 per cent.

In the short term consumer price inflation is expected to remain subdued due to both the global oil price shock and the appreciation of sterling introducing temporary disinflationary pressures into the economy. Once these effects dissipate we expect consumer price inflation to return to close to the Bank of England's mandated target of 2 per cent per annum from 2018 onwards. For the period 2021-5 we expect inflation to be on average 2.1 per cent per annum.

The path of exchange rates over the medium term is predominantly governed by interest rate differentials as a result of monetary policy decisions both domestically and abroad. The effective exchange rate is expected to appreciate in 2015 and 2016, by 7 per cent and 2 per cent respectively, due to global monetary policy developments. From 2017 onwards we expect the effective exchange rates to remain broadly unchanged, as the ECB also begins its process of interest rate normalisation.

The deficit on the current account balance is expected to narrow throughout our forecast period. From its estimated trough of 5.9 per cent of GDP in 2014, the deficit is forecast to shrink to 5.6 per cent and 5.4 per cent of GDP in 2015 and 2016, respectively. Further ahead, recovery in the Euro Area should lead to an improvement in the UK's balance of payments. As we note in the Income and saving section of this chapter, we assume that the weakening balance with the Euro Area is transitory and should lead to narrowing of the need for funding from abroad. For the period 2021-5 we expect the deficit on the current account balance to be, on average, 3.4 per cent of GDP. This still remains a greater deficit than the UK ran in the period 1997-2007 before the great recession, which on average was 1.8 per cent of GDP.

NOTES

(1) Labour demand is estimated conditional on the level of output, labour productivity etc. As such is it not possible to draw conclusions directly onto employment.

(2) Hood (2015) highlights the implications for different representative households as a consequence of these changes.

REFERENCES

Barrell, R., Hurst, A.I. and Mitchell, J. (2007), 'Uncertainty bounds for cyclically adjusted budget balances', in Larch, M. and Martins, L.N. (eds),fisco//nd/cotors,Brussels European Commission, pp. 187-206.

Bryson, A. and Forth, J. (2015), 'The UK's productivity puzzle', NIESR Discussion Paper No. 448.

Dolling M., Herbert, R. and Skipper, H. (2005), 'Early estimates of consumer spending', ONS, available at http://www.ons.gov.uk/ ons/rel/consumer-trends/consumer-trends/early-estimates-of consumer-spending/index.html.

Gregg, P., Machin. S. and Fernandez-Salgado, M. (2014), 'The squeeze on real wages--and what it might take to end it', National Institute Economic Review, 228, R3-16.

HMT(2015), 'Fixing the foundations: creating a more prosperous nation', available at https://www.gov.uk/government/uploads/ system/uploads/attachment_data/file/443898/Productivity_ Plan_web.pdf.

Homes and Communities Agency (2015),'2014 global accounts of housing providers', available at: https://www.gov.uk/government/ uploads/system/uploads/attachment_data/file/414362/Global_ Accounts_2014_Full.pdf.

Hood, A. (2015), 'Benefit changes and distributional analysis', IFS Post Budget Briefing, 9 July, 2015.

Kirby, S. (2015), 'Commentary: the macroeconomic implications of the parties' fiscal plans', National Institute Economic Review, 231, F4-11.

Kirby, S. and Meaning, J. (2014), 'Exchange rate pass-through: a view from a global structural model'. National Institute Economic Review, 230, pp. F59-64.

Massman, M., Mitchell, J. and Weale, M. (2003), 'Business cycles and turning points: a survey of statistical techniques', National Institute Economic Review, 183, pp. 90-106.

OBR (2015), Economic and Fiscal Outlook--July 2015.

Pope N. (2013), 'Public service productivity estimates total public services 2010', available at http://www.ons.gov.uk/ons/rel/psa/ public-sector-productivity-estimates-total-public-sector/2010/ art-public-service-productivity-estimates.html.

Riley, R. (2013), 'Modelling demand for low skilled/low paid labour: exploring the employment trade-offs of a living wage', NIESR Discussion Paper, No. 404.

Riley, R. and Rosazza Bondibene, C. (2015), 'Raising the standard: minimum wages and firm productivity', NIESR Discussion Paper No. 449.

Riley, R., Rosazza Bondibene, C. and Young, G. (2015), 'The UK productivity puzzle 2008-2013: evidence from British businesses', NIESR discussion paper no. 450.

Rush, P. (2015) Nomura note.

Appendix--Forecast details

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[FIGURE A9 OMITTED]

[FIGURE A10 OMITTED]

Table A1. Exchange rates and interest rates

                    UK exchange rates         FTSE
                                            All-share
              Effective    Dollar   Euro      index
              2011 = 100

2010            100.19      1.55    1.17     2472.7
2011            100.00      1.60    1.15     2587.6
2012            104.17      1.59    1.23     2617.7
2013            102.92      1.56    1.18     3006.2
2014            111.01      1.65    1.24     3136.6
2015            118.64      1.54    1.39     3194.4
2016            121.04      1.57    1.42     3278.2
2017            121.05      1.58    1.40     3432.7
2018            121.16      1.60    1.39     3594.4
2019            121.29      1.62    1.37     3787.9
2020            121.37      1.64    1.36     3987.3
2014 Q1         109.10      1.66    1.21     3148.9
2014 Q2         110.63      1.68    1.23     3171.0
2014 Q3         112.43      1.67    1.26     3161.3
2014 Q4         111.87      1.58    1.27     3065.3
2015 Q1         115.03      1.51    1.34     3207.6
2015 Q2         117.57      1.53    1.39     3254.1
2015 Q3         120.89      1.56    1.42     3142.7
2015 Q4         121.07      1.56    1.42     3173.5
2016 Q1         121.04      1.56     1.42    3223.2
2016 Q2         121.04      1.56     1.42    3261.3
2016 Q3         121.05      1.57     1.42    3291.8
2016 Q4         121.05      1.57     1.41    3336.5

