book book e

Contents
Background 1
UK Economic Growth 2
Monetary Policy and Interest Rates 4
Fiscal Policy 7
Labour Markets 9
UK Trade 11
World Trade 13
Trade liberalisation and protectionism 14
Overseas aid and development 15
Global Foreign Direct Investment (FDI) 16
The UK and the European Union 18
Anforme Ltd 2014
ISBN: 978-1-78014-004-9
Anforme Ltd, Stocksfield Hall, Stocksfield,
Northumberland, NE43 7TN
www.anforme.com
The UK and the international economy 2014
1
Background
The global economy is at a turning point according to the World Bank in January 2014. Growth appears to be strengthening
in both high-income and developing countries, but downside risks continue to threaten the global economic recovery,
said World Bank Group President Jim Yong Kim. The performance of advanced economies is gaining momentum, and
this should support stronger growth in developing countries in the months ahead. Still, to accelerate poverty reduction,
developing nations will need to adopt structural reforms that promote job creation, strengthen financial systems and
shore up social safety nets.
A similar picture is shown by the International Monetary Fund in their World Economic Outlook Update published in
January 2014. They showed global GDP growth as standing at 3% in 2013, with expectations of growth to 3.7% in 2014
and 3.9% in 2015. This is somewhat more bullish than the World Bank which projects world GDP growth of 3.2% this
year, rising to 3.4% in 2015.
The IMF projections can be seen in Figure 1 below.
Figure 1: Global GDP Growth (Per cent, quarter over quarter, annualised)
Source: IMF staff estimates
As can be seen in Figure 1 growth in emerging market and developing economies is running well ahead of the growth
in advanced economies, with a forecast of 5.1% growth in 2014 rising to 5.4% in 2015.
In looking at the Euro area the IMF suggests that the corner is being turned from recession to recovery. Here, growth
is expected to strengthen to 1% in 2014 and 1.4% in 2015, although it envisages that the recovery will be uneven.
Elsewhere in Europe the UK is expected to see more superior growth rates, with an average of 2.25% during 2014-15,
although it is noted that the economic slack within the economy will remain high.


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Advanced economies
Emerging market and developing economies
World
The UK and the international economy 2014
2
UK Economic Growth
The UK economy grew by 1.8% in 2013, which was the strongest rate of economic growth since 2007, according to
figures published at the end of February 2014 by the Office for National Statistics (ONS). It is interesting that the rate of
growth was well above the forecasts previously made by the Office for Budget Responsibility (OBR). At the time of the
2013 Budget they estimated growth in 2013 at only 0.6% and even in their Autumn Statement only put the figure at 1.4%.
In the fourth quarter of 2013 the growth in the service sector rose by 0.8%, the same as the previous quarter. The UKs
service sector accounts for more than three-quarters of total economic output. The production sector grew by 0.5%
whilst the manufacturing sector grew by 0.7% and construction rose by 0.2%.
The trend over the past six years can be seen in Figure 2 below.
Figure 2: UK GDP growth, quarter on previous quarter %
Source: ONS
One particularly notable point is that service sector output has now surpassed its pre-downturn peak by 1.3%. However,
the production sector remains 12.3% below its peak, with manufacturing 8.8% below and construction 11.3% below.
What we need to look at is whether the UK is going to have a more balanced growth going forward. There is obvious
concern that growth fuelled by household expenditure, plus a steady rise in house prices, might well see us returning to
our 2007 situation. In fact, consumer spending grew by 0.4% in the last quarter of 2013, but this was down from 0.9% in
the previous three months. There was also the positive that business investment was up by 2.4% in the fourth quarter
compared with the third, and was up 8.5% when compared to the previous year.
The OBR has now revised its forecast for UK growth upward from 2.4% to 2.7% in 2014 and from 2.2% to 2.3% in 2015.
It also forecasts GDP growth of 2.6% in 2016, 2.6% in 2017 and 2.5% in 2018.
The Bank of England is actually forecasting 3.4% growth this year, and is expecting a large rise in business investment
of 11.5% and an increase of 23% in housing investment. Businesses currently have large cash reserves on average,
which is money they have been holding onto until they thought the time was ripe for investment. If current levels of
confidence continue to grow, then it is likely that they will start to pour more resources into investment, which will also
create a rise in employment.
