UK Economic Outlook March 2015 - The impact of lower oil prices on the UK economy
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March 2015
UK Economic
Outlook
The impact of lower oil prices on the UK economy
New job creation in the UK: which regions will
benefit most from the digital revolution?
www.pwc.co.uk/economics
Contents
Highlights and key messages 3
1. Summary 4
2. UK economic prospects 7
• 2.1 Recent developments and the present situation 8
• 2.2 Economic growth prospects: national, sectoral and regional 12
• 2.3 Outlook for inflation and real earnings growth 14
• 2.4 Monetary and fiscal policy options 16
• 2.5 Summary and conclusions 16
3. The impact of lower oil prices on the UK economy 17
• 3.1 Trends in oil prices and the UK’s position 18
• 3.2 Modelling the impact of oil price shocks on the UK economy 19
• 3.3 Results from our analysis 20
• 3.4 Summary and conclusions 29
• Technical Appendix – Modelling oil price changes 30
4. New job creation in the UK: which regions will benefit most from 31
the digital revolution?
• 4.1 Introduction 31
• 4.2 New job creation in the UK economy 33
• 4.3 Evidence of regional convergence, 2004-2014 35
• 4.4 Projected employment growth across UK regions, 2014-2024 36
• 4.5 Fostering new job creation: Implications for policy 37
• 4.6 Summary and conclusions 38
• Technical Appendices – Data and Methodology and Regression Analysis 39
Appendices 41
A Outlook for the global economy
B UK economic trends: 1979 – 2014
Contacts and services 43
2 UK Economic Outlook March 2015Highlights and key messages
for business and public policy
• The UK economy has been
Key projections
recovering at a relatively strong rate
since early 2013, although there 2015 2016
were signs of a slight slowdown in Real GDP growth 2.5% 2.3%
growth in late 2014 due to problems
in the Eurozone and other Inflation (CPI) 0.3% 1.8%
geopolitical uncertainties.
Source: PwC main scenario projections
• In our main scenario we expect GDP
growth to average around 2.5% in Low inflation in the short term may • We think greater regional balance
2015, supported by recent oil price not prevent interest rate rises from would be good for the long-term
falls, before easing slightly to late 2015 future of the UK economy, but this
around 2.3% in 2016. should not be at the expense of
• Consumer price inflation is likely to
• We judge that risks to UK growth weakening the London economy.
be close to zero on average in 2015
are weighted somewhat to the London needs increased investment
due to lower global energy and food
downside in the short term due to in affordable housing and transport
prices, but could return to target by
international risks, but there are infrastructure to support potential
the end of 2016.
also upside possibilities in the continued strong jobs growth over
medium term if the global economic • We expect the MPC to keep interest the next decade.
environment improves. rates on hold in the short term,
• There should also be an emphasis on
but then to increase them gradually
• We expect the services sector to building up successful manufacturing
from late 2015 or early 2016
remain the main engine of UK growth and service sector clusters outside
onwards, returning to around
for both output and employment. London and the South East, which
3.5-4% by 2020. Businesses and
Manufacturing and construction requires long-term investment in
households should start to prepare
growth have slowed recently, but transport infrastructure, skills and
for this upward trend now.
should remain positive contributors knowledge hubs linked to top regional
to overall UK growth in 2015-16. London continues to lead the recovery, universities.
but growth has diffused to other regions
Lower oil prices are positive for the UK
economy • London and the South East are
continuing to lead the recovery,
• The sharp fall in oil prices since as has been the pattern for many
mid-2014 should boost most sectors years, but other UK regions should
of the economy except for those also register positive real growth
directly involved in oil and gas of around 1.7-2.5% in 2015.
production.
• Detailed analysis in this report
• In our central scenario, where oil shows that London has been a key
prices rise gradually to around source of new job creation associated
$73 per barrel in 2020, total UK with the digital revolution of the past
employment could be around 37,000 25 years. But the benefits of this have
higher in 2020 than in a baseline started to diffuse to other regions
scenario where oil prices remained over the past ten years and we
at their mid-2014 levels of around expect this to continue.
$108 per barrel through to 2020.
• Lower oil prices should also benefit
consumers significantly in the short
term, as well as boosting
government revenues and
narrowing the trade deficit slightly.
UK Economic Outlook March 2015 31 – Summary
Recent developments The rate of consumer price inflation downside risks relating to trends in
(CPI) has fallen sharply over the past the Eurozone and emerging markets
The UK economy grew by 2.6% in 2014
year to record lows as import price (including Ukraine and the Middle East),
as a whole, which was the fastest rate
inflation has dropped due to global and these have increased since mid-2014.
seen since 2007 and the strongest energy and food price declines. But there are also upside possibilities if
growth rate in the G7. these problems can be avoided and a
Future prospects virtuous circle of rising confidence and
However, UK quarter-on-quarter GDP spending can be established as in past
growth slowed somewhat to 0.5% in the As shown in Table 1.1, our main scenario
is for UK GDP growth to average around economic recoveries.
fourth quarter of 2014, which appears to
reflect the drag from sluggish growth in 2.5% in 2015 and around 2.3% in 2016.
This is similar to the latest consensus Inflation will remain very low this year,
the Eurozone as well as wider global but could rebound to close to target in
geopolitical risks related to the situation and OBR forecasts.
2016 if past falls in global energy and
in Russia/Ukraine and the Middle East food prices do not continue. There could
Consumer spending growth is projected to
in particular. But lower global oil prices be upside risks to this inflation outlook
be broadly similar to GDP growth, with a
have been a positive factor from the in the longer term if domestic wages
boost from lower oil prices this year but
perspective of UK consumers. start to recover without a corresponding
some moderation in growth in 2016.
rise in productivity.
UK growth has been driven primarily by
We expect continued investment growth
services over the past five years, but We do not expect any immediate rise in
in 2015, but at a slower rate than in 2014
manufacturing and construction have also official UK interest rates, but a gradual
as business confidence could be affected
been on an upward trend since early 2013 upward trend seems likely to begin in
by increased international risks and
despite some slowdown in late 2014. late 2015 or early 2016. In the long term,
possibly also temporary uncertainty
around the general election outcome. however, we would still expect official
The slowdown in the Eurozone has been rates to return very gradually to a more
partly offset by stronger growth in the normal level of around 3.5-4% by 2020.