Percentage changes

2010/2009        -0.4       -1.2     3.8       21.2
2011/2010        -0.2        3.7    -1.2        4.6
2012/2011         4.2       -1.1     7.0        1.2
2013/2012        -1.2       -1.3    -4.5       14.8
2014/2013         7.9        5.3     5.4        4.3
2015/2014         6.9       -6.3    12.2        1.8
2016/2015         2.0        1.5     1.8        2.6
2017/2016         0.0        0.8    -0.9        4.7
2018/2017         0.1        1.3    -1.1        4.7
2019/2018         0.1        1.2    -1.1        5.4
2020/2019         0.1        1.0    -1.1        5.3
2014Q4/13Q4       5.2       -2.2     6.5       -1.0
2015Q4/14Q4       8.2       -1.2    12.1        3.5
2016Q4/15Q4       0.0        0.3    -0.5        5.1

                                   Interest rates

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

2010            0.7       4.0        3.6        1.4        0.50
2011            0.9       4.1        3.1        1.6        0.50
2012            0.8       4.2        1.8        1.4        0.50
2013            0.5       4.4        2.4        1.1        0.50
2014            0.5       4.4        2.5        0.9        0.50
2015            0.6       4.5        1.9        0.7        0.50
2016            1.0       4.7        2.5        1.2        1.00
2017            1.5       4.8        2.9        1.8        1.50
2018            2.0       5.0        3.3        2.3        2.00
2019            2.4       5.3        3.6        2.6        2.50
2020            2.8       5.6        3.8        3.0        2.75
2014 Q1         0.5       4.4        2.8        1.1        0.50
2014 Q2         0.5       4.4        2.7        0.9        0.50
2014 Q3         0.6       4.5        2.6        0.8        0.50
2014 Q4         0.6       4.5        2.1        0.8        0.50
2015 Q1         0.6       4.5        1.6        0.7        0.50
2015 Q2         0.6       4.5        1.9        0.7        0.50
2015 Q3         0.6       4.5        2.0        0.7        0.50
2015 Q4         0.6       4.5        2.2        0.8        0.50
2016 Q1         0.8       4.6        2.3        1.0        0.75
2016 Q2         0.9       4.7        2.4        1.1        0.75
2016 Q3         1.1       4.7        2.5        1.2        1.00
2016 Q4         1.2       4.7        2.7        1.4        1.00

Percentage changes

2010/2009
2011/2010
2012/2011
2013/2012
2014/2013
2015/2014
2016/2015
2017/2016
2018/2017
2019/2018
2020/2019
2014Q4/13Q4
2015Q4/14Q4
2016Q4/15Q4

Notes: We assume that bilateral exchange rates for the first
quarter of this year are the average of information available to
15 July 2015.We then assume that bilateral rates remain constant
for the following two quarters 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

2011=100

                  Unit       Imports    Exports    Wholesale
              labour costs   deflator   deflator     price
                                                   index (a)

2010             100.3         93.4       94.5        97.3
2011             100.0        100.0      100.0       100.0
2012             101.9         99.2       99.6       101.1
2013             103.4        100.4      101.1       101.9
2014             103.5         96.8       98.9       102.8
2015             103.3         89.9       93.9       103.0
2016             104.0         89.5       93.7       102.9
2017             105.2         92.3       95.4       103.7
2018             106.9         94.8       97.4       105.9
2019             108.7         96.7       99.3       108.4
2020             110.3         98.5      101.1       110.7

Percentage changes
2010/2009          1.2          3.9        5.1         1.5
2011/2010         -0.3          7.1        5.8         2.8
2012/2011          1.9         -0.8       -0.4         1.1
2013/2012          1.4          1.2        1.5         0.8
2014/2013          0.1         -3.6       -2.1         0.9
2015/2014         -0.3         -7.1       -5.1         0.2
2016/2015          0.7         -0.4       -0.1        -0.1
2017/2016          1.1          3.1        1.8         0.8
2018/2017          1.6          2.8        2.1         2.1
2019/2018          1.7          2.0        1.9         2.4
2020/2019          1.4          1.8        1.9         2.1
2014Q4/13Q4        0.8         -4.0       -3.3         0.7
2015Q4/14Q4       -0.9         -7.5       -5.0         0.2
2016Q4/15Q4        1.0          2.7        1.7         0.0

              World oil   Consumption     GDP
                price      deflator     deflator
               ($) (b)                  (market
                                        prices)

2010             78.8         96.7        97.9
2011            108.5        100.0       100.0
2012            110.4        102.1       101.7
2013            107.1        104.0       103.5
2014             97.8        105.5       105.1
2015             56.6        105.4       106.4
2016             59.7        106.3       107.6
2017             60.5        108.0       108.8
2018             61.7        110.4       110.9
2019             62.9        112.8       113.3
2020             64.2        115.1       115.7

Percentage changes
2010/2009        27.6          4.4         3.2
2011/2010        37.6          3.4         2.1
2012/2011         1.8          2.1         1.7
2013/2012        -3.0          1.9         1.8
2014/2013        -8.7          1.5         1.6
2015/2014       -42.2         -0.1         1.2
2016/2015         5.6          0.9         1.2
2017/2016         1.3          1.6         1.1
2018/2017         2.0          2.2         1.9
2019/2018         2.0          2.2         2.2
2020/2019         2.0          2.1         2.1
2014Q4/13Q4     -30.3          1.3         1.2
2015Q4/14Q4     -27.3         -0.8         1.4
2016Q4/15Q4       9.1          1.2         0.9

