developed countries. 19 The recent weakness in productivity has occurred alongside strongemployment growth. Since Q1 2010 the UK has seen the fastest growth in employment of allthe G7 countries.1.17 Productivity growth is the main factor determining average living standards in themedium term. The government has implemented far-reaching structural reforms to improvethe UK’s long-term productivity. The OECD Secretary-General in February <strong>2015</strong> set out that the“United Kingdom has made tremendous progress in recovering from the largest economic crisisin 80 years. And this progress has laid the foundations for further reforms needed to boostproductivity and inclusiveness”. 20UK rebalancing, investment and trade1.18 As the recovery has become established, growth has been broadly balanced across sectors,and it is also becoming more balanced across the UK. There has been widespread growth acrossall major sectors since the start of 2013, including manufacturing, construction and services.1.19 Business investment has been a key factor driving the recovery. Business investment hasincreased 25.6% since Q1 2010 and is 5.3% above its pre-crisis peak in Q2 2008. Businessinvestment in 2014 saw the largest annual growth since 2007. Since Q1 2010, businessinvestment has grown 4 times faster than household consumption. The OBR forecasts2.6% household consumption growth in <strong>2015</strong>, alongside continued strong business investmentgrowth of 5.1% in <strong>2015</strong>. <strong>Budget</strong> <strong>2015</strong> announces a package of measures to support investmentin the oil and gas sector. The OBR’s assessment is these measures will boost the level of oilproduction by 2019 by 15%, equivalent to around 0.1% of GDP. 211.20 This government is committed to rebalancing growth across the regions and nations ofthe UK and is committed to the creation of a Northern Powerhouse. The latest data shows thatoutput per head in the North West, North East, West Midlands and Wales all grew faster thanLondon in 2013. In addition, in the year to the end of 2014, employment in the North East,North West and the East Midlands all grew faster than in London.1.21 The UK is one of the most open economies in the world, with significant trade andfinancial links with other countries. UK exports performance is highly dependent on theeconomic performance of the euro area, the UK’s largest trading partner.1.22 The UK’s current account deficit widened to 6.0% of GDP in Q3 2014. Chart 1.4 showsthe income balance has declined since early 2012, reflecting lower income received frominvestment abroad. Weaker euro area growth and global prospects have seen UK investmentsabroad yield lower returns while, in contrast, as the UK economy has continued to recover, thepayments made on foreign holdings of UK investment have increased. The OBR forecasts thatthe current account deficit will diminish over the forecast period from 4.3% of GDP in <strong>2015</strong>, to3.2% in 2016 and 2.3% in 2019.1.23 Weak euro area growth has meant goods exports to EU countries have been subdued. ButUK exporters have continued to expand in other markets and the volume of goods exports tonon-EU countries has increased by 24% since Q1 2010. The UK’s trade deficit in the 3 monthsto January <strong>2015</strong> was £4.4 billion, the lowest deficit since October 2000. The narrowing of thedeficit in the 3 months to January <strong>2015</strong> reflected a fall of £1.2 billion in UK imports and anincrease in exports of £2.4 billion.19‘The UK productivity puzzle: an international perspective’, speech by Martin Weale, December 2014.20Remarks by Angel Gurria for the ‘Economic Survey of the United Kingdom <strong>2015</strong>’, OECD, February <strong>2015</strong>.21‘Economic and fiscal outlook’, OBR, March <strong>2015</strong>.14 <strong>Budget</strong> <strong>2015</strong>
Chart 1.4: Current account4% of GDP20-2-4-6-82008200920102011201220132014<strong>2015</strong>20162017201820192020Trade balance Transfers balance Income balanceCurrent account balanceOBR forecastSource: Office for National Statistics, Office for <strong>Budget</strong> Responsibility.1.24 There continue to be signs of normalisation in the housing market with indicatorssuggesting continued increases in house building and moderating house price growth. Housingstarts were up 10% in England in 2014 and house prices grew by 9.8% in the year to December2014, down from 12.1% in the year to September 2014. 22 Effective mortgage rates fell to2.8% in January <strong>2015</strong>, the lowest rate on record. 23 Lower effective mortgage rates should makeit easier to service a mortgage and support housing demand. <strong>Budget</strong> <strong>2015</strong> announces the Helpto Buy: ISA to help first-time buyers realise their aspirations of homeownership.Global developments and risks1.25 Abandoning the government’s long-term economic plan would represent the mostsignificant risk to the UK economy. A sustained improvement in productivity growth is criticalto delivering the OBR’s forecast for the economy. The global economic recovery remains unevenand the UK is not immune to the severe problems being experienced in Europe and other partsof the world economy.1.26 In January <strong>2015</strong>, the International Monetary Fund (IMF) again downgraded its globalgrowth forecast for <strong>2015</strong> to 3.5%. 24 In the euro area, recovery remains slow and inflationhas turned negative. The IMF expects euro area growth of 1.2% in <strong>2015</strong>. In contrast, theUS economy is forecast to continue to recover strongly and the IMF projects growth of 3.6% in<strong>2015</strong>. In Japan, growth is forecast to be just 0.6% in <strong>2015</strong>. Chinese growth continues tomoderate as the government implements an ambitious reform plan to rebalance the economyand control credit growth, and is expected to fall below 7% in <strong>2015</strong>. Across emerging anddeveloping markets, the IMF expects growth to slow to 4.3% in <strong>2015</strong>.22‘House Building in England: October to December 2014’, DCLG, February 2014.23‘Effective interest rates: January <strong>2015</strong>’, Bank of England, February <strong>2015</strong>.24‘World Economic Outlook Update’, International Monetary Fund (IMF), January <strong>2015</strong>.<strong>Budget</strong> <strong>2015</strong>15
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