Net exports have been erratic, but we
US since the second quarter of 2014,
do not expect them to make a significant
but more generally international risks Higher interest rates will help savers
positive contribution to growth in 2015
have increased over the past nine and 2016 given ongoing problems in the and reduce pension fund deficits, but
months. As such, UK growth remains Eurozone in particular. UK growth will borrowers (including businesses and
heavily dependent on domestic demand. therefore remain heavily dependent on the government) might gain from
domestic demand. locking in funding now for long term
UK employment has continued to rise investments such as infrastructure and
strongly, which has supported consumer As always there are many uncertainties housing. Households need to bear in
spending growth despite relatively surrounding our growth projections, as mind likely future interest rate rises in
subdued rates of average real earnings illustrated by the alternative scenarios in any decisions on mortgages or other
growth until recent months. Rising Figure 1.1. There are still considerable longer term loans.
house prices have also supported
consumer confidence and spending,
but have moderated since mid-2014. Table 1.1 – Summary of UK economic growth prospects
Indicator OBR forecasts Independent PwC Main
Business investment had been showing (% change on (December 2014) forecasts scenario
signs of a stronger recovery in recent previous year) (February 2015) (March 2015)
years, though this fell back somewhat in
2015 2016 2015 2016 2015 2016
late 2014 according to the latest
preliminary official estimates. Public GDP 2.4 2.2 2.6 2.3 2.5 2.3
spending cuts have slowed down over the Consumer spending 2.8 2.2 2.9 2.4 2.6 2.3
past year, but will remain a drag on
growth for many years to come and could Source: Office for Budget Responsibility (December 2014), HM Treasury survey of independent forecasts (average values in
accelerate again after the general election. February 2015 survey) and latest PwC main scenario.
4 UK Economic Outlook March 2015Impact of lower oil prices In contrast, the impacts are much smaller Real household incomes also rise due to
where the fall in the oil price is wholly lower oil prices, which increases consumer
on the UK economy
or partially temporary: in these scenarios spending. As a result of growing economic
As discussed in detail in Section 3 of this the average impact on the level of GDP activity, we project that government tax
report, we think that the fall in the oil is 0.2-0.5%, with employment effects revenues should also rise as the tax take
price since mid-2014 should have a in 2020 of around 3,000 to 37,000 from corporate and personal income taxes
significant positive impact on the UK depending on how far and fast oil prices increases by more than the loss of North
by increasing overall economic activity rebound. The central case (Scenario 2) Sea oil and gas revenues.
as the cost of production decreases for where output is 0.5% higher and
businesses, especially for those that are employment in 2020 around 37,000 In summary, lower oil prices should
heavily dependent on oil inputs. higher would be most consistent with be positive for most sectors of the UK
our main scenario for the UK economy, economy, households and the government.
Although the oil and gas extraction but the other scenarios shown in Table But the scale of these benefits remains
sector is negatively affected by the 1.2 are also quite plausible outcomes. highly uncertain depending on how oil
reduction in the oil price, sectors such prices evolve from here.
agriculture, air transport, coke and
refined petroleum manufacturing, and
oil-intensive manufacturing sectors will Figure 1.1: Alternative UK GDP growth scenarios
benefit as the price of a key input falls.
6
Projections
Our modelling implies that water 4
% change on a year earlier
transport and other services sectors 2
will enjoy a smaller positive impact.
However, oil-intensive sectors are likely 0
to benefit from the reallocation of -2
capital and resources at the expense
-4
of less oil-intensive sectors.
-6
Future oil price trends remain highly
-8
uncertain, so we have looked at three 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
alternative scenarios. In a case where Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
the reduction in the oil price is Main scenario Renewed slowdown Strong recovery
persistent, the size of the UK economy Source: ONS, PwC scenarios
increases by around 1% on average
relative to the baseline between 2015
and 2020. Employment also increases
Table 1.2: Increase in total UK employment relative to baseline: 2016 and 2020
by around 90,000 by 2020 in this case
(Scenario 1 in Table 1.2). Oil price scenarios ($ per barrel) 2016 2020
Scenario 1 (settling at $50) 121,000 91,000
Scenario 2 (rising to $73 by 2020) 53,000 37,000
Scenario 3 (rising back to $108 by 2020) 11,000 3,000
Source: PwC analysis (the effects shown are relative to employment levels in a baseline case where oil prices remained at their
mid-2014 level of around $108 per barrel through to 2020).
UK Economic Outlook March 2015 5Which UK regions will London has been the greatest motor for Projecting patterns in regional
the creation of new types of jobs, employment growth over the next
benefit most from digital
outperforming the rest of the UK economy: decade, we find that total employment
job creation? for example, new types of jobs in Central in Central London could grow by around
The digital revolution has both created London increased from 8.6% to 9.8% of 25% between 2014 and 2024, but this
and displaced many types of jobs since total employment between 2004 and 2014. would be down from around 35% total
1990. In a special article in Section 4 employment growth over the past ten
of this report by Dr Carl Benedikt Frey But we also find some evidence of regional years (see Figure 1.2).
of Oxford University and John convergence over the past decade. While
Hawksworth of PwC, we focus on the London continues to lead in terms of the By contrast, employment growth rates
new types of jobs created since 1990 proportion of workers in new types of jobs, over the next decade in regions like West
and assess how this has affected total regions like Yorkshire, Tyne & Wear, Wales Yorkshire, Greater Manchester, the West
national and regional employment in and Northern Ireland with low initial Midlands, Scotland and the rest of the
the UK since 2004. We highlight the key employment shares in new types South East are projected to see some
role of London as an incubator for the of jobs in 2004 experienced higher growth acceleration in job creation relative to
digital revolution, but also find some rates of these new job types on average the past decade as the digital revolution
signs of catch up in other regions such as between 2004 and 2014. continues to diffuse.
the North, Wales and Northern Ireland.
Our findings suggest that new types of Future UK and London governments
We examined new job titles that jobs created since 1990 (linked mainly need to make sure that the city’s growth
emerged only after 1990 and found that but not only to the digital revolution) potential is not constrained by the
5.5% of the UK workforce had shifted initially appeared in areas like London supply of housing and transport
into these new types of jobs by 2004. where entrepreneurs, innovative firms infrastructure. But it also needs to
But by 2014 this proportion had risen and skilled workers were concentrated support the diffusion of digital job
only slightly further to around 6%. and then gradually diffused to other creation to other UK regions by boosting
Eight of the ten occupational categories regions. These other regions will transport links outside London,
where these new job titles arose were continue to catch up unless London’s supporting leading regional universities,
related to computers, so this can largely pace of new job creation is higher than and building skills, which we find to be a
be linked to the digital revolution. the rate of regional diffusion. key driver of economic success for cities.