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
2008 2009 2010 2011 2012 2013
The UK and the international economy 2014
3
The only drawback is that interest rates might rise from their current level of 0.5%. We can expect a rise but according to
the Bank of Englands Chief Economist, Spencer Dale, this will probably not happen until Spring 2015. He said in a radio
interview that he then envisaged rates ... rising to around 2% by the end of 2016 and on that forecast, on that basis, we
have a forecast in which the economy looks pretty good.
The UK and the international economy 2014
4
Monetary Policy and Interest Rates
The Bank of England has been given an inflation target of 2% expressed in terms of an annual rate of inflation based
on the Consumer Prices Index (CPI). The objective is not to ensure that inflation is at its lowest possible rate, because
the judgement is that inflation below this target is just as bad as inflation above it. In other worlds the inflation target is
a symmetrical one.
The Monetary Policy committee (MPC) of the Bank of England acknowledges that it is not possible to achieve a constant
interest rate, but tries to ensure that an interest rate will be set which can bring inflation to its target within a reasonable
time period without creating instability in the economy. There is a time lag between any change in interest rates being
made and the impact upon the real variables within the economy, which can be as much as 18 months. So if the MPC
thought that a current surge in inflation was caused by temporary factors, then they would be reluctant to raise interest
rates, which could then have an unwanted effect of choking off economic growth at the very time that the inflation rate
has sunk back down to its 2% target.
So, what has been happening to inflation and interest rates? Has the MPC been able to keep to its inflation target remit?
In actual fact inflation started rising towards the end of 2009. In November CPI stood at 1.9%, almost hitting the target
rate, but the following month it rose to 2.9%, although this was still within the 1% boundary either side of the target in
which the inflation rate should be contained.
However, for the whole of 2010 inflation was over 3%, and at 4% or over for the whole of 2011, rising to 5.2% in
September 2011. But the MPC did not take action to raise interest rates on the basis that the price rises were largely
due to external factors and were not caused by structural problems within the UK economy. The recent trend in inflation
can be seen in Figure 3.
Figure 3: CPI inflation, percentage change over 12 months, 2004-2014
Source: ONS
In fact the main culprits for this excessive inflationary rise, were increases in global oil and other energy prices, and
rapid growth in global food and other commodity prices. The MPC continued to maintain over this two year period that
such price rises were temporary factors, and that to raise interest rates would cause more harm to the economy. If fact
the Bank says that its remit recognises the role of price stability in achieving economic stability more generally, and in
Jan 2004 Jan 2006 Jan 2008 Jan 2010 Jan 2012 Jan 2014
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The UK and the international economy 2014
5
providing the right conditions for sustainable growth in output and employment. So the Bank took the measured view
that given the parlous nature of the UK economy as it struggled to recover during this period, it would be undermining
its task of achieving more general economic stability if it raised interest rates.
In fact the Bank was proved right. Since its peak of 5.2% in September 2011, CPI inflation has fallen to a low of 1.9% in
January 2014 from 2.0% in December 2013. In their bulletin of 18th February 2014 the ONS stated that: When trying
to understand inflation it is worthwhile thinking about the sectors that contribute to the actual rate of inflation (i.e. - what
made inflation change from 2.0% to 1.9%). The former dont change much from month to month but have the biggest
impact on households. In 24 out of the last 27 months, prices in the housing, water, electricity and gas & other fuels
sector have been the largest contributor to the inflation rate and currently account for a quarter of inflation.
But what has happened to interest rates? As a result of the credit crisis in 2007-08 the Bank of England responded by
reducing interest rates from 5.75% in December 2007 to 0.5% in March 2009, in nine separate reductions. The resulting
0.5% base rate was the lowest level in the Bank of Englands 315 year history. The Bank did this to make credit cheaper
and to encourage firms to borrow for investment and thus stimulate the economy. However, most firms were reluctant to
invest in a depression. The movements in Bank Rate can be seen in Figure 4.
Figure 4: UK Base Rates
Source: Bank of England
Also, as a response to the credit crunch, banks became reluctant to lend to each other. This was because any business
will go bust, not because they make lower profits or even a loss, but because they do not have enough cash to meet
their obligations.