                     Retail price index

               All    Excluding   Consumer
              items   mortgage     prices
                      interest     index

2010           95.1      95.0       95.7
2011          100.0     100.0      100.0
2012          103.2     103.2      102.8
2013          106.4     106.4      105.5
2014          108.9     109.0      107.0
2015          109.9     110.1      107.0
2016          112.1     112.1      108.1
2017          115.0     114.5      109.8
2018          119.1     117.5      112.1
2019          123.6     120.7      114.5
2020          128.0     123.8      116.8

Percentage changes
2010/2009       4.6       4.8        3.3
2011/2010       5.2       5.3        4.5
2012/2011       3.2       3.2        2.8
2013/2012       3.0       3.1        2.6
2014/2013       2.4       2.4        1.4
2015/2014       0.9       1.0        0.0
2016/2015       2.1       1.9        1.0
2017/2016       2.6       2.1        1.5
2018/2017       3.5       2.7        2.1
2019/2018       3.8       2.7        2.2
2020/2019       3.5       2.6        2.0
2014Q4/13Q4     1.9       2.0        0.9
2015Q4/14Q4     1.0       1.2        0.1
2016Q4/15Q4     2.1       1.8        1.2

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

[pounds sterling] billion, 2011 prices

               Final consumption         Gross capital
                  expenditure              formation

            Households    General     Gross     Changes in
            & NPISH (a)    govt.    fixed in-   inventories
                                    vestment        (b)

2010          1038.3       337.2      254.9         5.7
201 1         1039.1       337.3      260.8         4.3
2012          1050.8       345.2      262.7         6.5
2013          1068.5       344.2      271.6        10.2
2014          1095.1       349.6      294.9        13.4
2015          1131.5       353.9      311.4         9.5
2016          1170.7       355.9      331.7         9.4
2017          1194.7       357.1      348.3         9.4
2018          1220.5       357.2      363.0         9.4
2019          1248.6       358.3      374.1         9.4
2020          1278.7       367.6      382.3         9.4

Percentage changes
2010/2009        0.4         0.0        5.9
2011/2010        0.1         0.0        2.3
2012/2011        1.1         2.3        0.7
2013/2012        1.7        -0.3        3.4
2014/2013        2.5         1.6        8.6
2015/2014        3.3         1.2        5.6
2016/2015        3.5         0.6        6.5
2017/2016        2.1         0.3        5.0
2018/2017        2.2         0.0        4.2
2019/2018        2.3         0.3        3.1
2020/2019        2.4         2.6        2.2

Decomposition of growth in GDP
2010             0.2         0.0        0.9         1.4
2011             0.1         0.0        0.4        -0.1
2012             0.7         0.5        0.1         0.1
2013             1.1        -0.1        0.5         0.2
2014             1.6         0.3        1.4         0.2
2015             2.1         0.3        1.0        -0.2
2016             2.2         0.1        1.2         0.0
2017             1.3         0.1        0.9         0.0
2018             1.4         0.0        0.8         0.0
2019             1.5         0.1        0.6         0.0
2020             1.6         0.5        0.4         0.0

            Domestic      Total       Total
             demand    exports (c)    final
                                     expendi-
                                       ture

2010         1636.1       472.8       2109.6
201 1        1641.5       499.5       2141.0
2012         1665.1       502.8       2167.9
2013         1694.5       510.2       2204.7
2014         1753.0       512.6       2265.6
2015         1806.2       534.6       2340.8
2016         1867.7       559.4       2427.1
2017         1909.5       595.7       2505.2
2018         1950.1       627.5       2577.6
2019         1990.4       655.4       2645.8
2020         2038.0       680.9       2718.9

Percentage changes
2010/2009       2.7         6.2          3.4
2011/2010       0.3         5.6          1.5
2012/2011       1.4         0.7          1.3
2013/2012       1.8         1.5          1.7
2014/2013       3.5         0.5          2.8
2015/2014       3.0         4.3          3.3
2016/2015       3.4         4.7          3.7
2017/2016       2.2         6.5          3.2
2018/2017       2.1         5.3          2.9
2019/2018       2.1         4.4          2.6
2020/2019       2.4         3.9          2.8

Decomposition of growth in GDP
2010            2.8         1.8          4.5
2011            0.3         1.7          2.0
2012            1.5         0.2          1.7
2013            1.8         0.5          2.3
2014            3.5         0.1          3.7
2015            3.1         1.3          4.4
2016            3.5         1.4          4.9
2017            2.3         2.0          4.4
2018            2.2         1.7          3.9
2019            2.1         1.5          3.6
2020            2.5         1.3          3.8

               Total       Net     GDP
            imports (c)   trade     at
                                  market
                                  prices

2010           518.2      -45.3   1591.5
201 1          523.3      -23.8   1617.7
2012           539.6      -36.8   1628.3
2013           547.4      -37.1   1655.4
2014           560.3      -47.7   1705.0
2015           592.0      -57.4   1747.7
2016           635.9      -76.5   1790.0
2017           668.1      -72.4   1835.9
2018           690.8      -63.2   1885.7
2019           711.1      -55.8   1933.5
2020           735.7      -54.7   1982.1