Figure 1.2: Projected total employment growth in UK regions, 2014-2024, as compared to the past decade
40
35
30
Employment Growth (%)
25
20
15
10
5
0
-5
Central Inner Rest of Outer East West South Rest of Greater South Rest of Tyne & Wear Rest Strathclyde East Wales West Northern Merseyside Rest of Rest of
London London South East London Anglia Yorkshire West Scotland Manchester Yorkshire West of North Midlands Midlands Ireland Northern Yorks &
(not central) Midlands West Metropolitan region Humberside
2004-2014 2014-2024
Source: ONS Labour Force Survey; calculations by Carl Frey
6 UK Economic Outlook March 20152 – UK Economic prospects
Key points Figure 2.1: GDP and key components of domestic demand
• The UK economy expanded by 2.6% 110
in 2014, its strongest growth rate Government
105 GDP
since 2007. However, there was some Households
loss of momentum in the final 100 Investment
Index (Q1 2007 = 100)
quarter of the year. 95
90
• In our main scenario, we expect the
85
UK economy to grow by around 2.5%
80
this year, moderating slightly to
around 2.3% in 2016. 75
70
• The services sector remains the 2007 2008 2009 2010 2011 2012 2013 2014
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
primary driver of UK growth as output
General government consumption Household spending
in manufacturing and construction are GDP Fixed investment
still well below their pre-crisis level Source: ONS
and lost some momentum in the
second half of 2014. However, we
expect all major sectors to show
reasonable growth in 2015-16. • Public borrowing now looks likely to
come in at around £90 billion this
• London and the South East are fiscal year, close to OBR projections.
expected to maintain their positions We expect a broadly neutral Budget
as the two fastest growing regions in on 18th March, with any ‘giveaways’
the UK this year, but other regions largely matched by ‘takeaways’.
should also see positive growth.
Introduction
• The UK recovery is still exposed to
downside risks emanating from the In this section of the report we describe
Eurozone and an escalation of recent developments in the UK economy
geopolitical unrest in Russia/Ukraine and review future prospects. The
and/or the Middle East. However, discussion covers:
there are also upside possibilities from
a larger than expected boost to 2.1 Recent developments and the
household spending from lower oil present situation
prices, faster falls in the unemployment
rate and stronger real wage growth. 2.2 Economic growth prospects:
national, sectoral and regional
• The falling oil price has pushed
inflation close to zero recently, but it 2.3 Outlook for inflation and real
is likely to rebound to close to target earnings growth
by late 2016. The potential medium-
term upward pressures on inflation 2.4 Monetary and fiscal policy options
that could emerge as the recovery
continues may lead to a gradual 2.5 Summary and conclusions
increase in the official interest rate
from late 2015 onwards, although
the timing of the first UK rate rise
remains highly uncertain.
UK Economic Outlook March 2015 72.1 – Recent developments Figure 2.2: Sectoral output and GDP trends
and the present situation 110 Services
UK GDP growth of 2.6% in 2014 was the 105 GDP
fastest since 2007 and the strongest in
100
the G7. But the pace of quarter-on-quarter
Index (Q1 2007 = 100)
growth eased to 0.5% in the final quarter 95 Manufacturing
Construction
of 2014, reflecting slower growth in the 90
Eurozone and other geopolitical 85
uncertainties. 80
75
As shown in Figure 2.1, the level of GDP
has been on an upward trajectory for the 70
2007 2008 2009 2010 2011 2012 2013 2014
last few years, largely tracking consumer Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
spending growth. Although still around Services Manufacturing
4% below its pre-crisis peak, fixed Construction GDP
investment has also picked up strongly Source: ONS
in recent years according to the latest
official estimates (though investment
dipped again in Q4 2014 relative to the 7.3% in 2014. Despite the disappointing the past year. There was a sharp fall in
previous quarter). Government spending fourth quarter data, the pace of growth in the manufacturing
held up better in the recession, but has the January construction PMI of 59.1 sector in mid-2014, due in part to
grown more slowly recently as the indicates that growth momentum may weakness in demand from the Eurozone.
Treasury has sought to bring the budget have returned in early 2015, although The manufacturing PMI has been more
deficit down. this is still lower than the average of stable in recent months, and remained in
61.8 seen in 2014 as a whole. positive territory at around 54 in February
Services continue to lead the recovery 2015. But it is still the services sector that is
As shown in Figure 2.2, the services Manufacturing output grew by 2.7% leading the UK recovery in early 2015
sector continues to outperform on average in 2014, which was the according to these PMI indices.
manufacturing and construction, highest pace of growth since 2010.
and remains the main driver of Manufacturing output growth almost
economic growth. Output levels in stalled in Q4 2014, however, due in part
the manufacturing and construction to the drag on exports from the weakness The services sector
sectors were still well below their of demand from the Eurozone. Lower oil
pre-crisis peaks by around 5% and prices, feeding in through a decline in continues to outperform
8% respectively in Q4 2014. input costs, should boost manufacturing
this year, however, as discussed in more
manufacturing and
Despite the upward trend in output levels detail in Section 3 below. construction, and
in the construction sector in the first
three quarters of 2014, there was a sharp The message from the official data is remains the main driver
downturn in the last quarter of the year largely confirmed by the latest Markit/ of economic growth.
owing in large part to a drop in repair CIPS Purchasing Managers’ Indices
and maintenance work, which (PMIs) for services and manufacturing
experienced the largest quarter-on- (as shown in Figure 2.3). The services
quarter fall since Q4 2009. For the year as sector PMI in early 2015 signalled that
a whole, however, the picture was more the sector was still growing relatively
promising with an annual growth rate of strongly despite some slowdown over
8 UK Economic Outlook March 2015Recovery still driven by jobs not Figure 2.3: Purchasing Managers’ Indices of business activity
productivity
65
A continuing notable trend in the UK
Services
economy is the robust increase in 60
employment, which has surpassed its
55
pre-crisis levels, but productivity remains Manufacturing
subdued as shown in Figure 2.4. 50
Above 50 indicates
Employment growth has been 45
rising activity levels
particularly strong since early 2013
and continued its upward momentum 40
throughout 2014. The unemployment 35
rate reported for the last quarter of 2014
30
was 5.7%, down from 7.2% a year earlier. 2007 2008 2009 2010 2011 2012 2013 2014 2015
Jan Jan Jan Jan Jan Jan Jan Jan Jan
One of the biggest uncertainties for the Services Manufacturing
future of UK recovery is whether and Source: Markit/CIPS
when productivity will pick up. Given
that there is now less spare capacity in
the economy (only around 0.5% of GDP
Figure 2.4: Employment is rising strongly but productivity has been broadly flat
according to latest Bank of England
estimates), stronger productivity growth 110
will be critical in enabling wages to
recover without sparking inflationary Jobs
105
pressures in the medium term.