Running out of cash is a very serious business, especially when it is difficult to borrow. This persuaded financial
institutions to hang on to every penny they could muster, and as funds available for borrowing on money markets were
reduced, effective rates of interest on borrowing increased. These rose to levels far greater than the official Bank Rate.
Thus the interest rate reduction became largely ineffective in terms of increasing liquidity in the market place. This is
known as a liquidity trap.
7
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1999 2001 03 05 07 09 11 13
Per cent
14
The UK and the international economy 2014
6
To overcome this, in March 2009 the MPC announced that it would start to inject money directly into the economy. This
came to be known as Quantitative Easing (QE). Because the price of money (Bank Rate) was not working sufficiently,
the MPC started to concentrate on the quantity of money provided.
The reason for this was that if spending on goods and services became too low, inflation would fall below the 2% CPI
target which the Bank had to maintain. Deflation can be an even greater problem than inflation as has been the case
in Japan which has struggled with this since the mid 1990s. So, to encourage greater spending and avoid the risk of
economic stagnation, the Bank eventually injected the equivalent of 375 billion pounds into the economy through QE.
This amounts to around 23% of total UK GDP in 2013!
QE involves a direct increase in money supply, although it does not involve actually printing more money as everything
is done electronically. In effect, the Bank buys financial assets in the open market, largely government and corporate
bonds, by creating money out of thin air. The financial institutions which sell these bonds will then have additional cash
credited to their bank accounts as a result of the sale.
The theory is that as banks improve their liquidity they should be willing to lend to businesses to kick start the economy.
Has it worked? The true answer is that it is difficult to say. We do not know how severe the recession might have been,
and how slow the recovery, if QE had not been introduced.
The Bank produced a report of its first round of QE, which included 200bn of purchases made between March and
November 2009. This suggested that the programme had been economically significant by raising UK annual economic
output by 1.5-2.0%.
Although the Bank has not ruled out further use of QE, the new governor of the Bank of England, Mark Carney, set up a
policy of forward guidance in August 2013. To this end he announced that the Bank would keep the Bank Rate at 0.5%
until the unemployment rate fell to 7% or below. The idea is that economic agents in the economy will have some degree
of certainty about the likely length of time that interest rates will stay at 0.5%. The effect of this has been explained
as being a way of converting low short-term interest rates into lower long-term interest rates. This should encourage
banks to lend and firms to borrow and invest.
But in February 2014 Mr Carney had to change the parameters to his forward guidance because unemployment had
fallen much faster than anticipated. He therefore announced that any changes to the current interest rate policy would
depend on a range of different indicators, not just unemployment. These included items such as the size of the output
gap, which is the difference between potential and actual output, and broader variables such as income and spending.
The Banks February 2014 Inflation Report, suggested that forward guidance is working. It said that the majority of
businesses indicated that forward guidance had made them more confident about the near term prospects for the UK
economy, in many cases encouraging them to hire and invest.
The UK and the international economy 2014
7
Fiscal Policy
We have seen already how monetary policy has been constrained by the record low interest rate which effectively
has been at its lowest level possible, and the fact that the Bank of England has had to resort to measures such as
quantitative easing and forward guidance to gain any traction in policy. To a certain degree fiscal policy has also been
constrained in its flexibility by the decision of the coalition government from its first Budget in June 2010 to go for a so-
called austerity policy. This involved the raising of taxes and the slashing of government spending.
The government committed itself to reducing borrowing as it considered that the country had been living beyond its
means. Although there has been a lot of domestic opposition to public sector job cuts and increased taxation, there was
support from international bodies such as the IMF. The government has been able to point to the turnaround in economic
growth, at a faster rate than many other advanced economies, as a justification for the measures taken.
Whilst the government has been able to gain some control over borrowing, any borrowing at all will add to the total level
of government debt even if it is increasing at a diminishing rate. Public sector net debt figures have varied widely since
they were first introduced in 1974-75. For example, public sector net debt as a percentage of GDP was over 50% pre-
1977-78 and then fell to 26% by 1990-91. It then started to grow again, reaching 42% of GDP in 1996-97 before falling
again to 30% of GDP by 2001-02.
