ECON10082

STUDENT ID: 8760535

Tutor: Serena Masino

In this essay, I will discuss some measures of economic performance of the UK to access its overall performance over the last two decades, while also comparing its performance with other countries. I will be looking at inflation, unemployment rate, and GDP growth rate to make these comparisons.

Inflation In the UK, there are many method to calculate the inflation rate, while Consumer Price Index (CPI) and Retail price index (RPI) remain the dominant ones. CPI is measured according to the EU guidelines and therefore is internationally comparable. The only problem to CPI is that it lacks the ability to measure changes in some house costs. Thus, I will be using an additional measure called CPIH along with CPI, to include housing costs for making a more inclusive assessment of UKs inflation history. CPIH is a new additional measure of consumer price inflation including a measure of owner occupiers housing costs (OOH) and it is important to include OOH in our index as these account for approximately ten per cent of total household expenditure in the UK. (Restieaux, 2013, p.1). The recent data on CPI and CPIH is shown below:

Figure 1:

1990-2013

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STUDENT ID: 8760535

Figure 2:

1990-2013

6.0

1.5

Figure 3: CPIH and CPI 12 month change 2006-2012

5.0 12 month percentage change Difference (CPI - CPIH) 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 CPI-CPIH (right-hand axis) CPIH CPI -0.5 0.0 0.5 1.0

Jan-11

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-12

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Source: ONS The above figure 1 shows that UK has quite successfully been able to manage its target of 2 percent

inflation, if we ignore the big lumps followed by steep fall of early 1990s exchange rate crisis and the recent great depression of 2008-09. Since the great depression, because of the efforts to revive economy through interest rates, UKs economy has not been able to cop-up with its target, maybe because of a fear of another depression period, on the other hand US has managed to do it better even after a deeper recession as shown by figure 2. Figure 3 shows how house prices affect the inflation, where CPIH always being lower than or equal to CPI.
2

Jul-12

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STUDENT ID: 8760535

The below table compares UKs average annual CPI with that of 8 other economies over past 14 years:

Figure 4: HICP - International comparisons: EU countries: 1998 to 2013 Percentage change over 12 months
6 4 2 0 -2 -4 France Ireland Netherlands Sweden EU 25 (till 2006), EU 27 (2006 onwards) Germany Italy Spain UK Source: ONS (Feb 2013) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

It can be observed that the above EU countries follow almost the same trend over the years and the current average of most economies range between 2 to 3 percent with notable exceptions of Sweden and Italy.

Unemployment

This is one of the most influential factor to access the economic performance. It shows how an economy takes care of its labour force especially in the times of recession. I shall look at the past two decades unemployment rate and compare it with that of US, giving special attention to the post crisis performance. Take a look at the following figure which records UKs unemployment rate

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STUDENT ID: 8760535

since 1990:
Figure 5:

It can be observed from the above figure that since the early 1990s crisis, UK was able to manage its unemployment quite successfully, enjoying an eight year long period of stability. There is a sudden increase in unemployment since the great depression, which UK has not been able to tackle since then. The below figure compares UKs performan ce in managing unemployment since the 2008 crisis with that of US and EU: Figure 6: Unemployment Rate International Comparison (Jan 2008 - Feb 2013)
14 12

Unemployment Rate (%)

10 8 6 4 2 0

Jul-09

Nov-11

Jul-08

Jul-10

Jul-11

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jul-12

Nov-08

Nov-09

Nov-10

May-08

May-09

May-10

May-11

May-12

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

UK

US

EU

Sources: ONS (UK data), Eurostat (EU data), Bureau of Labour Statistics (US data).

It can be clearly observed that US observed a greater unemployment rate than UK due to the depression, but it is showing clear signs of recovery; on the other hand, UK is still struggling to
4

Nov-12

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Jan-13

ECON10082

STUDENT ID: 8760535

overcome the effects of the crisis with no progress at all. However both economies performed significantly better than the Eurozone, which is still worsening main reason being the Southern European countries. The difference in the unemployment rate might also be due to the different approaches to measure it. An interesting fact to note here is that in the early 2008, both inflation and unemployment were found to be increasing together right before the crisis.

GDP The gross domestic product (GDP) is the main measure to access the economic performance of an economy in the global market. Growth in GDP is considered as a growth in overall economy as it reflects the growth in the income of the residents. I will look at the UKs performance in keeping up its GDP growth rate through the following figure:

Figure 7:

One unique feature of this great depression was that it took the GDP growth rate to the minimum according to the above figure, and yet the growth rate is falling. It certainly reflects how severe this depression is. One can easily see the relatively smooth phase of GDP growth between the two depressions of 1990s and 2008-09 respectively. To access UKs relative performance in recovering from the crisis, I shall compare the post-crunch period through the following figure:

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STUDENT ID: 8760535

Figure 8: International comparision of UK's quarterly GDP growth rate (2008 - Q1 2013)
6 4 2 0 -2 -4 -6 -8 -10 UK US EU Sources: ONS (UK data), Eurostat (EU data), Bureau of Economic Analysis (US data).

The above figure more clearly reflects the post crisis story, taking quarterly growth rate in account. It can be observed that the UK has consistently been showing a negative GDP growth with a few positives. The Euro zone shows the similar story, where it seems difficult to recover from the creditcrunchs effects. On the other hand, US, even after having a considerably larger disaster, has improved its performance with consistently positive GDP growth. While looking at the GDP performance, one must also consider that GDP is essentially an indicator of a nations production. But production may be a poor indicator of societys well-being (Sloman, 2005, p.377). Conclusion UK observed a very long period of stability with favourable performance between the two crisis of early 1990s and 2008 respectively. Since the great depression, UK, along with its neighbour economies, have been struggling to improve its performance but still being better than the Eurozone average as seen above. The signs of this depression are clear and worse in the Euro area. As the post-crunch economy shows no signs of progress even after 4 years, this certainly is a great depression, thus it is too early to measure the consequences.
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GDP growth rate (%)

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STUDENT ID: 8760535

Bibliography

RESTIEAUX, A. 2013. Introducing the New CPIH Measure of Consumer Price Inflation. March 12, 2013 ed.: Office for National Statistics.

SLOMAN, J. 2005. Economics, GB, Pearson Education.

Office for National Statistics, UK , (Online), Available: http://www.ons.gov.uk/ons/datasets-andtables/index.html

Eurostat (Online), Available: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes

U.S. Bureau of Labour Statistics (Online), Available : http://www.bls.gov/data/