Index (Q1 2007 = 100)
The ‘productivity puzzle’ of recent years Productivity
100
has persisted despite revised data
published last autumn showing stronger
95
investment growth than previously
thought during the recovery, so reducing
the significance of this factor in 90
explaining why UK productivity has 2007 2008 2009 2010 2011 2012 2013 2014
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
remained so low. It may be, however,
that it will take time for this investment Output per job Workforce jobs
to push up productivity growth, at least Source: ONS
as measured by the national accounts.
The robust labour market performance increase in average earnings growth with
in the last quarter of 2014 is good news, regular pay growing by 1.7% in the last
but signs of labour market tightening quarter of 2014 compared to a year earlier,
have started to emerge as vacancies significantly faster than the growth rate of
have risen above their 2008 peak and consumer prices for the first time in many
business surveys are indicating rising years. Future prospects for real earnings
skills shortages, for example in the growth are considered further in Section
construction sector. There has been some 2.3 below.
UK Economic Outlook March 2015 9Housing market has cooled The London housing market increased by 7.4% in the 12 months
House prices ended 2014 around 10% experienced average price growth of to December 2014.
higher than at the start of the year, 17.4% in 2014, the fastest growth rate
which was the strongest annual average since 2000, though this rate of increase We think average house prices across
performance since 2007. But there were had moderated to 13.3% by the end of the whole of the UK will grow at an
clear signs of the pace of house price 2014 as Figure 2.5 shows. The average average rate of around 6-8% this year,
increases easing later in the year. London home now costs around which would involve some further
£500,000 according to the ONS, moderation in the pace of growth,
Figure 2.5 shows nominal house prices although this is down somewhat from its particularly in London1.
rises over the year to December 2014 by peak in mid-2014. Excluding London
region based on official ONS data. and the South East, house prices
Figure 2.5: House price rises by region
14
12
% house price change in year
10
to December 2014
8
6
4
2
0
London South East South East Yorkshire & Scotland West North Northern Wales North UK
East West Midlands Humberside Midlands East Ireland West
Source: ONS
Consumer spending remains Figure 2.6: Consumer confidence and retail sales
relatively buoyant
0 114
Figure 2.6 shows the evolution of 112
Retail sales index (Jan 2007 = 100)
Consumer confidence (net balance)
consumer confidence and retail sales. -10 110
During the financial crisis and 108
-20
subsequent downturn, the two did not 106
104
really move in a similar pattern. Since -30
102
early 2014, however, there has been a 100
pick-up in both measures as the recovery -40
Retail sales volume Consumer confidence 98
in the UK has strengthened and lower oil -50 96
and food prices have boosted real 94
household spending power. -60 92
2008 2010 2014
Apr Dec Nov
Consumer confidence (LHS) Retail sales volume (RHS)
Sources: PwC Consumer survey, ONS,
1 We plan to analyse house price prospects in more detail in the July 2015 edition of this report.
10 UK Economic Outlook March 2015Mixed trends in stock markets Figure 2.7: Equity market indices
Equity market indices in the US, UK and
140
Eurozone picked up towards the end of
130
2014 and in early 2015 after falling back US
120
Index (January 2007 = 100)
in September last year (see Figure 2.7). UK
110
Despite their volatile nature in the short
100
term, equity markets in the US and
90
Eurozone had a reasonably strong year
80
in 2014 as whole, but the UK market was Eurozone
70
less strong2. This could reflect the global
60
composition of the FTSE, which makes
50
it relatively exposed to the rise in
40
geopolitical risks during seen during 2007 2008 2009 2010 2011 2012 2013 2014 2015
2014. Nonetheless, equity markets Jan Jan Jan Jan Jan Jan Jan Jan Jan
remain broadly supportive of investment FTSE 100 Euronext 100 Dow Jones Industrial
growth, particularly in the US. Source: Thomson Reuters Datastream
2.2 Economic growth
prospects: national, Table 2.1 – PwC main scenario for UK growth and inflation
sectoral and regional (% real annual growth unless stated otherwise) 2014 2015p 2016p
We are projecting GDP growth of around GDP 2.6% 2.5% 2.3%
2.5% in 2015, very similar to 2014,
falling slightly to around 2.3% Consumer spending 2.1% 2.6% 2.3%
in 2016 (see Table 2.1). Government consumption 1.5% 1.1% 0.6%
Our overall GDP growth projections are Fixed investment 6.8% 2.9% 4.8%
largely unchanged from the previous Domestic demand 2.9% 2.2% 2.4%
edition of this report in November 2014,
Net exports (% of GDP) -0.5% 0.2% -0.2%
with the boost from lower oil prices
offset by increased risks relating to the CPI inflation (%: annual average) 1.5% 0.3% 1.8%
Eurozone and wider geopolitical risks.
Source: ONS for 2014, PwC main scenario projections for 2015-16
We have, however, revised our estimates
for the different expenditure
components and inflation in line with
recent data releases.
We expect consumer spending growth
to remain relatively robust at around
2.6% in 2015, but with some moderation
in growth in 2016 as the household
savings rate stabilises and spending
growth becomes more dependent on
real income growth.
