Presentation of the OECD Economic Survey of the United Kingdom 2020

OECD ECONOMIC SURVEY OF THE UNITED KINGDOM 14 OCTOBER 2020

@OECD

@OECDeconomy

http://www.oecd.org/economy/united-kingdom-economic-snapshot/

Key messages COVID-19, leaving the EU Single Market and low productivity growth are major challenges Fiscal and monetary policy support are key to foster a sustainable recovery • Prioritise digital infrastructure in the planned increased in public investment • Accelerate the green transition through public investment Get people back to good-quality jobs and support low-income households • Increase support job search and training • Reduce out-of-pocket cost of childcare Ensure a close trading relationship with the European Union and other countries • Keep low barriers to trade and investment with EU and non-EU countries • Seek high market access for services 2

The COVID-19 crisis has already hit the economy hard B – Income loss

A - real GDP

% of surveyed households responding positively

Y-o-y % changes

100

20 15

80

10 5

60

0

40

-5 -10 -15

0.7 %

Projection: -10.1%

-20 1700 1750 1800 1850 1900 1950 2000

20 0

Reduced income

Struggling Had to use to pay bills food banks

Source: OECD Interim Economic Outlook database, ONS and Bank of England, Millennium of Macroeconomic Dataset.

3

A. Transport GBR

DEU 140

120 120

100 100

80 80

60 60

40 40

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

140

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

Transport and tourism have been hit severely Index 1 January 2019 = 100 B. Travel and tourism

FRA

Source: Gonzales F., A. Jaax and A. Mourougane, “Nowcasting Services Trade”, forthcoming.

USA

4

Productivity has been underperforming over a decade Real output per hour, change from start of recession

35

% 1973

30

1979

2008

25 20 15 10

2020Q1

5 0 -5

0

5

10

15

20

25

30 35 40 45 Quarters since the peak

Source: OECD calculations based on ONS (2020), Labour productivity database, July.

5

Uncertainty has hampered investment and growth since 2016 Real GDP

Index 2016Q2 = 100, volumes

110

UK: Actual UK: Pre-referendum trend France, Germany and USA: Actual

108

2.8%

106 1.5%

104 102 100 98

2016Q2

2016Q4

2017Q2

2017Q4

2018Q2

2018Q4

Source: OECD (2020), OECD Economic Outlook: Statistics and Projections (database).

2019Q2

2019Q4 6

The recovery will be gradual and there are substantial risks around COVID-19 and exit from the Single Market A. Real GDP

B. Economic outlook Annual percentage change

Index 2019Q4 = 100, s.a.

105

2019 2020 2021

100 95 90

Gross domestic product (%)

1.5

-10.1

7.6

Unemployment rate (%)

3.8

5.3

7.1

Fiscal balance (% GDP)

-2.2

-15.2

-8.4

85

2021Q3

2021Q1

2020Q3

2020Q1

2019Q3

2019Q1

2018Q3

2018Q1

2017Q3

2017Q1

2016Q3

75

2016Q1

80

Source: OECD Interim Economic Outlook database, September.

Government gross debt (% of GDP)

116.2 138.2 140.1

7

Monetary policy has eased A. Change in policy interest rates since end-2019ยน

% of 2019 GDP

35 30

-1.0

25

-1.5

20

-2.0

15

-2.5

10

-3.0

5

-3.5

0

ZAF MEX BRA ISL TUR CZE CAN USA NOR POL CHL IND IDN KOR NZL GBR AUS CHN ISR EA JPN

-0.5

0.7 %

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

0.0

% pts

B. Assets purchased by the creation of central bank reserves

1. Between end-2019 and 1st October 2020.

Source: OECD (2020), Economic Outlook: Statistics and Projections (database), and Refinitiv.

8

The large-scale and rapid policy reaction is appropriate Proportion of businesses applying to government schemes Businesses currently trading

Businesses temporarily closed or paused trading

77% Coronavirus Job Retention Scheme 23%

Government-backed accredited loans or finance agreements

18%

Business grants funded by the UK and devolved governments

20%

Not applied for any of these schemes 0 Source: ONS.

