The UK economy in numbers
For me, the biggest casualty of the financial crisis, after employment prospects and interest on savings, was a sense of perspective. The numbers were just so vast, dwarfing all previous analysis of the nation’s finances. A newspaper columnist summed up the general confusion saying ‘A billion here, a billion there, and pretty soon we’re talking big numbers’. When talk in the US got into trillions, I gave up trying to make sense of it.
Some of the talk was ‘shock and awe’ tactics to counter the febrile atmosphere of the time. But now, several years on and starting to consider the effect of unwinding the mysterious Quantitative Easing (QE), I find myself wanting to catch up with some basic metrics of the UK economy. Here’s what I found (jump to bottom to see the impact of QE).
National Income
With apologies in advance to economists, I have an accountant’s view of GDP (also called national income or national output). I think of it as the sales turnover if the UK was a company. It’s the value of everything we produce. In this case, we ‘sold’ £1,606bn in the 12 months to June 2013, made up of personal incomes worth £857bn (53%) and added value to goods and services to the tune of £749bn (47%), see table below.
Are ‘sales’ of £1,606bn impressive? Well, it makes us the 6th biggest economy in the world after the US, China, Japan, Germany and France. The whole world ‘sold’ £46,262bn last year. But population size has a lot to do with it, so GDP/head is usually taken as a better indicator of prosperity. The UK has 63m people (see table below) so, in dollar terms, our GDP / head is $39,399. There’s quite a lot of small, specialist countries ahead of us in the league table of GDP/ head: Singapore, Hong Kong, Qatar, Luxembourg and Switzerland are all ahead of us. However the United States, a country of 304m people, achieves a GDP / head of $50,000. They are 27% more productive that us.
Government Finances
In quieter times the government has usually raised in taxes and spent approximately 40% of national income (£642bn) but, with incomes depressed and spending having recently grown faster than it could be earned, we are in deficit to the tune of £100bn. It will likely be 2016-17 – another three years – before things will be back in balance.
Six years of shortfalls have meant the government has had to borrow a lot to fund the gap. Public debt has doubled since the start of the financial crisis. It is now £1,203bn excluding the £82bn used to keep the banks from bankruptcy. It’s been worse in our history, but usually only in wartime. Because interest rates are at historic lows, servicing the debt is not quite as bad as it could have been. Living with high debt is not necessarily a problem, but it will mean cuts in expenditure elsewhere in order to create headroom in the budget to pay higher interest charges.
Personal Finances
The average salary for both males and females is £25,700. Coming from HMRC, these figures will include bonuses and other enhancements to basic wage, but also part-time workers. Full-time equivalent earnings may be higher, say, around £26,500; a nurse’s salary, for example. Full-time equivalent male earnings may be higher still, say, around £28,400.
The net cash position of households in the UK is nil. Cash on deposit is almost exactly matched by outstanding loans. (See table below). We’re solvent, but only just! However, as it’s likely that most of the cash is held by older people and most of the loans by younger people, matching out across the whole country is pretty much what we might expect.
The savings ratio hit an all time high of 12.3% in 1980 before declining steadily to a low of 1.5% before the financial crisis hit in 2007-08. It has now recovered somewhat. Overall indebtedness compared to income is still uncomfortably high at 134%.
Adding up all our savings, property and other bits and pieces, total personal wealth in the UK is £5,346bn (see table below). This works out as an average of £202,829 per household. The biggest component of our wealth is property. Average house prices for all properties is £242,415 but is £170,231 for those properties with a mortgage over them, which is roughly half of all homes. This means the average outstanding mortgage loan to value ratio is 46%.
The market capitalisation of all UK listed companies on the stock exchange is £2,291bn. Adding this together with publicly owned assets and we arrive at an approximation of the total wealth of the UK of £8,905bn. Now we’re really are talking big numbers!
