Oecd Economic Surveys : United Kingdom 1980-1981.

73 Pages·5.184 MB·English

by  OECD

OECD
ECONOMIC SURVEYS
UNITED KINGDOM
JULY 1981
BASIC STATISTICS OF THE UNITED KINGDOM
THELAND
Area(1 000sq.km) 244 Majorcities (population inmillions
Agriculturalurea (1 000sq. km). 1979 184 1979mid-yearestimates):
Greater London 6.9
Birmingham 1.0
Glasgow 0.8
Liverpool 0.5
Manchester 0.5
THE PEOPLE
Population (30.6.1979) 55946000 Totalcivilianemployment, 1980 24397000
No. inhabitantspersq.km 229 ofwhich:
Netincrease inpopulation, Agriculture 637000
1974-1979,annualaverage -7000 Industry (incl.construction) 9270000
Percentagechangeatannual Otheractivities 14490000
raies, 1974-1979 0.0
THEGOVERNMENT
Publiccurrentexpenditure 1980 CompositionofHouseofCommons,
(percentofGNP) 22 June 1981 (No.ofseats):
Publicsectorcurrentreceipts 1980 Conservative 337
(percentofGNP) 41 Labour 255
Nationaldebt 31st March 1980 Social DemocraticParty 14
(ratioloGeneralGovernment Liberal 11
revenue) 120 Northern IrelandParties 11
Scottish NationalParty 2
PlaidCymru 2
Vacant 2
Speaker 1
635
Lastgeneralelection:3.5.1979
FOREIGNTRADE
Exports: Imports:
Exportsofgoodsandservicesas Importsofgoodsandservicesas
apercentageoftheGNP(1980) 28 apercentageoftheGNP(1980) 26
Mainexports (percentageoftotal Mainimports(percentageoftotal
exportsin 1980): importsin 1980):
Machinery 23 Machinery 15
Transportequipment II Petroleumandpetroleumproducts 12
Chemicals II Chemicals 6
Non-ferrousmetals 4 Non-ferrousmetals 5
Textiles 3 Fruitandvegetables 2
Ironandsteel 2 Meat 2
THECURRENCY
Monetaryunit: Poundsterling CurrencyunitperUSJ,
averageofdailyfigures:
Year 1980 0.4302
May 1981 0.4786
Note An internationalcomparisonofcertainbasicstatisticsisgiven inanannex table.
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UNITED KINGDOM
JULY 1981
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
The Organisation for Economic Co-operation and Development
(OECD) was set up under a Convention signed in Paris on 14th
December 1960, which provides that the OECD shall promote policies
designed:
to achieve the highestsustainableeconomicgrowth andemploy¬
ment and a rising standardofliving in Member countries, while
maintainingfinancialstability,andthustocontributetothedeve¬
lopment ofthe world economy;
tocontributeto soundeconomicexpansioninMemberaswellas
non-membercountries in theprocess ofeconomic development;
to contribute to the expansion ofworld trade on a multilateral,
non-discriminatory basis in accordance with international
obligations.
The Members ofOECD are Australia, Austria, Belgium, Canada,
Denmark, Finland, France, the Federal Republic ofGermany. Greece,
Iceland, Ireland, Italy,Japan, Luxembourg, the Netherlands, NewZea¬
land,Norway,Portugal,Spain,Sweden,Switzerland,Turkey,theUnited
Kingdom and the United States.
TheSocialistFederal RepublicofYugoslaviaisassociated in certain
work oftheOECD,particularlythatoftheEconomic andDevelopment
Review Committee.
The annual review of the United Kingdom
by the OECD Economic and Development Review Committee
took place on 29th June 1981.
©OECD, 1981
Queriesconcerningpermissionsortranslationrightsshouldbeaddressed
to:
Director ofInformation, OECD
2, rue André-Pascal, 75775 PARIS CEDEX 16, France.