Percentage changes
2010/2009        8.7                 1.9
2011/2010        1.0                 1.6
2012/2011        3.1                 0.7
2013/2012        1.4                 1.7
2014/2013        2.4                 3.0
2015/2014        5.7                 2.5
2016/2015        7.4                 2.4
2017/2016        5.1                 2.6
2018/2017        3.4                 2.7
2019/2018        2.9                 2.5
2020/2019        3.5                 2.5

Decomposition of growth in GDP
2010            -2.7       -0.9      1.9
2011            -0.3        1.4      1.6
2012            -1.0       -0.8      0.7
2013            -0.5        0.0      1.7
2014            -0.8       -0.6      3.0
2015            -1.9       -0.6      2.5
2016            -2.5       -1.1      2.4
2017            -1.8        0.2      2.6
2018            -1.2        0.5      2.7
2019            -1.1        0.4      2.5
2020            -1.3        0.1      2.5

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

Table A4. External sector

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

                   [pounds sterling] billion,
                       2011 prices (b)

2010          289.4        398.9         -109.5
2011          309.2        405.7          -96.5
2012          306.6        416.2         -109.6
2013          305.1        419.1         -114.0
2014          304.1        431.3         -127.2
2015          320.8        458.0         -137.2
2016          337.8        493.8         -155.9
2017          360.5        519.7         -159.2
2018          379.5        537.2         -157.7
2019          396.0        552.5         -156.5
2020          411.4        571.4         -160.1

Percentage changes
2010/2009      10.8         12.2
2011/2010       6.8          1.7
2012/2011      -0.8          2.6
2013/2012      -0.5          0.7
2014/2013      -0.3          2.9
2015/2014       5.5          6.2
2016/2015       5.3          7.8
2017/2016       6.7          5.3
2018/2017       5.3          3.4
2019/2018       4.3          2.9
2020/2019       3.9          3.4

            Exports of   Imports of    Net trade
             services     services    in services

                   [pounds sterling] billion,
                       2011 prices (b)

2010          183.4        119.3          64.1
2011          190.3        117.6          72.7
2012          196.2        123.4          72.8
2013          205.1        128.3          76.8
2014          208.5        129.0          79.5
2015          213.7        134.0          79.8
2016          221.6        142.2          79.4
2017          235.2        148.4          86.9
2018          248.1        153.6          94.5
2019          259.4        158.6         100.8
2020          269.6        164.3         105.3

Percentage changes
2010/2009      -0.4         -1.0
2011/2010       3.8         -1.4
2012/2011       3.1          4.9
2013/2012       4.6          4.0
2014/2013       1.6          0.5
2015/2014       2.5          3.9
2016/2015       3.7          6.1
2017/2016       6.2          4.3
2018/2017       5.5          3.5
2019/2018       4.6          3.3
2020/2019       3.9          3.6

            Export price     World     Terms of    Current
              competi-     trade (d)   trade (e)   balance
            tiveness (c)

                           2011 = 100              % of GDP

2010            95.9          94.6       101.2       -2.6
2011           100.0         100.0       100.0       -1.7
2012           101.3         102.3       100.4       -3.7
2013           100.6         105.0       100.7       -4.5
2014           104.8         108.8       102.2       -5.9
2015           103.5         113.5       104.4       -5.7
2016           103.3         119.6       104.7       -5.6
2017           101.5         125.9       103.4       -5.2
2018           100.6         131.6       102.7       -4.4
2019            99.8         137.1       102.6       -3.7
2020            99.1         142.5       102.7       -3.4

Percentage changes
2010/2009        1.9          10.1         1.1
2011/2010        4.2           5.7        -1.2
2012/2011        1.3           2.3         0.4
2013/2012       -0.7           2.6         0.3
2014/2013        4.2           3.6         1.5
2015/2014       -1.2           4.3         2.2
2016/2015       -0.2           5.4         0.3
2017/2016       -1.7           5.3        -1.2
2018/2017       -1.0           4.5        -0.7
2019/2018       -0.8           4.2        -0.1
2020/2019       -0.7           3.9         0.0

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 sector

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

             2011=100          [pounds sterling] billion,
                                    current prices

2010            99.1       817.0       1358.0      1052.8
2011           100.0       827.8       1383.5      1067.9
2012           102.2       849.4       1424.2      1107.0
2013           104.2       875.9       1457.3      1129.8
2014           105.7       903.5       1493.4      1155.4
2015           106.0       923.6       1552.8      1200.4
2016           108.3       953.0       1611.7      1244.0
2017           111.2       988.3       1683.5      1299.9
2018           114.8      1031.4       1770.3      1365.2
2019           118.8      1075.7       1863.7      1434.1
2020           122.9      1118.5       1961.5      1507.0

Percentage changes
2010/2009        3.5         3.2          4.5         5.3
2011/2010        6.9         1.3          1.9         1.4
2012/2011        2.2         2.6          2.9         3.7
2013/2012        1.9         3.1          2.3         2.1
2014/2013        1.5         3.1          2.5         2.3
2015/2014        0.3         2.2          4.0         3.9
2016/2015        2.1         3.2          3.8         3.6
2017/2016        2.7         3.7          4.5         4.5
2018/2017        3.2         4.4          5.2         5.0
2019/2018        3.5         4.3          5.3         5.0
2020/2019        3.4         4.0          5.2         5.1

