Movements in the bond and currency markets are a barometer of investor expectations about a country’s economic prospects.
Selling bonds through the Debt Management Office is the main way the UK government borrows money to fund the gap between what it spends and the money it receives.
A rise in the premium, or yield, demanded by markets for loaning money means funding the deficit becomes more expensive.
The UK’s historic low unemployment rate has been one of the major economic success stories of the past year. Initially led by part-timers and the self-employed, the growth in employment has broadened to include full time employees. But real wages, which had started to recover following the financial crisis, began falling again this year as the depreciation of sterling after the Brexit vote has fed through to consumer prices but nominal wage growth has not picked up.
A measure of how much economic output is generated for a unit of input, productivity has been the Achilles heel of the UK recovery. For many decades before the financial crisis of 2008-09, it tended to grow at a stable pace of around 2 per cent per year, whether measured by output per worker, output per hour worked or the efficiency of both labour and capital used.
But since the crisis, productivity has failed to pick up, confounding forecasters at the Bank of England and the Office for Budget Responsibility. A brief pick-up in productivity growth in 2016 appears to have been a false dawn.
Exceptionally low inflation, driven largely by falling oil prices, supermarket price wars and the strength of sterling keeping down the costs of imports, was a boon for household finances in 2014 and 2015. But the sharp fall in the value of sterling since the vote to leave the EU means that imports have become more expensive and inflation has risen well above the Bank of England’s 2 per cent target.
The Bank of England increased interest rates above the 0.5 per cent ‘emergency levels’ they were cut to in 2009 for the first time in August 2018. Markets are now speculating whether the central bank made the right decision to move before the outcome of the Brexit negotiations is known.
Consumer spending has been one of the driving forces of the UK recovery. But concerns remain about the basis of this spending: if people are using up their savings or taking out loans this could cause future problems.
The services sector is the real powerhouse of the UK economy, accounting for almost 80 per cent of GDP. It is one of the few parts of the economy to have surpassed its pre-recession peak.
Manufacturing has a symbolic place in British economics, despite the fact that its importance has declined consistently over the decades. In 1948, it contributed about 36 per cent of GDP, compared with about 10 per cent today. The number of people employed in the sector has declined even faster than its share of output but new technology has made the sector more productive as it focuses on higher value goods.
Construction accounts for about 6 per cent of the economy, but was very hard hit by the recession. It contracted by 17 per cent from peak to trough and remains below its pre-downturn peak. After a period of growth, mainly driven by housebuilding, the sector has begun falling again, but the data remains very volatile.
Banks’ lending to businesses started to grow in 2016, having declined since 2011 (when the Bank of England started collecting data). Since the financial crisis the government has introduced many schemes and used much political pressure to encourage banks to improve access to finance for businesses.
The UK has a history of credit-led booms, followed by house price crashes: in fact the last time this happened the UK had to nationalise two banks. This means regulators now pay close attention to signs prices may be rising out of control. Since last summer, most markets have cooled but prices are still much higher than a few years ago.
Public spending cuts have been a central theme since 2010 but the government is still struggling to close the UK’s budget deficit. It has been hampered by continuing weakness in economic growth and tax receipts.
Despite numerous initiatives by successive governments, the UK has been importing more than it exports for a long time. While financial markets have to date been relaxed about the current account deficit, some economists are beginning to worry, saying it could make the UK vulnerable to external shocks.