However, since then, public sector net debt has been on the rise, increasing sharply from 2008. It rose from 45% of GDP
at the end of March 2009 to 74% of GDP at the end of March 2013. This can be seen in Figure 5 below.
Figure 5: Public Sector net debt as a percentage of GDP, 1975-76 to 2012-13.
Source: Office for National Statistics
There is an immediate parallel between public sector net borrowing (the amount the public sector borrows) and the
level of public sector net debt. Between 1998-99 and 2000-01, net borrowing was negative, which meant that the public
sector had a surplus. This also meant that public sector net debt was falling. But, after this period net borrowing became
positive, meaning that the government was running a deficit. This can be seen in Figure 6.
percent
80
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40
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10
0
1976/77 1980/81 1984/85 1988/89 1992/93 1996/97 2000/01 2004/05 2008/09 2012/13
The UK and the international economy 2014
8
Figure 6: Public sector net borrowing, 1993-94 to 2012-13. (excluding the temporary effects of financial interventions.
Source: Office for National Statistics
It can be seen in the figure above that between 2003-04 and 2007-08 net borrowing was fairly stable, at a level between
34bn and 42bn. But, this was before the credit crunch hit worldwide from the end of 2007. Thus net borrowing rose
sharply to reach a high of 157bn in 2009-10. After this, with the introduction of government austerity measures, it fell to
139bn in 2010-11, before dropping to 119bn in 2011-12 and 82bn in 2012-13. This latter figure would have reached
116bn if a transfer of the Royal Mail pension Plan and transfers by the Bank of England Asset Purchase Facility were
included. But the figures are generally looked at minus the temporary effects.
The government is continuing to squeeze spending and in its Budget statement in March 2014 said that: The government
is continuing to take action to improve financial management and spending control. Departments remain ahead of their
consolidation targets and are again forecast to underspend by 7bn in 2013-14. Underspends are forecast to the end
of this Parliament.
However, on the tax side the government is reducing corporation tax on businesses to 21% in April 2014, and to 20% in
April 2015, which will be the joint lowest rate in the G20, and is aimed at stimulating business expansion.
The government forecasts that public sector net debt will peak at 78.7% of GDP in 2015-16, before falling each year and
reaching 74.2% of GDP in 2018-19. As far as public sector net borrowing as a percentage of GDP is concerned, this is
forecast to fall by half from its 2009-10 peak by 2014-15, and the OBR forecasts a small surplus in 2018-19.
160
140
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100
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60
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-20
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billion
efects of RM and APF transfers
1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 2012/13
The UK and the international economy 2014
9
Labour Markets
Recessions always cause a major fall in employment levels but during the recent recession the UK labour market has
been far more resilient than might have been expected. In fact in Figure 7 below we can see that employment returned
to its pre-crisis level faster than in any other previous recovery over the last 40 years. Since early 2010, the pace of net
employment creation has been 3 times as fast as over the same period in previous recessions and recoveries.
Figure 7: Employment levels through recessions and recoveries
Source: Office for National Statistics and HM Treasury.
The latest figures published by the ONS in March 2014 show that in the November 2013 to January 2014 quarter,
employment in the UK was up 105,000 from the previous quarter, and up 459,000 on the year to 30.19 million. Over the
same period, unemployment was down 63,000 over the preceding quarter and 191,000 down over the year, to reach
a level of 2.33 million. The unemployment rate was 7.2% of the workforce for this latest quarter, down from 7.8% the
previous year.
It is also interesting to look at the changes between public sector and private sector employment. The recent changes
show that there were 5.51 million people employed in the public sector for December 2013, down 159,000 from
September 2013 and down 203,000 from a year earlier. However, these large falls in public sector employment were
mainly due to a reclassification of Royal Mail plc. If this is excluded public sector employment fell by 13,000 in the quarter
and by 14,000 on the year.
There were 24.68 million people employed in the private sector for December 2013, up 264,000 from September 2013
and up 662,000 on a year earlier. But when we remove the Royal Mail effect, these figures show a rise of 118,000 on
the quarter and by 473,000 on the year.