20 40 60 80 100 0 %

All businesses (excluding those permanently ceased trading) 77%

75%

23%

25%

21%

18%

21%

20%

20 40 60 80 100 %

0

20 40 60 80 100 % 9

MOVING FROM CRISIS MANAGEMENT TO ACHIEVING RECOVERY

10

Higher unemployment risks scarring the economy 5

Million

Million

10 Claimant count unemployed (LHS)

4

9

Total number of jobs furloughed (RHS)

3

8

2

7

1

6

0

5

January

March

Source: ONS and HM Revenue & Customs.

May

July

September

11

Fiscal support should remain in place as needed until the recovery is established 3

Primary balance

% of GDP

0 -3 -6 -9

Source: OECD Interim Economic Outlook database.

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

-15

2005

-12

12

The emergency package and the fall in GDP will raise the public debt-to-GDP ratio 200

Net public debt

% of GDP No adjustment

Adjustment in primary balance

160

Manufacturing and services productivity rebound

120 80

2039

2037

2035

2033

2031

2029

2027

2025

2023

2021

2019

2017

2015

2013

2011

2009

2007

0

2005

40

Note: The "No adjustment" scenario assumes that the primary balance stay constant in terms of GDP after 2021. "Adjustment in primary balance" scenario assumes the primary balance improves by 0.5% of GDP per year over 2025-2035 and it remain unchanged after 2035. The “Manufacturing and services productivity rebound� scenario that productivity growth in the service sector will rebound to 2% and to the 1995-2005 average in manufacturing.

Source: OECD Interim Economic Outlook database and calculations using data from Office for Budget Responsibility (OBR).

13

0

Source: IFF Research (2018), Employer skills survey 2017.

Instructing, teaching or training people

Team working

Managing or motivating other staff

Main technical and practical skills shortages

Managing own feelings / handling those of others

Managing own time and task prioritisation

Writing instructions, reports, etc.

Average increase by skills type

Basic numerical skills

% pts

Reading / understanding instructions, reports, etc.

6

People and personal skills

8

Technical and practical skills

Investing in skills should be a key part of supporting workers, including for basic skills Basic skills, difference between 2017 and 2015 , Main people and personal skills shortages

4

2

14

Participation in lifelong learning has declined 35 30

%

Participation in lifelong learning 2019

2012

25 20 15 10

0

SVK GRC POL TUR HUN LTU LVA CZE ITA BEL DEU PRT ESP EU27 SVN IRL AUT GBR LUX NOR FRA NLD EST ISL DNK FIN CHE SWE

5

Source: Eurostat, based on the EU Labour Force Survey.

15

Low-skilled and own-account workers receive less training Difference in training rates between full-time permanent workers and own-account workers

Source: OECD (2019), Going Digital: Shaping Policies, Improving Lives, and OECD Employment Outlook 2019: The Future of Work and Survey of Adult Skills (PIAAC).

GBR

USA

OECD

CAN

0

JPN

0

16-65 years-old, 2012 or 2015

FRA

8

% pts

DEU

5

GBR

16

JPN

10

USA

24

FRA

15

OECD

32

CAN

20

ITA

40

DEU

% pts 25

ITA

Difference in training rate between low-skilled and other workers

16

Poverty rates are highest among households out of work and single parents 30

Severe material deprivation rate, 2018

%

%

30

Household type

Age

Source: Eurostat (2020), EU Statistics on Income and Living Conditions (database).

Unemployed

Inactive

0

Not employed

0

Self-employed

5

Employed

5

Retired

10

Aged 65+

10

Aged 25-49

15

Aged under 18

15

Single with dependent children

20

Single

20

Two or more adults with dependent children

25

Total

25

Work statusยน 17

Easing access to childcare will help to foster female participation and social mobility Average weekly hours for children in early childhood education and care 0 to 2-year old, 2017 or latest year

40 30 20

0

NLD GBR CHE NZL AUT IRL ESP GRC ITA OECD BEL FRA FIN DEU SWE LUX HUN NOR EST DNK POL SVN ISL LVA PRT

10

Source: OECD Family Database (http://www.oecd.org/els/family/database.htm).

18

The crisis is an opportunity to green the economy B. Share of CO2 emissions by sector

A. CO2 intensity CO2 per GDP, production-based

kg/USD, 2015 PPP 0.40 United Kingdom 0.32

% of total 100

OECD

Agriculture and fishing

80

2018

0

2016

0.00

2014

Industry

2012

20

2010

0.08

2008

Transport

2006

40

2004

0.16

2002

60

2000

0.24

Commercial and public services Residential

2002

2017

United Kingdom

2002

2017

OECD

Source: OECD Green Growth Indicators database and IEA CO2 emissions from fuel combustion database.