2 Although the FTSE performed better in February 2015.
UK Economic Outlook March 2015 11We expect reasonably robust growth in Table 2.2 – Official and independent forecasts
business investment this year3 and next
owing to the benefits of lower oil prices (% real YoY growth unless Latest OBR forecasts (December Average independent
stated otherwise) estimates 2014) forecasts (February 2015)
and steady domestic demand growth,
though the election may lead to a 2014 2015 2016 2015 2016
temporary period of uncertainty that
GDP 2.6% 2.4% 2.2% 2.6% 2.3%
could slow investment growth during
the first half of 2015. Total investment Manufacturing output 2.7% N/A N/A 1.7% 1.8%
remains below its pre-crisis peak, Consumer spending 2.1% 2.8% 2.2% 2.9% 2.4%
however, so there is still room to grow
to make up for past relative weakness Fixed investment 6.8% 8.4% 5.9% 5.3% 5.0%
(see Figure 2.1). With interest rates still Government consumption 1.5% -0.4% -0.6% 0.8% -0.1%
at record low levels, businesses are
Domestic demand 2.9% 2.9% 2.2% 2.7% 2.3%
expected to continue to take advantage
of this to boost their investment levels. Exports 0.4% 2.4% 4.7% 2.9% 4.3%
Imports 1.8% 3.9% 4.7% 3.0% 4.1%
Government consumption growth is
projected to remain modest as the new Current account (£bn) -74 -64.6 -55.2 -82.5 -78.3
government, of whatever complexion, Unemployment claimant 0.8 0.84 0.83 0.8 0.8
continues to bear down on the budget count (Q4, m)
deficit in 2015 and 2016.
Source: ONS for 2014, OBR Economic and Fiscal Outlook (December 2014), HM Treasury Forecasts for the UK economy: a
comparison of independent forecasts (February 2015)
Net exports are expected to make a
broadly neutral contribution to GDP
growth on average in 2015 and 2016
Figure 2.8: Alternative UK GDP growth scenarios
as the Eurozone remains relatively weak
and global growth picks up only slowly 6
Projections
in our main scenario (though the US
4
should be a bright spot here, which
% change on a year earlier
should boost UK services exports 2
in particular).
0
A comparison of Tables 2.1 and 2.2 -2
shows that our latest GDP projections
-4
are slightly more optimistic than those
of the OBR from December, but similar -6
to the more timely estimates from the -8
average of the independent forecasts 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
surveyed by the Treasury in February. Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
Main scenario Renewed slowdown Strong recovery
Source: ONS, PwC scenarios
3 The projected average annual growth rate of investment in 2015 is dampened by base effects following an apparent fall in Q4 2014, although this was only
a preliminary estimate that could well be revised later.
12 UK Economic Outlook March 2015Alternative growth scenarios • Our ‘renewed slowdown’ scenario, should ensure they have contingency
Uncertainty remains a key theme when by contrast, sees UK growth slowing plans in place to deal with the possibility
considering future prospects for the down sharply to only around 0.5% in of these kinds of events.
economy and, to account for this, we 2016. This is based on the assumption
have considered two alternative UK of adverse shocks emanating from a In the short term, risks to growth remain
growth scenarios in addition to our revived crisis in the Eurozone, such as somewhat tilted to the downside given
the possibility of Greece exiting the international uncertainties, but they
main scenario, as shown in Figure 2.8:
euro, a significantly weaker economic appear more balanced in the medium
outlook in some Asian markets such as term if these short term risks
• Our ‘strong recovery’ scenario
China, as well as further unrest in do not materialise, particularly if oil
projects growth accelerating to
Russia/Ukraine and the Middle East. prices remain relatively low (as discussed
around 4% in 2016. This relatively
These events would have negative further in Section 3 below).
optimistic scenario assumes a much
quicker recovery in the Eurozone and implications for UK business, damaging
confidence which could lead to cutbacks Sectoral prospects
global economies than in our main
scenario, boosting consumer and in investment and employment, thereby The sector dashboard in Table 2.3 shows
business confidence in the UK. This also depressing consumer spending. the actual growth rates for 2014,
in turn would result in businesses alongside our projected growth rates for
undertaking greater investment We do not believe that these alternative 2015 and 20164, for five of the main
activity and an increase in consumer scenarios are the most likely outcomes, sectors within the UK economy.
spending, as well as higher demand but they are certainly well within the The table also includes a summary of the
for UK goods abroad. bounds of plausibility. Businesses key issues affecting each sector.
Table 2.3 – UK sector dashboard
Growth
Sector and GVA share 2014 2015p 2016p Key issues/trends
Manufacturing (10%) 2.7% 2.5% 2.9% The manufacturing sector started the year on a reasonably high note with a PMI
of 53 in January. Oil price falls should provide a boost for the sector in 2015.
The ongoing uncertainty around Greece and the possibility of a further
slowdown in the Eurozone could be a negative influence on UK goods
exports. As such, domestic demand will remain a key driver of growth.
Construction (6%) 7.3% 1.1% 2.0% The construction PMI picked up in January after disappointing official data for
Q4 2014.
Residential house building is expected to remain reasonably buoyant in 2015.
Distribution, hotels & restaurants 4.7% 3.3% 2.4% Retail sales volumes have generally been on an upward trajectory since
(14%) 2013, with growth picking up in Q4 2014 following the slowdown seen in Q3.
Falling unemployment and improving real wage growth caused by low
inflation rates will lift consumer purchasing power and keep strong growth
going at least in 2015.
Business services and finance (31%) 3.7% 3.5% 3.1% The UK’s large and relatively strong business services sector continues to
experience strong growth.
The financial sector remains exposed to the risks stemming from the
Eurozone, regulatory changes and global financial market volatility.
Government and other services (23%) 1.1% 1.0% 1.2% Government spending should continue rising at only a relatively modest
pace given continuing efforts to control the budget deficit.
Total GDP 2.6 % 2.5% 2.3%
Sources: ONS for 2014, PwC for 2015 and 2016 main scenario projections and key issues. These are only five of the most
important sectors of the economy, so their GVA shares only add up to around 84% rather than 100%.
4 Though we would stress that sectoral projections for 2016 remain highly provisional at this early stage, with wide margins of uncertainty surrounding the illustrative
projections in Table 2.3 for next year.
UK Economic Outlook March 2015 13Regional prospects It is important to note that regional data
Figure 2.9 shows our projections for are much less timely than national data
– the latest available regional GVA data
London and the South
growth in the main UK regions for 2014
and 2015. London and the South East5 are for 20136. As a result, the margins of East are expected to
error around these regional projections
are expected to retain their positions
are even larger than for the national
retain their positions as
as the two fastest growing regions this
year with a growth rate similar to the growth projections and so they can the two fastest growing
only be taken as illustrative of broad
previous year. Most other regions are
expected to expand at a slightly slower directional trends. Small differences in regions this year with
rate than the UK average this year, projected growth rates between regions a growth rate similar
but all should see positive growth of are not of any practical significance.
more than 1.5% in 2015.
to the previous year.