Industry Finances
In 1970, the economy split roughly 50:50 between services and manufacturing / production. Since then there has been a significant deindustrialisation. Admittedly this process had been going on for decades but it accelerated in the late 1980’s. The chart below shows manufacturing and production makes up roughly a quarter of our GDP and less in terms of employment. For ‘pure’ manufacturing – things that be can put on a ship and exported – the figures are worse. In relative terms, its share of the economy has declined from about 30% in 1970 to 11% now, with 8% employed in the sector.
UK businesses have sales of £2,149bn on which they make profits of £250bn before depreciation, which is a healthy profit margin of 11.6%. They distribute about 40% of these profits, after tax, and invest most of the rest.
Investment and Productivity
It turns out the amount of new investment made by companies and the public sector has a much bigger impact on economic performance than quantitative easing ever will. Investment tends to receive much less attention in the financial press than the metrics already mentioned. Only economic policy wonks pay attention. But it matters a lot. Investment in new technology, new equipment and new buildings, and more particularly the additional money we make from these investments, drives productivity in the economy. A bigger population or working harder, for longer hours, would increase the aggregate level of GDP but it is investment that allows us to do more with less, the factor that drives GDP/head. In economic jargon this is called ‘Total Factor Productivity’. It’s the difficult to pin down quality of changing business processes, working smarter etc. The sort of change represented by the fact a typing pool (such as existed in my first job in industry, as recently as 1989) now seems laughably anachronistic.
In the table below I’ve separated out investment in housing from the corporate and public sectors. Although some of this will be but-to-let, I’ve assumed the quality of our housing stock doesn’t really drive productivity. However, total investment including dwellings is used in international comparisons so I’ve included it for benchmarking purposes.
The financial crisis has hit investment hard. Although investment had been falling from above 20% of GDP to around 17-18% of GDP before the crisis, it has dropped sharply to 13% since. As a consequence our capacity for productivity increases in the future has dropped from a long-run average of 1.15% per annum to 1.12% at the moment. Hopefully it will recover because there are other countries such as Germany and China that continue to invest more than 20% of their GDP, thereby increasing their potential future prosperity. If business investment ever fell to 100% of depreciation we’d be doing no more than replace existing assets. In this scenario productivity improvements would cease.
Quantitative Easing (QE)
At first I thought QE was just a way of recapitalising banks through the back door but, from a distance of several years, we can now see its impact more clearly. By purchasing bonds the Bank of England lowered interest rates. The result has been an increase in asset prices. This is precisely what the Bank predicted would happen back in 2011 when they published the chart below:
As soon as interest rates start rising again, we’ll be in the ‘adjustment phase’. It ought to be possible to quantify just how painful this adjustment will be for investors. The table below shows the amount of QE and its impact if the full inflationary amount is transmitted to asset values.
As at December 2013, house prices have risen 9% and the UK all-share index has risen 16% since QE got into its stride in 2009-10. The implication of the Bank of England’s chart is that asset prices will now rise by less than inflation over the next 14 years.
In the US, QE has been the equivalent of 19% of the stockmarket value although stocks have risen much higher off the back of increased profits. But Japan gets the prize of the biggest number of all. There the QE planned is a whopping 38% of the stockmarket capitalisation and stocks responded accordingly. So far the European Central Bank has avoided the policy.
Summary
Given the scale of the multiple calamities since 2007 – banking system, government finances, euro – the UK economy is in surprisingly good shape shape. Not yet normal but the patient is at least breathing on its own. The policy of QE deserves a lot of the credit for this. Investors and home owners have benefited enormously but, as the Fed has just started tapering, an adjustment phase must be just around the corner and it will pay to be wary.
Sources
These figures are taken from multiple sources and not all in the same financial year so the picture painted uses pretty broad brush strokes, with margins of error as high as 20% in some cases. The sources are: the Office for National Statistics, HM Treasury – Whole Government Accounts, HM Revenue and Customs, The Bank of England, Investment Management Association, the London Stock Exchange, the Land Registry, Halifax House Price Index and the Dept of Business Innovation and Skills.