UK’s solid economic metrics drowned out by EU and immigration debate

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The meteoric rise in support for the UK Independence Party (UKIP) has, notably, taken place despite the UK economy outperforming many developed and most European economies (see Figure 1) and a number of events, including the royal wedding, Olympics and silver jubilee, putting the UK firmly on the map.

  • The IMF forecasts UK GDP growth at 3.2% in 2014[1], nearly twice as fast the developed-economy average of 1.8%, faster than any other EU economy[2] and only marginally slower than the best performing Asia-Pacific economies[3].
  • UK government debt is forecast at 92% of GDP at end-2014, below the euro-area average (96.4%) and within the G7, only larger than Germany’s (75.5%) and Canada’s (88.1%).
  • The fiscal deficit of 5.3% of GDP is still high by EU and developed-world standards, but nearly half of the 2010 ratio and forecast to fall to near 4% next year.
  • The unemployment rate (IMF definition) is forecast at 6.3% this year, well below the 11.6% euro-area average and within touching distance of Germany’s (5.3%)[4]. The total number of unemployed fell below two million in June-August 2014 and the unemployment rate dropped to 6.0% (UK definition) – the lowest level and ratio since late 2008[5].
  • Inflation, as measured by average consumer price inflation in 2014, is forecast to be bang in line with the developed world average of 1.6%.
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Figure 1: UK economy in decent shape relative to advanced economies. Source: IMF World Economic Outlook October 2014, 2014 forecasts

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Figure 2: Real weekly earnings have collapsed in the past 5 years. Source: ONS; Note: real earnings defined as seasonally adjusted weekly earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

That’s not to say the UK economy is out of the woods and arguably growth needs to be both more balanced (regionally and sectorally) and sustainable. But on the whole, the coalition government has done a better job of dragging the UK out of the post-2008 quagmire than many of its peers. Therefore, it is telling that decent headline numbers have not translated into popular support for the ruling Conservatives, let alone its coalition partner. I would identify a number of interconnected reasons. For starters, the UK’s outperformance may have ironically worked against the Conservatives and helped UKIP by partly driving the “UK would do even better if it wasn’t part of an under-performing EU” argument. The costs and benefits of EU membership over the short and long-term are sufficiently difficult to quantity for UKIP leader Nigel Farage to have at least sown some doubt.

Furthermore, real earnings[6]– an arguably more tangible metric to most households than GDP growth or public debt levels – have fallen about 10% since Q3 2009 based on ONS data[7] (See Figure 2). At the same time social security benefits are perceived (rightly or wrongly) as overly-generous and the overall tax take[8] as too onerous. UKIP has stolen the march in linking these concerns to the EU’s unfettered immigration policies and, with some success, reinforced its call for the UK to exit the EU. More on that in following commentaries.

 

Olivier Desbarres is a former G10 and emerging markets economist, rates & currency strategist with 15 years experience. He has written extensively on EU membership and is now an independent commentator.


[1] http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/tblparta.pdf

[2] France’s economy has grown a paltry 1% since 2012 and successive prime ministers have done little to arrest the country’s rising debt.

[3] The IMF forecasts GDP growth in 2014 at 3.7%, 3.6% and 3.5% in South Korea, New Zealand and Taiwan respectively

[4] http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/tblpartb.pdf

[5] http://www.ons.gov.uk/ons/index.html

[6] Defined as total pay (regular pay plus bonuses) deflated by the Retail Price Index

[7] http://www.ons.gov.uk/ons/dcp171766_351467.pdf and http://www.ons.gov.uk/ons/taxonomy/index.html?nscl=Weekly+Earnings#tab-data-tables

[8] including income tax, national insurance, council tax and VAT

 

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