Figure 2.9: PwC main scenario for output growth by region
3.5
3.0% 3.0%
3.0 2.9% 2.9%
2.7%
2.6% 2.6% 2.6%
2.5% 2.5% 2.5% 2.5% 2.5%
2.5 2.4% 2.4% 2.4% 2.4% 2.4%
% growth by region
2.3% 2.3%
2.2%
2.1%
2.0%
2.0 1.9%
1.8%
1.7%
1.5
1.0
0.5
0.0
London South East West East Yorkshire & South North Scotland Wales North N Ireland UK
East Midlands Midlands Anglia Humberside West West East
2014 2015
Source: PwC analysis
2.3 Outlook for inflation 2015, and has actually risen slightly In our main scenario, we expect the
from 1.2% in November. It seems annual rate of inflation on the Consumer
and real earnings growth therefore that, as the Bank of England Prices Index (CPI) measure to average
The headline CPI inflation rate was well has said, around two thirds of the 0.3% this year. This is significantly
below the Monetary Policy Committee’s slowdown in inflation relative to the 2% below the average of 1.5% reported in
target of 2% in 2014 and dipped further target is attributable to the effect of 2014. We expect inflation to regain
to a record low of 0.3% in January 2015. factors that are temporary in nature momentum in 2016, bringing the rate
and whose impact would be expected closer to its target level of 2% by the
The lagged effects of past reductions to dissipate toward the end of the year, end of next year (see Figure 2.10).
in global energy and food prices were barring further falls in global
the main contributors to this sharply commodity prices. As with our GDP scenarios, we have also
declining headline inflation rate, considered two alternative scenarios for
although core inflation (excluding food, There is no sign yet in the UK of the UK inflation:
drink, tobacco and energy costs) systemic deflation experienced in
remained higher at 1.4% in January Japan in the 1990s and the Eurozone
more recently.
5 As discussed in detail in Section 4, this is a long term trend linked in part to the prominent position of London in new computer-related areas of work,
with positive spillovers to other parts of the South East.
6 This significant regional data lag explains why we do not attempt to make regional growth projections for 2016 at this time.
14 UK Economic Outlook March 2015• In our ‘high inflation’ scenario, we Figure 2.10: Alternative UK inflation (CPI) scenarios
assume that a combination of stronger
global growth, a marked rebound in 6
Projections
oil prices and resilient developments
5
in domestic cost growth will push
headline CPI inflation back up to % change on a year earlier
4
around 3% on average in 2016. 3
Inflation target = 2%
• In our ‘low inflation’ scenario, by 2
contrast, we assume that UK domestic 1
demand growth will be slower, global
0
GDP growth rates deteriorate and
commodity prices remain weak. -1
As a result, the average annual 2010 2011 2012 2013 2014 2015 2016
Q1 Q1 Q1 Q1 Q1 Q1 Q1
inflation rate in this scenario would
remain very subdued, averaging only Main scenario Low inflation High inflation Inflation target
just above zero in 2016. In this Source: ONS, PwC scenarios
scenario, we expect negative inflation
rates for several quarters in 2015
(as compared to only for a month Figure 2.11: CPI inflation vs nominal earnings growth
or two in our main scenario).
5
Projections
CPI
As with GDP growth, these alternative
4
scenarios are not as likely as our main
scenario, but businesses should plan for
% change p.a.
3
such contingencies. Real Squeeze
2
Outlook for real earnings growth
Earnings
As shown in Figure 2.11, real average 1
earnings growth was pushed into negative
territory for 6 years up to 2014, with real 0
growth rates averaging -1.2% per annum 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
during that period. However, the real CPI Average weekly earnings (excl bonus)
earnings squeeze experienced in 2014 was Source: ONS, PwC analysis
very modest compared to earlier years.
The largest real earnings squeeze was
experienced in 2011 with a fall of 2.5%.
In 2015, our main scenario is that the
squeeze will end and real earnings will
exhibit positive growth. This is due
primarily to the very low consumer
price inflation rate expected in 2015,
as discussed above. This positive growth
in real earnings is expected to continue
in the following few years, as Figure
2.11 shows, but the level of real earnings
would not be expected to regain
pre-crisis peaks until late in this decade.
UK Economic Outlook March 2015 152.4 Monetary and fiscal The latest public sector finances data In our main scenario, we expect the UK
saw a strong budget surplus in January. economy to grow by around 2.5% in
policy options It now seems likely that the budget deficit 2015, helped by the boost to household
The Monetary Policy Committee (MPC) will come in at around £90 billion in spending power from lower oil prices,
again agreed to maintain the Bank Rate 2014/15 as a whole, similar to the OBR’s before slowing slightly to around 2.3% in
at 0.5% and the stock of purchased forecast in December but somewhat 2016. We expect London and the South
assets financed by the central bank higher than the implied forecast at the East to continue to be the fastest growing
reserves at £375 billion at its February time of the March 2014 Budget (although parts of the UK in 2015, but all regions
meeting. However, for two members, definitional changes since then make a should show positive growth of more
the decision was “finely balanced” as the precise comparison difficult). than 1.5% this year in our main scenario.
case for increasing the Bank Rate later
this year is strengthened by the outlook Fiscal policy plans for 2015/16 and Our main scenario projection is for
of domestic inflationary pressures in the beyond will be reviewed in the Budget, inflation to remain a long way below the
medium term. Against this, for one which the Chancellor will deliver on 18 Monetary Policy Committee’s (MPC)
member of the MPC, the likelihood of March. We would not expect any major inflation target of 2% this year, but then
a monetary policy tightening was the change in the overall fiscal stance, with pick up towards target in 2016, on the
same as loosening. any ‘giveaways’ being broadly balanced assumption that oil prices rise gradually
by ‘takeaways’. However, whatever the over this period. We would not dismiss
It seems unlikely that there will be an composition of the next government, the possibility of an interest rate rise
early rate rise (certainly not before the further fiscal tightening is likely for at later this year if the MPC sees domestic
general election in May), but we would least the next 2-3 years, though the tax inflationary pressures mounting in the
expect the debate on the MPC to pick up and spending plans of the different medium term.
again as long as the recovery continues parties diverge more after that period.
through the year and there are no major Significant uncertainties continue to
adverse global shocks. In this case,
2.5 Summary and surround the UK recovery, with risks
we might expect the first rate rise in late stemming from the recent problems in
2015 or possibly early 2016, though any conclusions Greece and elsewhere in the Eurozone,
such increases are likely to proceed at The pace of the UK economic recovery and continued geopolitical tension in
a very gradual pace. eased slightly in the fourth quarter of Russia/Ukraine and the Middle East.