For December 2013, 81.8% of people in employment worked in the private sector with the remaining 18.2% in the
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
1973Q2 - 1979Q1
1979Q2 - 1985Q1
1990Q2 - 1996Q1
2008Q2 -2013Q1
Quarters after peak in GDP
103
102
101
100
99
98
97
96
95
94
93
92
91
Employment levels through recessions and recoveries
The UK and the international economy 2014
10
public sector. This latter figure has dropped from 22% in 2009 and reflects the government cutbacks in the public sector.
Between 2008 and 2012 there was a drop of 6.2% in public sector employment. Figure 8 shows the changes in each
sector since 2010.
Figure 8: Change in UK employment level since 2010
Department for Work and Pensions.
In fact, private sector employment has increased by 1.73 million since 2010 which reflects the pick-up in UK growth, and
which has been able to offset the decline in public sector employment. It is anticipated that the upturn in employment
and the fall in unemployment will continue. The OBR now expects a rate of 6.8% for UK unemployment in 2014, falling
to 5.4% in 2018. At the same time it expects a rise in employment of 1 million over the forecast period from 30.4 million
in 2014 to 31.4 million in 2018.
On a global scale, the picture has not been quite so rosy. In Global Employment Trends 2014, published by the
International Labour Organization, global unemployment has increased by 5 million in 2013. Almost 202 million people
were unemployed worldwide in 2013 in total. In fact, 45% of the increase comes from East Asia and South Asia, followed
by Sub-Saharan Africa and Europe.
The ILO forecasts that if current trends continue, global unemployment is set to worsen further, reaching more than 215
million jobseekers by 2018. During this period, around 40 million net new jobs are expected to be created every year,
but this is less than the 42.6 million people that are expected to enter the labour market every year.
The ILO also points out the particular problem of youth unemployment. Young people aged15-24 have been
disproportionately affected by the weak global recovery from recession. It is estimated that 74.5 million in this age group
were unemployed in 2013 which is a rise of 1 million on the year before. This means that the global youth unemployment
rate has reached 13.1% which is almost three times as high as the adult rate.
1,600,000
1,300,000
1,000,000
700,000
400,000
100,000
-200,000
-500,000
Private
Sector
Public
Sector
Total
The UK and the international economy 2014
11
UK Trade
According to the Bank of Englands inflation report, published in February 2014, the UK current account deficit widened
to 5.1% of nominal GDP in the 3rd quarter of 2013. This was partly as a result of the increase in the trade deficit but was
also added to by a drop in net foreign investment income. The trends since 2005 can be seen in Figure 9 below.
Figure 9: UK current account
Source: Bank of England
Prior to 2012 net investment income was consistently positive, helping to offset our traditional trade deficit. This surplus
in net investment income was largely due to earnings by UK private non-financial corporations on their foreign direct
investment (FDI). However, this FDI income has fallen in recent times, which the Bank puts down to a worsening in the
profits of UK-owned overseas operations.
The latest figures from the ONS show that the deficit on trade in goods narrowed by 2.3 billion to 27.0 billion in the
three months ending January 2014, compared with the previous three months. Exports of goods in the latest three
months fell by 1.1% to 74.2 billion, while imports decreased by 3% to 101.2 billion.
Over this same period exports to other EU countries fell by 1.9% to 37.1 billion, whilst imports from other EU countries
fell by 4.6%. Exports to countries outside the EU fell by 0.3% to 37.1 billion whilst imports from these countries fell by
4.6%, reflecting a fall in oil imports.
According to the Budget report in March 2014, net trade contributed 0.4 percentage points to GDP growth in the fourth
quarter of 2013. But it was volatile through the year contributing 0.1 percentage points to GDP growth over the year as
a whole. Goods exports to other EU countries have been subdued ... At the same time, UK exporters have continued to
expand in other markets, with goods exports to countries outside the EU rising 23% since 2010. According to the OBR
exports of goods to the EU have risen by 10% since 2010.
Investment income
(a)
Trade balance
Current transfers
Current account balance
Percentages of nominal GDP
(a) Includes compensation of employees
2005 06 07 08 09 10 11 12 13
6
4
2
+
0
_
2
4
6
The UK and the international economy 2014
12
Back in November 2013 the EU forecast that the UKs current account deficit will be the highest for 25 years, and will
rise to 4.4% of GDP for the whole of 2014, and will improve very little thereafter. A major problem is the fact that sterling
has risen 10% in the past year as tracked by the Bloomberg correlation-weighted index. This will make our exports more
expensive abroad and our imports cheaper to the UK, which will only make the situation worse.