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

               [pounds sterling] billion,   per cent
                       2011 prices

2010          1088.6     1038.3     89.3      11.0
2011          1067.9     1039.1     90.4       8.6
2012          1084.6     1050.8     96.9       8.0
2013          1086.1     1068.5    102.8       6.4
2014          1094.6     1095.1    111.0       6.1
2015          1138.7     1131.5    118.7       6.1
2016          1170.0     1170.7    124.1       5.7
2017          1203.6     1194.7    128.0       6.6
2018          1237.1     1220.5    131.8       7.4
2019          1271.4     1248.6    135.2       7.9
2020          1308.9     1278.7    138.4       8.4

Percentage changes
2010/2009        0.9        0.4     -2.1
2011/2010       -1.9        0.1      1.3
2012/2011        1.6        1.1      7.2
2013/2012        0.1        1.7      6.1
2014/2013        0.8        2.5      7.9
2015/2014        4.0        3.3      6.9
2016/2015        2.8        3.5      4.6
2017/2016        2.9        2.1      3.1
2018/2017        2.8        2.2      3.0
2019/2018        2.8        2.3      2.6
2020/2019        2.9        2.4      2.3

              House        Net
            prices(d)   worth to
                         income
                        ratio (e)

            2011=100

2010          101.0        6.3
2011          100.0        6.6
2012          101.6        6.8
2013          105.2        6.7
2014          115.8        7.3
2015          126.1        7.6
2016          135.5        7.6
2017          137.0        7.4
2018          139.1        7.3
2019          141.2        7.3
2020          142.7        7.2

Percentage changes
2010/2009       7.2
2011/2010      -1.0
2012/2011       1.6
2013/2012       3.5
2014/2013      10.0
2015/2014       8.9
2016/2015       7.5
2017/2016       1.1
2018/2017       1.5
2019/2018       1.5
2020/2019       1.1

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) Office for National
Statistics, mix-adjusted, (e) Net worth is defined as housing
wealth plus net financial assets.

Table A6. Fixed investment and capital

[pounds sterling] billion, 2011 prices

                         Gross fixed investment

             Business      Private      General     Total
            investment   housing (a)   government

2010          143.7          60.5         50.6      254.9
2011          152.3          62.2         46.3      260.8
2012          158.7          60.2         43.7      262.7
2013          167.2          64.0         40.4      271.6
2014          180.5          72.4         42.0      294.9
2015          190.5          77.7         43.2      311.4
2016          201.8          86.7         43.2      331.7
2017          209.1          95.5         43.7      348.3
2018          214.5         103.6         44.8      363.0
2019          217.9         110.4         45.8      374.1
2020          219.6         116.0         46.7      382.3

Percentage changes
2010/2009       3.7          15.7          2.3        5.9
2011/2010       6.0           2.8         -8.5        2.3
2012/2011       4.2          -3.1         -5.5        0.7
2013/2012       5.3           6.2         -7.7        3.4
2014/2013       8.0          13.1          3.9        8.6
2015/2014       5.5           7.4          2.9        5.6
2016/2015       5.9          11.6          0.1        6.5
2017/2016       3.6          10.2          1.2        5.0
2018/2017       2.6           8.5          2.5        4.2
2019/2018       1.6           6.6          2.2        3.1
2020/2019       0.8           5.0          2.0        2.2

             User     Corporate       Capital stock
            cost of   share of
            capital    GDP (%)    Private   Public (b)
              (%)

2010         15.7       24.1      2965.0      780.9
2011         15.3       25.0      2980.7      794.9
2012         13.3       24.6      3005.0      815.1
2013         12.4       24.9      3033.1      841.7
2014         13.6       25.2      3079.3      859.7
2015         13.7       26.2      3136.9      878.4
2016         14.0       26.7      3210.0      896.7
2017         14.2       27.0      3293.7      914.9
2018         14.4       27.6      3385.0      933.7
2019         14.8       28.2      3480.2      953.0
2020         14.9       28.8      3576.3      972.6

Percentage changes
2010/2009                            0.4        3.0
2011/2010                            0.5        1.8
2012/2011                            0.8        2.5
2013/2012                            0.9        3.3
2014/2013                            1.5        2.1
2015/2014                            1.9        2.2
2016/2015                            2.3        2.1
2017/2016                            2.6        2.0
2018/2017                            2.8        2.1
2019/2018                            2.8        2.1
2020/2019                            2.8        2.1

Notes: (a) Includes private sector transfer costs of non-produced
assets, (b) Including public sector non-financial corporations.

Table A7. Productivity and the labour market

Thousands

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

2010          25017       29229       2497        31725       40683
2011          25117       29376       2593        31969       40944
2012          25214       29697       2572        32268       40880
2013          25516       30043       2476        32519       40915
2014          25939       30726       2027        32753       41037
2015          26430       31137       1856        32992       41133
2016          26700       31439       1813        33252       41242
2017          26957       31733       1776        33509       41335
2018          27250       32064       1714        33778       41398
2019          27468       32320       1721        34041       41463
2020          27614       32499       1780        34279       41557

Percentage changes
2010/2009     -0.3         0.2         3.9         0.5         0.6
2011/2010      0.4         0.5         3.8         0.8         0.6
2012/2011      0.4         1.1        -0.8         0.9         -0.2
2013/2012      1.2         1.2        -3.7         0.8         0.1
2014/2013      1.7         2.3        -18.1        0.7         0.3
2015/2014      1.9         1.3        -8.4         0.7         0.2
2016/2015      1.0         1.0        -2.3         0.8         0.3
201712016      1.0         0.9        -2.0         0.8         0.2
2018/2017      1.1         1.0        -3.5         0.8         0.2
2019/2018      0.8         0.8         0.4         0.8         0.2
2020/2019      0.5         0.6         3.4         0.7         0.2