2014, but remains relatively strong However, there are also upside
Therefore we might expect interest rates compared to the rest of Europe. possibilities due to the continued
to increase to around 2% by the end of Consumer spending has been a key robust growth in investment and
2017 and to around 3.5-4% by 2020. driver of this growth and the upward consumer spending, particularly if oil
Business and individuals should consider trend in investment in recent years has prices remain low (as discussed in more
such rises in the cost of borrowing also helped to support growth (despite detail in the next section of this report).
moving forward, as well as stress testing a dip in investment in Q4 2014).
against rate rises where these would have The services sector remains the main In summary, the UK’s recovery remains
major effects on their finances. engine of growth as it has consistently relatively robust, but the international
outperformed the manufacturing and environment continues to be a source
construction sectors, but both of these of downside risks.
also showed some recovery in 2014.
16 UK Economic Outlook March 20153 – The impact of lower oil prices
on the UK economy
Key points • In contrast, the impacts are smaller Introduction
where the fall in the oil price is
• The significant fall in oil prices The dramatic decline in oil prices since
temporary: depending on how
since mid-2014 should increase mid-2014 is having a significant impact
far and fast oil prices rebound,
overall UK economic activity as on the world economy. How does such
the boost to GDP could vary
the cost of production decreases for a large and unexpected decline in oil
from 0.2-0.5% and the increase
businesses, especially for those that prices affect the UK economy
in employment by 2020 could
are heavily dependent on oil inputs. specifically, and which industry sectors
vary from 3,000 to 37,000.
This will boost both investment are likely to emerge as winners or
and employment. losers? How does a change in the oil
• Real household incomes also rise
price affect UK government revenues
as oil prices fall, which increases
• Although the oil and gas extraction and the trade balance?
consumer spending. This is due to
sector is negatively affected by the
two factors: overall consumer prices
reduction in the oil price, sectors In order to answer these questions,
fall as cost savings are passed on to
such as agriculture, air transport, we used our dynamic computable
households and real wages increase
coke and refined petroleum general equilibrium (CGE) model to
as demand for labour rises in
manufacturing and oil-intensive assess the impact of future changes
fast-expanding sectors.
manufacturing sectors will benefit in the oil price on the UK economy.
as the price of their key input falls. We used three projected oil price
• As a result of growing economic
scenarios that differ in the magnitude
activity, government tax revenues
• Water transport and other services and persistence of the oil price shock,
also rise as the tax take from
sectors will enjoy a small positive against a baseline where oil prices
corporate and personal income taxes
impact. However, oil-intensive remain at mid-2014 peak levels.
increase, more than offsetting
sectors are likely to benefit from
declining revenues from the oil and
the reallocation of capital and The rest of the article is structured as
gas sector. The fall in the oil price
resources at the expense of less follows:
should also have a small impact in
oil-intensive sectors.
narrowing the UK trade deficit.
• Section 3.1 discusses past trends in
• We use a model of the UK economy oil prices and the UK’s trade position
to quantify these effects in three in crude oil and oil products.
alternative scenarios. In a case where
the reduction in the oil price is • Section 3.2 sets out our oil price
permanent, settling at around The significant fall in scenarios and modelling approach.
$50 per barrel, the size of the UK
economy (GDP) increases by around
oil prices since mid- • Section 3.3 discusses the results
1% on average relative to the 2014 should increase from the analysis.
baseline between 2015 and 2020.
Employment also increases by UK economic activity. • Section 3.4 summarises and draws
around 90,000 by 2020, with a peak conclusions from the analysis.
boost to employment of around
120,000 in 2016.
UK Economic Outlook March 2015 173.1 Trends in oil prices costs) to maintain production levels demand for oil is increasingly driven
in order to defend and grow market by developing countries rather than
and the UK’s position share by forcing more expensive developed countries.
Trends in oil prices unconventional sources out of the
Oil prices mostly traded above the market. On the demand-side, the The net impact of these factors is unclear,
US$100/barrel mark over the four years decelerating pace of growth in China but could imply a return in the longer
to mid-2014. However, by mid-January and the slow economic recovery in term to a level of oil prices in line with
2015, oil prices had fallen dramatically the EU have contributed to weakening marginal supply costs, which at current
to around a third of their peak level in demand for oil. and projected levels of global demand
June 2014 and, despite some recovery might be around $70-100 per barrel.
since mid-January, remain well below These factors combined have exerted The path by which prices return to this
those levels. The recent fall in oil prices downward pressure on prices. In addition, kind of level is, however, highly uncertain,
was one of the biggest in history, with oil consumers are taking advantage of as is the pace of any such adjustment.
the only comparable declines in recent the opportunity to stockpile cheap oil,
decades being the oil price collapse in which could further dampen demand The UK’s position
the 1980s and in the 2008-9 global for oil in the short-term. The UK is the largest producer of oil
financial crisis. The latter was reversed and second-largest producer of natural
relatively quickly, but the former proved In the longer term, technological gas in the European Union. Production
to be long-lasting, so we need to explore advancements will continue to drive from UK oil and natural gas fields in the
how different scenarios for future oil down the costs of extracting North Sea peaked around the late 1990s
price movements will influence the unconventional shale gas and tight and has declined steadily since as the
economic impact of the recent decline. oil reserves (including hydraulic discovery of new reserves and new
fracturing or “fracking” methods), production has failed to keep up with
A combination of supply- and demand- which will bolster non-OPEC oil supply. the maturity of existing sites. Figure 3.1
side factors led to this sharp decline. Furthermore, the rebalancing of the shows the UK’s position in terms of net
On the supply-side, strong growth in Chinese economy away from exports of crude oil and oil products.
production by non-OPEC producers manufacturing to services could have Following years of being a net exporter
and growing US shale oil production a negative impact on oil consumption.1 of petroleum and natural gas, the UK
have contributed to an overall increase Growth in other developing countries, became a net importer of crude oil from
in output. Added to this is the apparent increasing energy efficiency and the 2005, and oil products from 2013.
strategy of OPEC producers led by Saudi shift towards renewable energy in
Arabia (who have lower production developed countries could mean that
Figure 3.1: UK net exports of crude oil and oil products2
50,000
40,000
30,000
20,000
'000 tonnes
10,000
0
-10,000
-20,000
-30,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Crude oil Oil products
Source: DECC
1 IMF (2013) “Commodity Market Review”, October 2013.
2 Crude oil includes the production of crude oil and natural gas liquids, petroleum products are refined crude oil. A negative value signifies that in that particular year
imports were greater than exports.