CONTENTS
Introduction 5
I Recent developments 6
Demand and output 7
Labour market developments 11
Costs and prices 14
Balance of payments 17
II Medium-term labour market trends 25
III Economic policies 32
Fiscal policies .33
Monetary developments 38
IV Short-term economic prospects 45
V Conclusions 48
Annex: Calendar of main economic events 53
Statistical annex 58
TABLES
Text
1 Demand and output 8
2 Labour market statistics 13
3 Costs and prices 15
4 Contributions to retail prices 16
5 Balance of payments 18
6 Selected current account items 20
7 Export and productivity trends in manufacturing 22
8 North Sea oil and gas 24
9 Labour market developments 28
10 Population of working age and activity rates 29
11 Medium-term financial strategy 33
12 Public sector budgets 35
13 Consolidated public sector deficits 36
14 Public expenditure plans 37
15 Monetary indicators 39
16 The outlook for 1981 and 1982 46
17 Recent conjunctural indicators 47
OECDEconomicSurveys
Statistical annex
A Expenditure on GDP 58
B Gross domestic fixed capital formation by sector and
by type of asset and for selected industries 59
C Consumption and investment 60
D Production and manpower 61
E Domestic finance 62
F Wages, prices and external position 63
G Analysis of capital transactions and official financing 64
H Foreign assets and liabilities 66
I Foreign trade by area 67
DIAGRAMS
1 External competitiveness and national income 6
2 Investment trends 9
3 Stocks and stock/output ratios 10
4 Cyclical response of employment 12
5 External trade 21
6 Employment by sector 26
7 Output, productivity and investment in manufacturing 31
8 Money supply and liquidity trends 41
9 Interest rates 43
INTRODUCTION
The recession deepened last year with real GDP falling by about 2 per cent
below its 1979 level. In contrast to the fall in output, final domestic demand
was broadly stable but with the exception of government consumption, all the
main components weakened. A large stock adjustment entailing a negative
contribution of about 3 per cent to real GDP was partly offset by a related
decline in import volumes. The main feature, however, was the 15 per cent
fall in manufacturing production through the year. Unemployment rose sharply
to the highest post-war level. The recession reflected largely the slowdown in
world trade and the effects of the continuing effective appreciation of the
exchange rate which together with high wage settlements caused a severe
financial squeeze on industry. The exchange rate change also had an important
influence on inflation, the rate of price rises decelerating since mid-year. Partly
due to North Sea oil but mainly reflecting the fall in imports and the sharp
improvement in the terms of trade, the current external account moved into
surplus. These main features of economic performance continued into the
early months of 1981 although there were indications that the rate of fall in demand
and activity may have been slowing down but the underlying rate of inflation
has not fallen further.
Monetary conditions were tight in 1980 despite the growth of money supply
(sterling M3) overshooting substantially the target range of 7 to 1 1 per cent and
the reduction in interest rates which was made possible by the lower inflation rate.
Monetary policy is expected to remain non-accommodating to inflation in 1981
and 1982 in line with the Government's Medium-Term Financial Strategy. Fiscal
policy was less restrictive last year, but was tightened in the March Budget this
year. On the basis of existing policies and with the growth of world trade
expected to remain moderate, GDP is likely to fall again in 1981 followed by a
weak recovery in 1982 which, however, may be insufficient to halt the rise in
unemployment. The rate of inflation may fall further depending partly on the
exchange rate. With a pick-up in imports as destocking comes to an end and a
decline in exports, the current external account could move into small deficit.
Recent trends in demand and activity, prices and costs and the balance of
payments are briefly analysed in Part I of this Survey. Part II examines some
aspects of medium-term labour market developments while Part III reviews
economic policies. Short-term prospects.for the economy form Part IV and the
Survey concludes with the main considerations for policy (Part V).
OECDEconomicSurveys
I RECENT DEVELOPMENTS
Recent economic developments have been heavily influenced by the
deterioration in external competitiveness over a number of years. Reflecting
favourable North Sea oil prospects and relatively high interest rates which were
maintained during most of 1980, sterling appreciated in effective terms by about
15 per cent but because of the sharp fall in output and the high level of pay rises,
relative unit labour costs1 increased by 30 per cent during the year. In the three
years to end-1980, the loss of competitiveness exceptionally large by any
standards amounted to over 60 per cent and has affected many real and
Diagram I Externalcompetitivenessandnational income
Log.scale \m-ioo LOG. SCALE 1977=100
180 ISO
170 170
160 160
RELATIVE UNIT y'
LABOUR COSTS1
150 150
/
140 / 140
/--'
/
130 / 130
' EFFECTIVE EXCHANGE RATE
120 \ 120
/
no no
TERMS OF TRADE
ioo 100
90 L
90
I II III IV I II III IV I II III IV I II III IV
1977 1978 1979 1980
LOG.SCALE1»77=100 LOG.SCALE 1?77=IOO
110 110
109 109
106 108
107 107
REAL NATIONAL DISPOSABLE INCOME'