Electricity and heat producers

19

Recommendations to support the recovery • Ensure support is available and adapted as needed based on epidemiological and economic developments, while not hindering the reallocation of resources towards firms and sectors with better growth prospects.

• Consider introducing more targeted measures. Keep monetary policy accommodative until there are clear signals of price pressures.

• Further increase active labour market spending to displaced and low-skilled workers.

Use well-designed in-work benefits to support low-income earners. Strengthen efforts to make good-quality childcare less costly.

• Continue effort to reduce emissions in the transportation sector. Align carbon pricing across sectors and fuels and eliminate incentives to develop oil and gas fields. Continue to give fuel poverty full consideration.

• Once the recovery is firmly established, address the remaining structural deficit and put the public debt-to-GDP ratio on a downward path 20

FOSTERING PRODUCTIVITY IN SERVICE SECTORS

21

The productivity shortfall is larger in the United Kingdom than in most economies Deviation of the level of productivity from the pre-crisis trend path 2019 or latest year 20

%

10 0 -10 -20

-40

ESP IRL DNK AUS NZL ITA ISR PRT CHE CAN BEL DEU MEX JPN TUR AUT FRA CHL OECD KOR LUX NLD USA POL ISL GBR FIN NOR SWE SVN SVK CZE HUN LTU GRC

-30

Source: OECD calculations based on OECD (2020), OECD Productivity Statistics (database).

22

Services sectors account for a large share of the productivity shortfall Sectoral contribution to productivity shortfall relative to 1997-2007 trend growth 100

%

Manufacturing

Services

Other sectors and sectoral allocation

80 60 40 20 0

United Kingdom (2016)

OECD average excl. UK (2016/17)

Note: Based on the decomposition formula of shift-share analysis. For the OECD aggregate, unweighted average of 19 countries excluding the United Kingdom.

Source: calculations based on OECD (2019), OECD National Accounts Statistics and OECD Structural Analysis Database.

23

Productivity varies widely across service industries Real value added per hour worked in GBP, 2019 75

60

45

30

15

0

Total services

Non financial services

Financial services

Information and communication

Distribution services

Source: OECD calculations based on ONS (2020), "GDP output approach – low-level aggregates", May, and "Productivity jobs, productivity hours, market sector workers, market sector hours", April.

24

Leaving the Single Market will reduce service sector productivity into the long term Impact on productivity of leaving the EU Single Market Difference compared to current situation, per cent 0 -1 -2 -3 -4 -5

Wholesale & retail; trade, motor trade, motor vehicle repair

Transport & storage

Information & communication

Finance & insurance

Professional scientific and technical activities

Note: In the simulation, restrictions to service trade raise from the intra-EU level to the most-favoured nations (MFN) level.

Source: Calculations using Kim, Mourougane and Baker (forthcoming).

25

Both public and private investment have been low Total investment 30

% of GDP United Kingdom

Germany

France

United States

26 22 18

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

14

Source: OECD (2020), OECD Economic Outlook: Statistics and Projections (database).

26

A very low share of infrastructure spending is allocated to digital 80 70

Decomposition of investment by sector

GBP, billion Transport

Energy

Utilities

GBP, billion

Digital infrastructure

Otherš

80 70

60

60

50

50

40

40

30

30

20

20

10

10

0

2018-19

2019-20

2020-21²

Source: Infrastructure and Projects Authority, "Analysis of the national infrastructure and construction pipeline", Policy paper, November 2018 and "National infrastructure and construction procurement pipeline 2020/21, June 2020.

0

27

Spending on research and development is lower than the OECD average Research and development expenditure, 2018 or latest year % of GDP 5

% of GDP 5 4

3

3

2

2

1

1

0

0

MEX CHLยน LVA SVK LTU TUR IRL GRC LUX POL ESP PRT NZLยน ITA EST HUN CAN GBR AUSยน CZE SVN OECDยน ISL NOR NLD FRA FIN BEL USA DNK DEU AUT JPN SWE CHEยน KOR ISR

4

1. Unweighted average for the OECD aggregate. 2017 for Australia, Chile, New Zealand and Switzerland.

Source: OECD (2020), Main Science and Technology Indicators (MSTI database).