                Productivity          Unemployment, %
                (2011 = 100)
                                   Claimant   ILO unem-
            Per hour   Manufact-     rate     ployment
                         uring                  rate

2010          98.7       97.9        4.6         7.9
2011         100.0       100.0       4.7         8.1
2012          98.8       98.3        4.7         8.0
2013          98.6       98.2        4.3         7.6
2014          98.8       99.9        3.0         6.2
2015          99.9       98.4        2.3         5.6
2016         101.2       100.8       2.1         5.5
2017         102.9       103.5       2.0         5.3
2018         104.7       106.0       1.8         5.1
2019         106.5       108.6       1.8         5.1
2020         108.7       111.5       1.9         5.2

Percentage changes
2010/2009     1.5         8.2
2011/2010     1.3         2.2
2012/2011     -1.2       -1.7
2013/2012     -0.3       -0.2
2014/2013     0.3         1.7
2015/2014     1.1        -1.5
2016/2015     1.2         2.4
201712016     1.7         2.7
2018/2017     1.7         2.4
2019/2018     1.8         2.5
2020/2019     2.0         2.7

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

[pounds sterling] billion, fiscal years

                                                   2013-14   2014-15

Current                Taxes on income              373.7     389.7
receipts:              Taxes on expenditure         221.8     229.9
                       Other current receipts        23.5      24.2
                       Total                        619.0     643.7
                       (as a % of GDP)               35.7      35.6

Current                Goods and services           347.7     352.4
expenditure:           Net social benefits paid     220.1     226.2
                       Debt interest                 35.8      32.3
                       Other current expenditure     52.2      51.1
                       Total                        655.8     662.1
                       (as a % of GDP)               37.8      36.6
Depreciation                                         33.9      34.9
Surplus on public sectore current budget (a)        -70.7     -53.3
(as a % of GDP)                                      -4.1      -2.9
Gross investment                                     60.1      65.4
Net investment                                       26.2      30.5
(as a % of GDP)                                       1.5       1.7
Total managed expenditure                           715.8     727.5
(as a % of GDP)                                      41.3      40.2
Public sector net borrowing                          96.9      83.8
(as a % of GDP)                                       5.6       4.6
Financial transactions                               25.8      -1.4
Public sector net cash requirement                   71.0      85.2
(as a % of GDP)                                       4.1       4.7
Public sector net debt (% of GDP)                    79.7      81.0
GDP deflator at market prices (201 1 = 100)         104.0     105.5
Money GDP                                          1733.2    1810.7
Financial balance under Maastricht (% of GDP) (b)    -5.7      -5.8
Gross debt under Maastricht (% of GDP) (b)           87.3      89.3

                                                   2015-16   2016-17

Current                Taxes on income              403.6     429.8
receipts:              Taxes on expenditure         237.0     246.9
                       Other current receipts        21.0      20.7
                       Total                        661.7     697.4
                       (as a % of GDP)               35.3      35.9

Current                Goods and services           353.0     359.6
expenditure:           Net social benefits paid     223.8     225.5
                       Debt interest                 35.3      38.3
                       Other current expenditure     57.1      58.7
                       Total                        669.1     682.1
                       (as a % of GDP)               35.7      35.1
Depreciation                                         37.2      39.5
Surplus on public sectore current budget (a)        -44.6     -24.2
(as a % of GDP)                                      -2.4      -1.2
Gross investment                                     69.3      69.3
Net investment                                       32.0      29.8
(as a % of GDP)                                       1.7       1.5
Total managed expenditure                           738.4     751.4
(as a % of GDP)                                      39.4      38.7
Public sector net borrowing                          76.7      54.0
(as a % of GDP)                                       4.1       2.8
Financial transactions                               18.7     -12.6
Public sector net cash requirement                   58.0      66.6
(as a % of GDP)                                       3.1       3.4
Public sector net debt (% of GDP)                    80.1      80.1
GDP deflator at market prices (201 1 = 100)         106.7     107.8
Money GDP                                          1876.2    1941.6
Financial balance under Maastricht (% of GDP) (b)    -3.6      -3.2
Gross debt under Maastricht (% of GDP) (b)           90.2      88.9

                                                   2017-18   2018-19

Current                Taxes on income              452.3     477.1
receipts:              Taxes on expenditure         256.4     267.9
                       Other current receipts        20.4      20.4
                       Total                        729.1     765.4
                       (as a % of GDP)               36.1      36.2

Current                Goods and services           361.4     364.1
expenditure:           Net social benefits paid     230.4     235.5
                       Debt interest                 39.1      39.6
                       Other current expenditure     60.4      62.6
                       Total                        691.3     701.8
                       (as a % of GDP)               34.2      33.2
Depreciation                                         41.4      43.4
Surplus on public sectore current budget (a)         -3.6      20.2
(as a % of GDP)                                      -0.2       1.0
Gross investment                                     70.4      72.4
Net investment                                       29.1      29.0
(as a % of GDP)                                       1.4       1.4
Total managed expenditure                           761.8     774.2
(as a % of GDP)                                      37.7      36.6
Public sector net borrowing                          32.6       8.8
(as a % of GDP)                                       1.6       0.4
Financial transactions                               -7.3      -3.9
Public sector net cash requirement                   39.9      12.7
(as a % of GDP)                                       2.0       0.6
Public sector net debt (% of GDP)                    78.6      75.6
GDP deflator at market prices (201 1 = 100)         109.2     111.5
Money GDP                                          2019.2    2116.4
Financial balance under Maastricht (% of GDP) (b)    -2.1      -0.8
Gross debt under Maastricht (% of GDP) (b)           87.6      84.3