18 UK Economic Outlook March 2015Figure 3.2 compares the historic real Figure 3.2: Real GVA growth for oil and gas sector vs rest of UK economy
growth in GVA for the UK oil and gas sector
and for the rest of the economy. The oil and 10
gas sector – which consists of the extraction
5
of crude petroleum and natural gas and the Rest of economy
manufacture of refined petroleum products 0
– has shrunk to around a third of its size
% p.a. growth
since its peak in the late 1990s. The sector -5
now accounts for less than 2% of total UK
GVA, as compared to 6% in 1999. -10
Oil and gas
-15
3.2 Modelling the impact
of oil price shocks on the -20
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
UK economy Oil and gas sector GVA excl oil and gas
Our modelling approach Source: ONS
We used a computable general equilibrium
(CGE) model to assess the impact of future
changes in the oil price on the UK economy Figure 3.3: Alternative oil price scenarios
in three alternative scenarios. The model
120
estimates how the UK economy would Baseline
react to changes in policy, technology and 100
other external factors by looking at the
Scenario 3
interactions between different industrial 80
US$/barrel
sectors, households, the government and Scenario 2
60
the rest of the world. These models are
a standard tool of empirical economic 40
Scenario 1
analysis, and are widely recognised and
used by international organisations such 20
as the IMF, OECD and the World Bank,
as well as the European Commission, 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
national governments and central banks. Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
Baseline Scenario 1 Scenario 2 Scenario 3
We simulate an oil price shock in this
Source: PwC analysis, IMF
model by reducing the output price of the
oil and gas extraction sector and the input
price of other sectors in the economy,
which takes into account the relative oil
intensity of the different sectors.
• Scenario 1: Oil price remains • Scenario 3: Oil price gradually
Oil price scenarios at a low level of US$50/barrel. returns to US$108/barrel in 2020.
We assess the following three
scenarios for the period to 2020 • Scenario 2: Oil price gradually The CGE model measures the impact of
(shown in Figure 3.3): increases to US$73/barrel in 2020.3 each scenario relative to a baseline
3 The forecasts for Scenario 2 were drawn from the IMF’s projections published in January 2015. This scenario is also broadly consistent with our main scenario for the
UK economy in Section 2 above.
UK Economic Outlook March 2015 19where the oil price remains at its Figure 3.4: Impact on the level of real GDP, 2015-2020
mid-2014 peak of around $108 per
barrel. This baseline is also consistent 1.6
with our growth projections for the UK 1.4
economy published in the July 2014 % difference from baseline
1.2
issue of the UK Economic Outlook.
1.0
The model also assumes longer-term
UK economic growth to be in line with 0.8
historical trend growth rates. 0.6
0.4
3.3 Results from our 0.2
analysis 0.0
2015 2016 2017 2018 2019 2020
The results from the modelling show
that the UK economy will be Scenario 1 Scenario 2 Scenario 3
significantly affected by a reduction Source: PwC analysis
in oil prices. Although North Sea oil
producers and refiners will experience
a reduction in output, the UK economy
benefits as a whole. Generally, the fall from other countries that also benefit that the impact of the oil price shock
in oil prices increases overall economic from the oil price shocks, thus takes time to filter through the economy.
activity as the cost of production diminishing the benefit to the UK.
decreases and investment increases. In the following sub-sections, we set out
Consumers also benefit from lower In Scenario 2 where the oil price the rest of the findings from our analysis,
energy costs and cheaper goods and recovers gradually to $73 by 2020 in line particularly with regard to sectoral GVA
services, which boosts real incomes with latest IMF projections, UK GDP is and employment, inflation, household
and translates into an increase in estimated to be around 0.5% higher on consumption, UK government revenues
consumption. Below we present and average over the 2015-20 period relative and the trade balance.
discuss these results in more detail. to the baseline.
Impact on output by industry sector
Impact on overall UK GDP In Scenario 3, where the oil price Figure 3.5 maps the transmission of a fall
Figure 3.4 shows the impact of the recovers to mid-2014 levels by 2020, in the oil price at the industry sector
change in oil price on the level of UK the impact on the economy is much level. We distinguish between the oil
real GDP.4 As shown in Figure 3.4, smaller at 0.2% on average over the and gas extraction sector, sectors with
in Scenario 1, where the oil price 2015-20 period, with minimal effects on oil-intensive production processes,
remains persistently low at US$50 the level of GDP by 2020 given this is a and sectors that use oil and gas less
per barrel between 2015 and 2020, purely temporary shock in this scenario. intensively in their production processes.
the initial impact will raise the level of Our analysis focuses on the impact of the
real UK GDP by around 1.2% in the first The model assumes adaptive fall in the oil price on the UK as a whole,
year relative to the baseline where oil expectations, which means that rather than focusing on specific regions
prices remained at $108 per barrel. economic agents revise their within the UK. However, there are likely
The effect peaks in 2016 when the level expectations of future oil prices during to be regional differences, depending on
of GDP increases by around 1.4% of the each period based on current oil prices. the distribution of oil-intensive industries
baseline level as the full impact of the oil The implication of this assumption is across the regions.5
price shock filters through the economy. that there is a lag between the initial
The impact then tails off to around 0.6% oil price shock and the subsequent The CGE model takes into account the
of the baseline as the UK is exposed to economic impact. The stickiness of “reorganisation effect”, where firms
stronger competition by cheaper imports downward price adjustments also means automatically adjust their production
4 See the technical appendix for comparisons of the results of our study with existing academic literature.
5 In particular, the area around Aberdeen may be a loser given the concentration of onshore oil and gas activity there. Some parts of the North and Midlands may also
benefit more from impacts on oil-intensive heavy industry, but our model does not allow quantification of these regional variations.
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