28

Productivity can be supported through digital adoption Impact on firm productivity of closing one-fourth of the Impact on MFP gap with best performing countries after 3 years, %

2.5 2.0 1.5 1.0 0.5 0.0

Higher use of Upgrading Easier high-speed skills (technical financing for broadband and young managerial) innovative firms

Higher use of e-government

Reducing barriers to digital trade

Reducing regulatory barriers to competition and reallocation

Note: Estimated impact on the multi-factor productivity (MFP) of the average firm of a range of policy and structural factors which are found to support the adoption of new technologies.

Source: Sorbe et al. (2019), "Digital dividend: policies to harness the productivity potential of digital technologies".

29

Recommendations to boost productivity in the service sectors • Prioritise digital infrastructure, particularly in deprived regions, in the allocation of the planned increase in public investment. Ensure sound governance of infrastructure investments.

• Ensure continuity in government support through the Industrial Strategy, a multidimensional approach to boost investment, innovation and skills intended to foster productivity growth.

• Refine the competition framework to adapt it to the digital economy: enable greater personal data mobility and systems with open standards; adopt a broader approach to merger assessment including an evaluation of the overall economic impact of mergers.

• Ease-land use regulations to seek the right balance between improving resource allocation, and environmental and social concerns.

• Develop digital skills of low-skilled workers, including through further increasing public spending on training.

30

PREPARING FOR LEAVING THE EU SINGLE MARKET AND CUSTOMS UNION

31

The United Kingdom is deeply integrated in the European Union Exports and imports of goods and services, 2018 B. Main trading partners: Imports

A. Main trading partners: Exports

USA

USA Rest of the world

China

Rest of the world

China

Norway

Switzerland Germany Germany Netherlands

Netherlands

Spain Belgium Italy

France

Ireland

Ireland

Source: ONS (2019), "UK Balance of Payments, The Pink Book: 2019".

Italy

France Belgium

Spain 32

A no-deal exit from the EU Single Market is a risk Exports, percentage difference between the a no deal and the current situation in the medium term

% 0 -10 -20 -30 -40 -50

Source: OECD METRO model.

33

Firms will have to adapt to higher trade costs after the exit from the EU Single Market Difference compared to current situation, medium term

0

A. Output loss

%

% pts 0

-1

-1

-2

-2

-3

-3

-4

-4

-5

FTA

+ end of free movement of people

Source: Arriola et al. (forthcoming).

+ further services liberalisation

-5

B. Contribution to output loss

Increase Rules Non-tariff FTA border of origin barriers costs on goods

+ end of + further free services move- liberalment isation of people

34

-20

Source: Arriola et al. (forthcoming).

Natural resources incl coal and petroleum products

Pharmaceutical products

Minerals, metals, and metal products

Transport

Communication

Exports

Financial services and insurance

Construction

Trade

Machinery and equipment, not elsewhere classified

Other manufacturing

0

Business services, not elsewhere classified

%

Agriculture and food

5

Motor vehicles, parts, and transport equipment Textiles, wearing apparel, and leather products Chemical rubber plastic products Computer, electronic and optical products

Sectors will be impacted differently by the exit from the Single Market Difference FTA compared to current situation, medium term Imports

-5

-10

-15

35

Regions will be impacted differently by the exit from the Single Market Share of regional employment by sector, 2019 100

%

London and South East

7 English regions excl. London and South East

Scotland

Wales

Northern Ireland

% 100

80

80

60

60

40

40

20

20

0

Agriculture, forestry and fishing

Manufacturing

Source: ONS (2020), "JOBS05 Workforce jobs by region and industry.

Distribution services

ICT, finance and insurance

0

36

Recommendations : Leaving the EU Single Market and Customs Union • Keep low barriers to trade and investment with the European Union and others, particularly market access for the service sectors including financial services

• Enhance communication on a no-deal exit from the European Union. Prepare targeted support to firms and workers that may suffer the most. Put in place trade facilitation measures to smooth disruptions at the border.

37

For more information

http://www.oecd.org/economy/united-kingdom-economic-snapshot/

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Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

38