106 106
105 105
104 r~-\ 104
103 GDP FACTORCOST 103
102 102
101 101
100 100
99 99
I II I il I II I n
1977 1978 J979 1980
1 Inacommoncurrency.
2 Realnationaldisposableincome isGDPfactorcost adjusted fortermsoftradechanges.
Sources: EconomicTrendsandOECD, Secretariatestimates.
1 The changes ofdomestic unitlabour costs in relation to those of the main competitors
expressed in a common currency.
UnitedKingdom
nominal aggregates. The currency appreciation since 1978 entailed a sizeable
improvement in the terms of trade which is the main reason for the large
differences in recent movements of real national disposable income2 and real
GDP at factor cost. Over the three years to the second half of 1980, real national
disposable income rose by more than 6 per cent whereas real GDP was broadly
unchanged suggesting a substantial rise in living standards despite flat output3;
the respective changes between the second halves of 1979 and 1980 were falls of
3 per cent and 3i per cent. Employees were the principal beneficiaries
of the improvement in the terms of trade, real disposable average earnings rising
by over 15 per cent in the three years to the second half of last year. The increase
during 1980 was about 3 per cent which explains the strength of private
consumption in the face of rapidly falling output and rising unemployment.
The counterpart to the increase in real personal earnings was a severe squeeze
on company profits, which (excluding North Sea oil operations) fell to historically
low levels in the second half of 1980, i.e. less than 5 per cent of GNP compared
with 9 per cent in 1978 and 1 1 per cent in the early 1970s. This decline and the
concomitant squeeze on cash flows stimulated considerable destocking which
substantially depressed GDP during 1980. Moreover, falling profits contributed
to the decline in company investment. Because of the high import content of
stocks the rundown of stocks led, however, to a sizeable decline in the volume
of non-oil imports, which more than offset, the decline in non-oil export volumes
(due to the decline in export competitiveness). The improvement in the real
foreign balance provided a big positive contribution to GDP, thus mitigating
somewhat the negative effects of destocking (Tabic 1).
Demand and output
After reaching a cyclical peak of 22j per cent in the pay round ending
in the third quarter of 1980, the year-on-year growth of average earnings slowed
down to some 16? per cent in the first quarter of 19814 which still gave a year-
on-year increase in real disposable average earnings of 2? per cent. However,
this was more than offset by a steep fall in employment leading to a decline
in the real after-tax wage and salary bill.of nearly 11 per cent during 19805;
in 1980 as a whole there was an increase of h per cent. Mainly because of
rising unemployment payments, government transfers was the only item of
personal income which experienced a real growth during 1980 (6 per cent);
transfers probably continued to rise in the beginning of 1981. In total, real
disposable income fell marginally during 1980 but because of the steep increase
during 1979 (61 per cent) still showed a small rise in 1980 as a whole.
Precautionary savings, reflecting rising unemployment and the desire to restore
the real value of liquid assets in the face of rapid inflation, explain the continuing
increase in the personal saving ratio to a historical peak of 151 per cent in
1980. The increase in the personal saving ratio was particularly important in
the second half of the year, thus dampening private consumption. The high
2 Real national disposable income is GNP adjusted for the terms of trade changes.
An improvement (deterioration) in the terms of trade increases (decreases) the resources
available to the country for consumption and investment since with a given level of exports
more (less) imports can be obtained.
3 Real national disposable income is a better measure of the changes in a country's
purchasing power and hence, its standard of living in the short run, than real GDP.
4 In recent months, average settlements have been in single figures and the underly¬
ing increase in average earnings has slowed down much faster than suggested by the year-
on-year increase in earnings.
5 During or through the year indicates the period between the fourth quarter of the
preceding year arid the fourth quarter of the actual year.