The UK and the international economy 2014
13
World Trade
World trade growth fell to 2.0% in 2012, which was down from 5.2% in the previous year, according to the World Trade
Organisation (WTO). The WTO attributed the abrupt deceleration of trade to slow growth in developed economies
and recurring bouts of uncertainty over the future of the euro. It noted that flagging output and high unemployment in
developed countries reduced imports and fed through to a lower pace of export growth in both developed and developing
economies. Growth in both world merchandise trade and GDP can be seen in Figure 10.
Figure 10: Growth in the volume of world merchandise trade and GDP, 2005-14 (Annual % change)
*Figures for 2013 and 2014 are projections.
Source: WTO Secretariat.
The figures above refer to merchandise trade in volume terms, which means that it is adjusted to account for inflation
and exchange rate movements. But nominal trade flows (that is denominated in dollar values) only increased by 0.2%
in 2012, compared to the 2.0% for volume growth.
The reason for this is down to the falling prices of traded goods. Some of the biggest price falls were for commodities
including coffee (-22%), cotton (-42%), iron ore (-23%) and coal (-21%).
Preliminary figures released by the WTO suggest that merchandise trade grew by less than 2.5% in 2013. However,
their projections for growth in 2014 are between 4.0% and 4.5%. But this will still be below the 20-year average growth
of 5.3%, and well below the pre-crisis trend of 6% from 1990 to 2008.
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
2005
Exports
2006 2007 2008 2009 2010 2011 2012 2013P 2014
Average export
growth 1992-2012
Average GDP
growth 1992-2012
GDP
The UK and the international economy 2014
14
Trade liberalisation and protectionism
In November 2001, the 142 members of the World Trade Organisation (WTO) met in Doha and agreed to launch a new
trade liberalisation round commencing in January 2002. The World Bank has estimated that if all trade barriers were
abolished it would boost global income by nearly 2000 billion and lift 320 million people out of poverty. In fact, since
1948 there have been eight such rounds of tariff reductions which have seen tariffs in the industrialised world cut by
more than 80%. Also, during this period, trade has grown faster than international output in all but eight years, showing
the importance of trade as an engine of growth.
However, there was a basic tension in the Doha Round negotiations between the developing countries that wanted
developed countries to abandon their agricultural subsidies and the developed countries that were calling upon the
developing countries to make big reductions in their tariff barriers.
But by the end of July 2008 the round of trade negotiations virtually ground to a halt and the worldwide economic crisis
seemed to have put trade liberalisation on the back burner, as well as reducing the credibility of the WTO. However,
a breakthrough was achieved in December 2013 at a meeting in Bali, which according to Roberto Azevedo, director-
general of the WTO, will put the Doha round back on track.
Overall the Bali package agreed by the WTO, will tackle trade barriers, including bureaucracy, but will also lower import
taxes and agricultural subsidies. Economists forecast that by speeding up and streamlining customs procedures the Bali
package will provide a significant boost to the global economy. Some estimates suggest that it is worth up to $1 trillion
per year, and could generate up to 21 million jobs across the developed and developing world.
Azevedo called Bali a leap forward in favour of developing countries although there will still be plenty of negotiations
necessary to complete this whole round of trade agreements.
In March 2014 the OECD estimated the potential impact on trading costs for developing countries of the facilitation
agreement concluded in Bali. It found that with full implementation of the agreement, the total cost of trading would be
cut by 14.1% for low income countries; by 15.1% for lower middle income countries and by 12.9% for upper middle
income countries.
Even with a limited implementation of the deal, cost reductions are estimated at 11.7% for low income countries; 12.6%
for lower middle income countries and 12.1% in upper middle income countries.
However, times of austerity and recession can lead countries to take more protectionist measures. The WTO said in
February 2014 that there was still concern about trade restrictive measures. In fact there are two categories of trade
remedy actions, which are mostly anti-dumping and safeguarding measures and other trade measures, which largely
apply to import tariff increases and customs procedures.