                                                   2019-20   2020-21

Current                Taxes on income              502.8     531.9
receipts:              Taxes on expenditure         280.1     292.8
                       Other current receipts        21.3      22.3
                       Total                        804.1     847.1
                       (as a % of GDP)               36.3      36.5

Current                Goods and services           370.8     395.9
expenditure:           Net social benefits paid     243.3     255.1
                       Debt interest                 40.2      40.1
                       Other current expenditure     64.9      67.3
                       Total                        719.2     758.4
                       (as a % of GDP)               32.5      32.7
Depreciation                                         45.4      47.5
Surplus on public sectore current budget (a)         39.5      41.2
(as a % of GDP)                                       1.8       1.8
Gross investment                                     74.6      77.9
Net investment                                       29.2      30.4
(as a % of GDP)                                       1.3       1.3
Total managed expenditure                           793.8     836.2
(as a % of GDP)                                      35.8      36.1
Public sector net borrowing                         -10.3     -10.8
(as a % of GDP)                                      -0.5      -0.5
Financial transactions                               -5.5     -19.1
Public sector net cash requirement                   -4.8       8.3
(as a % of GDP)                                      -0.2       0.4
Public sector net debt (% of GDP)                    72.0      69.2
GDP deflator at market prices (201 1 = 100)         113.9     116.3
Money GDP                                          2216.0    2318.9
Financial balance under Maastricht (% of GDP) (b)     0.2       0.4
Gross debt under Maastricht (% of GDP) (b)           80.1      76.0

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, but include flows from
the Asset Purchase Facility of the Bank of England, (a) Public
sector current budget surplus is total current receipts less
total current expenditure and depreciation, (b) Calendar year.

Table A9. Saving and investment

As a percentage of GDP

           Households         Companies           General
                                                government

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

2010    7.9       4.3      11.4      9.1      -5.6      2.9
2011    6.0       4.5      12.8      9.3      -4.2      2.6
2012    5.6       4.5      11.6      9.6      -4.5      2.4
2013    4.4       4.7      10.9     10.3      -2.8      2.1
2014    4.2       5.0      10.2     10.6      -2.4      2.2
2015    4.2       5.0       9.7     11.0      -1.2      2.3
2016    3.9       5.5       9.9     11.4      -0.4      2.2
2017    4.5       6.0       9.2     11.5       0.7      2.1
2018    5.1       6.4       8.6     11.5       1.9      2.0
2019    5.5       6.7       8.1     11.4       2.8      2.0
2020    5.9       6.9       7.8     11.2       3.0      2.0

         Whole economy        Finance from       Net
                                abroad (a)     national
                                                saving
       Saving   Invest-   Total   Net factor
                 ment               income

2010    13.7     16.3      2.6       -1.1         0.4
2011    14.7     16.4      1.7       -1.2         1.5
2012    12.8     16.5      3.7        0.3        -0.5
2013    12.6     17.0      4.5        0.9        -0.7
2014    11.9     17.8      5.9        2.4        -1.3
2015    12.7     18.3      5.7        2.6        -0.8
2016    13.5     19.1      5.6        1.8         0.0
2017    14.5     19.7      5.2        1.3         1.0
2018    15.6     20.0      4.4        0.9         2.1
2019    16.4     20.1      3.7        0.6         2.9
2020    16.7     20.1      3.4        0.4         3.2

Notes: Saving and investment data are gross of depreciation unless
otherwise stated, (a) Negative sign indicates a surplus for the
UK.

Table A10. Medium and long-term projections

All figures percentage change unless otherwise stated

                        2012    2013    2014    2015    2016

GDP (market prices)      0.7     1.7     3.0     2.5     2.4
Average earnings         2.2     1.9     1.5     0.3     2.1
GDP deflator             1.7     1.8     1.6     1.2     1.2
  (market prices)
Consumer Prices Index    2.8     2.6     1.4     0.0     1.0
Per capita GDP           0.0     1.0     2.2     1.8     1.7
Whole economy           -1.2    -0.3     0.3     1.1     1.2
  productivity (a)
Labour input (b)         1.9     1.8     2.7     1.3     1.0
ILO unemployment         8.0     7.6     6.2     5.6     5.5
  rate (%)
Current account         -3.7    -4.5    -5.9    -5.7    -5.6
  (% of GDP)
Total managed           43.9    41.1    40.6    39.5    38.8
  expenditure
  (% of GDP)
Public sector net        8.1     5.3     5.2     4.1     3.1
  borrowing
  (% of GDP)
Public sector net       74.6    78.3    80.6    81.6    80.2
  debt (% of GDP)
Effective               104.2   102.9   111.0   118.6   121.0
  exchange rate
  (2011 = 100)
Bank Rate (%)            0.5     0.5     0.5     0.5     0.8
3 month interest         0.8     0.5     0.5     0.6     1.0
  rates (%)
10 year interest         1.8     2.4     2.5     1.9     2.5
  rates (%)