OECDEconomicSurveys
Table 1 Demand and output
Percentage volumechanges, seasonally adjustedatannual rate
'Fromprevious
Frompreviousyear hall"year
1979 1980
1976 1977 1978 1979 1980 II 1 II
Private consumption 0.3 -0.6 6.0 4.7 0.7 -2.2 4.2 -3.3
Government consumption 0.6 -1.2 2.1 2.0 1.7 1.8 2.1 I.I
Fixed investment 1.3 -2.6 3.5 -1.3 -2.2 8.9 -7.5
Final domesticdemand 0.6 -1.1 4.7 3.0 0.4 0.6 1.9 -2.8
plusstockbuilding1 2.1 0.6 -0.4 0.7 -3.1 -0.3 -4.2 -3.5
pluscompromise adjustment1 2 -1.0 0.7 0.2 0.6 -0.3 - -0.1 -1.0
Total domesticdemand 1.7 0.2 4.4 4.3 -2.9 0.3 -2.4 -7.2
Exports 9.0 6.7 1.8 2.1 0.5 8.4 0.7 -7.2
Imports 4.2 1.2 3.9 11.1 -3.3 10.3 -3.3 -15.4
Change in foreign balance1 1.2 1.5 -0.6 -2.5 1.1 -0.7 1.2 2.8
GDPat market prices-1 2.9 1.7 3.8 1.8 -1.9 -0.5 -1.2 -4.6
GDP m.p. excluding North Sea oil 2.3 0.8 3.2 1.0 -2.0 -0.9 -1.1 ^1.7
Agricultural production -8.0 12.6 8.1 -1.3 8.5 3.7 13.9 3.4
Miningand quarrying4 25.8 49.2 23.9 26.8 2.2 10.1 0.2 -1.1
Manufacturing 2.0 1.9 0.5 0.1 -9.8 -1.8 -10.5 -15.9
Construction, gas, electricityand water -0.3 1.1 5.6 0.0 -4.9 2.0 -6.4 -8.7
Services 1.9 1.1 3.1 2.3 -0.3 0.0 1.0 -3.1
GDPat factorcost (on an output basis) 1.9 2.6 3.4 2.2 -2.9 0.5 -2.8 -6.6
Real personal disposable income 0.6 -1.8 8.4 6.3 2.) 6.2 -0.8 3.8
Personal savings rate 11.9 10.8 12.7 14.1 15.3 15.8 13.7 16.8
1 ConlribulionloGDPestimatedbytakingthechangeasapercentageofGDPinthepreviousperiod.
2 Thedifl'erencebetweenexpenditure-basedGDPand"compromise"GDP. Thelatteristheweightedaverageoftheout¬
put,expenditureandincomemeasureofGDP. Theweightsarcrespectively40percent.40percentand20percent.
3 Ona"compromise"basis.
4 IncludingNonhSeaoilandgasproduction.
Source*:EamomivTrends. PressandInformationServiceRelease.June 1981 andOIICDSecretariatestimates.
saving ratio at the end of 1980, the slowdown in the rate of inflation and pre-
Budget buying boosted private consumption in the first quarter of 1981, but its
level remained slightly below the peak in the second quarter of 1979.
Government consumption, instead of declining as officially forecast, continued
to rise during 1980, while government investment broadly in line with official
forecasts fell considerably to a level in the fourth quarter of 1980 similar to
that in 1960. The significant loss of competitiveness affected mostly the tradeable
goods sector, in particular manufacturing, with immediate consequences on invest¬
ment. The real rate of return of industrial and commercial companies (excluding
North Sea oil) fell to roughly 2 per cent in the second half of 1980, which is by
far the lowest over the last thirty years and some two-thirds lower than during
the previous recession in 1974-75. In manufacturing, the decline in profits in
1980 seems to have been more marked; with output falling from the cyclical
peak in mid-1979 and with weak prospects over the medium term, there was an un¬
usually sharp decline in manufacturing investment of 15 per cent during the
year6.
6 The OECD figures include leasing by financial institutions of capital goods to the
manufacturing sector; accordingly these amounts are deducted from investment in distribution
and services. The official United Kingdom statistics classify investment by ownership rather
than by use ; as most leased assets are owned by finance companies, leasing to manufactur¬
ing is classified as investment in distribution and services in United Kingdom publications.
The official statistics (excluding leasing) show a decline in manufacturing investment of
20 per cent during 1980 and of 10 per cent in 1980 as a whole (7 per cent including leasing).