The cracks begin to show – A review of the UK economy in 2015

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Screenshot 2016-01-15 15.43.14


On 29th December 2015, the Economists for Rational Economic Policies (EREP) network published its Review of the UK Economy in 2015, with a series of short articles focusing on different aspects.  The report includes John Weeks on fiscal policy; Ann Pettifor on monetary policy; Richard Murphy on taxation; Özlem Onaran on inequality and wage stagnation; Jeremy Smith on labour productivity; Andrew Simms on climate change and energy.

Here’s a short summary:


The year 2015 has repeatedly disappointed those who had high expectations that the UK economy was back to “normal times” and destined to see significant continued economic “growth.” At the start of the year, there was a general expectation that inflation would start to rise after the sudden fall in oil prices, and that the Bank of England’s Monetary Policy Committee would start, gently, the process of raising interest rates as “slack” in the economy disappeared.

In reality, and despite some positive results (the number of those in some form of employment, for example) those expectations have gently deflated as 2015 progressed. Most economists had forecast annual GDP increase of over 2.5%. The most recent ONS estimates, up to Q3, show a continuing slide in the annual rate of change per quarter. The annual rate of real GDP change in 2014 per Quarter was 2.8%, 3%, 2.8% and 2.8%. But in 2015, a series of steps down:

Q1 2.5%

Q2 2.3%

Q3 2.1%

More worryingly still, the rate of change in nominal GDP (i.e. current prices) in Q3 was also 2.1% – it is exceptionally rare for nominal GDP not to be greater than real GDP, and besides being an indicator of deflation, has a negative impact on the government finances. Indeed, we saw in the October and November public finance figures some evidence that tax receipts have slowed since the summer, with VAT in November being just 0.8% greater than in November 2014. This may make achievement of the government’s borrowing target for 2015/16 (£73.5 billion) difficult to achieve.

These recent GDP and public finance figures were published just before Christmas – and just a few weeks after the November Autumn Statement and Spending Review. The Office for Budget Responsibility had – thanks to some assumptions on GDP and tax receipts that were queried by many as being over-optimistic – helped the Chancellor to sidestep short-term political problems over working tax credit by allowing a slower path to his promised budget surplus. Those OBR and government assumptions now suffer from considerable scepticism.

Not only has GDP decelerated, but its composition has continued to disappoint. There is almost no sign of the promised “rebalancing” towards “the makers” and “the builders”. While several service industries, including real estate and food and hotels, have fared relatively well, manufacturing has seen a decline, while overall industrial production has only marginally increased over the year:

Manufacturing annual change per quarter:

Q1 1.2%

Q2 0.1%

Q3 -0.9%

Industrial production, with help from a UK oil industry increasing output (but at far lower prices) has risen between 1% and 1.4% year on year, while construction – after a strong rate of annual increase in 2014, fell back from an annual rate of 6.4% in Q1 to a very modest 1% in Q3.

This imbalance is also to be seen in the UK trade and current account statistics, both of which continue to show major deficits. The current account deficit was £17.5 billion in Q3, the same as in Q2 – leaving a deficit of 3.7% of GDP. The total trade deficit widened to £8.7 billion in Q3, from £4.7 billion in Q2, with our trade in goods worsening.

Inflation, if that is the right word, remains close to zero, with some months just above (0.1% in November), and some just below. This is due not only to the continuing fall in oil prices, but to the steady fall in all commodity prices, which indicates a wider and deeper basis for sustained deflationary pressure (at least in all manufactured goods).

The economy is far short of reaching the 2% inflation target set for the Bank of England by the government, and in part explains why UK Bank-set interest rates – unlike in the US – seem likely not to rise for some time yet.   But equally important, the rise in wages which earlier in the year looked as though it might top 3% per annum, meaning a real terms pay increase at last, has recently abated, with the last two months (September and October) only showing annual rises of around 2%. The only main exception is pay in construction, which is over 6% up on the year.

Despite the increase in those in some form of employment (as employee or self-employed), the wage pressures are far from strong, and real wages remain far below their peak in 2008. This trend to lower pay has weakened demand and productivity. Whilst commodity and producer deflation have enabled shoppers to buy more goods for the same money, it is notable that people are not spending much more. On the contrary, in recent months, we have seen unsecured private debt mounting, as people once again resort to borrowing to get by.

The other side of the coin is asset inflation. The reluctance of the private sector to invest in non-speculative assets, combined with QE providing liquidity for the wealthy, together help propel a property price boom which the government has done much to promote with state-aided Help to Buy and similar schemes to increase property prices.

So indeed, as the year has progressed, the economy has slowed and regressed. The public finances are built on hopes and assumptions that appear to be fragile indeed, and economic activity in many key areas has decelerated whilst the property boom helps the asset-rich. The weaknesses in the UK economy are more and more apparent, like a building with a flashy design but poor construction. The cracks begin to show. Let’s hope there’s no earthquake coming…

Download the full report here.



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  • Tony Harvey

    Sorry but I DO hope there is an economic ‘earthquake coming’. I also am glad the economic growth is slowing. It has the potential to bring the whole shabby Ponzi debt & speculation monetary & economic edifice down and I think that will be a GOOD thing because I don’t believe the ground up monetary and economic reform so much needed to our neo-liberal system will happen without a crash. Such an enormous crash that will really force those who hold the levers of power and the 1% behind many of them that so much benefit from the current system- to really consider change. (Though the ongoing educational and campaigning efforts of groups like PM are also necessary- and I applaud and support them). I also don’t believe such a crash would cause the food, energy & essentials of life to stop flowing- more than very briefly- once the powerful 1% and their agents realise that the old system is finished- essential industries would be temporarily nationalised, their debts isolated, money created (its just numbers in computers after all) to run them and employ the workers. The crops will still grow and the oil and gas will still be there to be pumped even if this crap deregulated economic and monetary system finally- at long last- hits the buffers.

  • Rollo10

    What are these ‘growth’ figures based on? For example we had 2.88% growth in Q1 2014 then in Q2 it was 3%, now is this 3% more than the last figure? What is the base figure?

    I always thought that ‘growth’ meant exactly what it said, so if we had 2.88% growth in Q1 we earned 2.88% more than Q4 of the year before and 3% [Q2] should be of the last figure, obviously, they aren’t, other wise we would have had 11.64% growth [ ; )) ] in Q4 2014, over Q4 2013 figures? 2.88 + 3 + 2.88 + 2.88 = 11.64
    Secondly; where is this growth, it certainly isn’t in Trade as this sector continues to be in the red and, as a portion of GDP is a lot smaller [7%] than the level in 1997 [28%] to GDP?
    On close inspection [considering you can find them] our GDP is circa £1.9tn in 2014, of this £1.2tn was ‘Consumer Debt’ and £655bn was from Income Tax. The Income Tax take, is what is allowed in the Budget, what happens to the rest?
    Our Government rely on ‘Borrowing’ [which is ADDED to GDP] this is why we have so many Immigrants [new borrowers] because we have 19m people Economically In-Active [can’t get a loan]!

  • FWHMyers

    Positive Money keep churning out these articles which are framed by the tacit assertion that further economic growth is both desirable and a realistic option. The emphasis is on criticisms of monetary and economic policy that is ‘failing’ to create the preferred growth.

    I just don’t think that this is joined up thinking. There is a strong case to say that growth is a thing of the past, that -desirable or not, the global economy and our domestic one will flatline then contract over the coming decades.

    I think PM should push the case that a more equitable and controlled decline is only possible through monetary reform; rather than joining the chorus of denial which insists that we will keep growing forever.

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