                        2017    2018    2019    2020    2021-25

GDP (market prices)      2.6     2.7     2.5     2.5       2.3
Average earnings         2.7     3.2     3.5     3.4       3.5
GDP deflator             1.1     1.9     2.2     2.1       2.1
  (market prices)
Consumer Prices Index    1.5     2.1     2.2     2.0       2.1
Per capita GDP           1.9     2.0     1.9     1.9       1.7
Whole economy            1.7     1.7     1.8     2.0       2.0
  productivity (a)
Labour input (b)         0.9     1.0     0.7     0.5       0.3
ILO unemployment         5.3     5.1     5.1     5.2       5.6
  rate (%)
Current account         -5.2    -4.4    -3.7    -3.4      -3.4
  (% of GDP)
Total managed           38.0    36.9    35.9    36.0      37.0
  expenditure
  (% of GDP)
Public sector net        1.9     0.7    -0.3    -0.5       0.3
  borrowing
  (% of GDP)
Public sector net       79.7    77.6    74.3    70.9      62.7
  debt (% of GDP)
Effective               121.0   121.2   121.3   121.4    121.2
  exchange rate
  (2011 = 100)
Bank Rate (%)            1.3     1.8     2.2     2.6       3.7
3 month interest         1.5     2.0     2.4     2.8       3.8
  rates (%)
10 year interest         2.9     3.3     3.6     3.8       4.1
  rates (%)

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

Simon Kirby *, with Oriol Carreras **, Jack Meaning **, Rebecca Piggott ** and James Warren **

* NIESRand Centre for Macroeconomics. E-mail: s.kirby@niesr.ac.uk. ** NIESR. Thanks to Tianle Zhang for creating the fan charts. Unless otherwise stated, the source of all data reported in the figures and tables is the NiGEM database and forecast baseline. The UK forecast was completed on 28 July 2015.

Table 1. Summary of the forecast

Percentage change

                              2012   2013   2014   2015   2016

GDP                           0.7    1.7    3.0    2.5    2.4
Per capita GDP                0.0    1.0    2.2    1.8    1.7
CPI Inflation                 2.8    2.6    1.4    0.0    1.0
RPIX Inflation                3.2    3.1    2.4    1.0    1.9
RPDI                          1.6    0.1    0.8    4.0    2.8
Unemployment, %               8.0    7.6    6.2    5.6    5.5
Bank Rate, %                  0.5    0.5    0.5    0.5    0.8
Long Rates, %                 1.8    2.4    2.5    1.9    2.5
Effective exchange rate       4.2    -1.2   7.9    6.9    2.0
Current account as % of GDP   -3.7   -4.5   -5.9   -5.7   -5.6
PSNB as % of GDPW             7.3    5.6    4.6    4.1    2.8
PSND as % of GDPOO            77.4   79.7   81.0   80.1   80.1

                              2017   2018   2019   2020

GDP                           2.6    2.7    2.5    2.5
Per capita GDP                1.9    2.0    1.9    1.9
CPI Inflation                 1.5    2.1    2.2    2.0
RPIX Inflation                2.1    2.7    2.7    2.6
RPDI                          2.9    2.8    2.8    2.9
Unemployment, %               5.3    5.1    5.1    5.2
Bank Rate, %                  1.3    1.8    2.2    2.6
Long Rates, %                 2.9    3.3    3.6    3.8
Effective exchange rate       0.0    0.1    0.1    0.1
Current account as % of GDP   -5.2   -4.4   -3.7   -3.4
PSNB as % of GDPW             1.6    0.4    -0.5   -0.5
PSND as % of GDPOO            78.6   75.6   72.0   69.2

Notes: RPDI is real personal disposable income. PSNB is public
sector net borrowing. PSND is public sector net debt, (a) Fiscal
year, excludes the impact of financial sector interventions, but
includes the flows from the Asset Purchase Facility of the Bank
of England.

Table 2. Destination country shares of total UK exports

                       UK goods exports (per
                         cent of total) (a)

                       2003   2008   2013

Germany                11.2   11.1   9.9
France                 10.0   7.1    6.9
Rest of EU             38.1   37.8   33.6
Russia                 0.8    1.7    1.7
Rest of Europe         3.7    4.5    5.1
United States          15.1   13.9   13.2
Brazil                 0.4    0.7    0.9
Rest of the Americas   2.7    2.5    2.9
Japan                  1.9    1.5    1.6
China                  1.3    2.4    4.3
India                  1.5    2.1    2.0
Rest of Asia           9.0    9.8    12.6
Australasia            1.4    1.4    1.6
Africa                 2.8    3.6    3.6

                        UK service exports
                           (per cent of
                             total) (b)

                       2003   2008   2013

Germany                7.7    7.0    6.0
France                 6.1    6.0    5.3
Rest of EU             27.2   28.5   24.3
Russia                 0.7    1.1    1.1
Rest of Europe         8.3    9.5    10.8
United States          22.9   19.9   24.2
Brazil                 0.3    0.5    0.6
Rest of the Americas   4.8    6.2    5.8
Japan                  3.7    1.9    2.4
China                  1.0    1.3    2.1
India                  0.8    1.1    1.0
Rest of Asia           10.2   10.0   10.0
Australasia            2.6    2.8    3.1
Africa                 3.6    4.3    3.3

Source: ONS Pink Book, 2014.

Notes: (a) May not sum to 100 due to rounding, (b) May not sum to
100 due to rounding; service exports to international
organisations excluded.

Table 3. Summer Budget 2015 policy decisions

                   2015-16   2016-17   2017-18   2018-19   2019-20

PSCE in RDEL        -1.3      17.2      27.0      28.3      12.1
Net investment      -0.9      -0.7      -0.8      -0.7      -1.3
Discretionary        1.0       4.0       5.1       6.8       5.8
  tax policy
Discretionary       -0.1      -5.0      -7.0      -9.4      -12.1
  welfare policy

Source: Office for Budget Responsibility (2015), Economic and
Fiscal Outlook, July, tables 4.14 and A.1.

Notes: PSCE in RDEL is public sector current expenditure in
Resource Departmental Expenditure Limits.