When both of these categories were counted together it was found that overall 407 new restrictive measures were
reported between mid-October 2012 and mid-November 2013. This compares with 308 measures in the same period
a year earlier. These new restrictive measures affect about 1.3% of world merchandise imports and are valued at $240
billion. Protectionism is very damaging and costly to overall world trade and it is to be hoped that the agreements agreed
to at Bali will lead to a reduction in such measures.
The UK and the international economy 2014
15
Overseas aid and development
It was probably no great surprise that development aid fell by 4% in real terms in 2012, following a fall in 2011, according
to the latest figures issued by the OECD. The organisation puts this down to the continuing financial crisis and euro
zone turmoil which has resulted in a number of countries cutting back on their aid budgets.
The OECDs secretary-general Angel Gurria was quoted as saying: It is worrying that budgetary duress in our member
countries has led to a second successive fall in total aid, but I take heart from the fact that, in spite of the crisis,
nine countries still managed to increase their aid. As we approach the 2015 deadline for achieving the Millennium
Development Goals, I hope that the trend in aid away from the poorest countries will be reversed. This is essential if aid
is to play its part in helping achieve the Goals.
He was concerned about a shift in aid towards middle-income countries in the Far East and South and Central Asia.
For example, bilateral aid to sub-Saharan Africa fell by 7.9% in real terms in 2012 and to the group of Least Developed
Countries it fell by 12.8%.
In 2012, members of the Development Assistance Committee (DAC) of the OECD provided $125.6 billion in net official
development assistance (ODA), representing 0.29% of their combined gross national income (GNI), a 4.0% drop in real
terms compared to 2011. The full picture can be seen in Figure 11.
Figure 11: Net Official Development Assistance in 2012 as a percentage of Gross National Income
The fall in aid in 2012 is the largest since 1997 and since 2010, the year it reached its peak, ODA has fallen by -6.0% in
real terms. This is also the first time since 1996-97 that aid has fallen in two consecutive years.
It should be noted that Luxembourg, Sweden, Norway, Denmark and the Netherlands continue to exceed the United
Nations ODA target of 0.7% of GNI. The UK is in 6th place with ODA of 0.56% of GNI. But the UK Budget in 2013-14
provided for an increase in aid to the 0.7% target.
Net ODA rose in real terms in 2012 in 9 countries with the largest increases being in Australia, Austria, Iceland, Korea
and Luxembourg. On the other hand, net ODA fell in 15 countries with the largest falls in Spain (-49.7%), Italy (-34.7%),
Greece (-17.0%) and Portugal (-13.1%).

1.00
0.99
0.93
0.84
0.71
0.56
0.53
0.48
0.47
0.45 0.45
0.38 0.36
0.32
0.28 0.28
0.27
0.22
0.19
0.17
0.15
0.14 0.13 0.13
0.29
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
As % of GNI
UN Target 0.7
Average country effort 0.43
(1) Secretariat estimate.
Source: OECD, 3 April 2013.
The UK and the international economy 2014
16
Global Foreign Direct Investment (FDI)
Global foreign direct investment (FDI) flows rose by 11% in 2013, to an estimated $1.46 trillion, which is a level
comparable to the pre-crisis average, according to UNCTADs Global Investment Trends Monitor in January 2014.
However, developed countries remain trapped in a historically low share of global FDI, accounting for only 39%. The
trend in global inflows can be seen in Figure 12.
Figure 12: Global FDI inflows, average 2005-2007, 2007-2013 (Billions of US dollars)
Source: UNCTAD.
Over the past couple of years FDI flows to developing economies have overtaken flows into developed nations as can
be seen in Figure 13.
Figure 13: FDI inflow shares by major economic groupings 1991-2013 (Per cent)
Source: UNCTAD.
FDI flows to developed countries now account for only 39% of total flows, and are at a historically low level of 39% for
the second consecutive year. This is notwithstanding the fact that the actual FDI inflow was up by 12% in 2013 to $576
billion. However, this was only 44% of the peak value attained in 2007. FDI to the European Union increased but flows
into the US continued to decline.
1 494
2 002
1 819
1 221
1 412
1 691
1 317
1 461
pre-crisis
average
2005-
2007
2007 2008 2009 2010 2011 2012* 2013**



* Revised


** Preliminary estimates.


0
25
50
75
100
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
*
Developed economies
Developing economies
Transition economies
The UK and the international economy 2014
17
By contrast, FDI flows to developing economies reached a new record level of $759 billion, which accounted for 52%
of global FDI inflows in 2013. This increase was mainly driven by Latin America and the Caribbean and Africa. Although
developing Asia is the worlds largest region for receiving FDI, the flows here did not change much from the previous
year.
At the same time transition economies saw a major 45% rise in FDI inflows, reaching a record level of $126 billion, with
inflows to the Russian Federation rising by 83%.
As far as the UK is concerned, FDI inflows in 2013 amounted to $53 billion. However, the UKs ranking globally fell from
6th to 9th place. The only other developing nations above the UK are the US and Canada, with the other six places being
taken by China, Russian Federation, British Virgin Islands, Hong Kong, Canada, Brazil and Singapore.
UNCTAD forecasts that FDI activity will rise further in 2014 and 2015 to $1.6 trillion and $1.8 trillion respectively, due to
the ongoing recovery in the developed economies.
The UK and the international economy 2014
18
The UK and the European Union
It has been difficult to miss the fact that the eurozone has been in an ongoing crisis over the past six years, and that the
UKs relationship with the EU as a whole has been under increasing scrutiny. In fact the British prime minister, David
Cameron, announced in January 2013 that if the Conservatives won the next election in 2015 they would renegotiate
the British position in Europe, and then give voters an opportunity in a referendum in 2017 to decide on whether to stay
in the EU or withdraw. On the other hand, Ed Milliband the Labour leader has said that if they win the general election
they will not hold a referendum unless there are proposals to transfer further powers from London to Brussels.
We do not have the space here to look at the arguments for and against a UK withdrawal but we will instead look at the
recent EU budgets to see how the UKs situation has been changing.
To understand the budget we need to know where the money comes from. The budget is financed by customs duties,
resources based on value added tax and also gross national income. In fact for the 2013 budget, 11.3% came from VAT,
14.1% from customs duties and 73.4% from gross national income, with 1.2% coming from other revenue.
Between 2009 and 2013 EU spending commitments as a whole increased by 13.95 billion (11.38 billion) from
136.95 billion (121.92 billion) in 2009 to 150.90 billion (123.15 billion) in 2013. As far as the UKs net contribution
is concerned, this has fluctuated over the past seven years. Although UK gross payments have risen steadily, these are
offset by the rebate which the UK has negotiated, and also public sector receipts. This latter figure includes payments
direct to the UK government from agricultural funds and social and regional development funds which are then disbursed
by the UK government to the private sector. These fluctuations can be seen in Figure 14.
Figure 14: Profile of UK gross and net contributions to the EU Annual Budget for the years 2007-13 ( billion)
It can be seen in Figure 14 that the UKs net contribution was increasing fairly sharply between 2008 and 2011, but in the
last two years the rate of increase has been reduced dramatically. Although these figures would no doubt cause alarm
for the eurosceptics in our midst, there is much better news now. There is something called the Multi-Annual Financial
Framework which establishes the budgets, and the next one runs from 2014 to 2020.

Note: 2013 is an HM Treasury estimate based on the Office for Budget Responsibility Forecast

Source: HM Treasury and the Ofce for Budget Responsibility
0
2
4
6
8
10
12
14
16
2007 2008 2009 2010 2011 2012

b
i
l
l
i
o
n
2013
Net Gross
The UK and the international economy 2014
19
At the February 2013 Europe council leaders agreed that EU expenditure ceilings should be reduced. This is the first
time in EU history that these EU budget frameworks have been cut. Leaders agreed to an unprecedented real-terms cut
in the payment limit to 908 billion (741 billion) for the seven year period. This means that the EUs seven-year budget
will cost less than 1% of the EUs gross national income for the first time in its history.
This means that overall payments for the 2014 budget have been set at 135.50 billion which is no less than a 6.2%
decrease compared to 2013.
Will the fact that EU member countries are finally bringing budget expenditures to heel cause the British public to vote
in favour of remaining in the EU if we ever get to a referendum? Only time will tell.
The UK and the international economy 2014
20
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