Episode 29: UK Economic Outlook

November 2023

Are we out of the woods yet? In this podcast, Ellie Golden hosts our UK Chief Economist Barret Kupelian, along with Jake Finney, a manager in our Economics team, to discuss their views on the macroeconomic outlook and the report's special article, which offers a holistic evaluation on undergraduate degrees. The speakers outline their views on GDP growth, the outlook on headline inflation and what recent geopolitical developments could mean for domestic prices in the UK.

Read the full UK Economic Outlook.

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Ellie Golden: Hello and welcome to the latest episode of PwC's Economics in Business podcast. I'm Ellie Golden, a consultant in our economics practice and I'll be your host for today. This episode will focus on our recent report of the UK economic outlook and I'm delighted to be joined by two members from PwC's economics team, our chief economist, Barret Kupelian, who is joining us virtually today, and economist Jake Finney who is here in the studio with me. Before we get into the content of the report, Barret, can you provide me with a little bit of an overview of what the UK economic outlook is and what it covers?

Barret Kupelian: Thanks, Ellie. So, for the benefit of our listeners, the UK economic outlook is the firm's main publication which focuses on the UK economy, some of the sectoral developments as well as projections for the future. So, you know, the real GDP growth grade, our views on the labour market and inflation, and what we also do in this report is we typically release a special article focusing on a relevant topic of interest, and in this current edition, what we did do is, we conducted an evaluation of the returns of undergraduate degrees.

Ellie: Amazing, thank you. So, a super-interesting but especially relevant report, given all of the headline inflation stats that I'm sure many of you have been hearing in the news over the past year or two. So, our last UK economic outlook was published in April this year, so April 2023, which brings us to the big question, what are the main changes you've seen since this report was published?

Barret: That's a big question. So, let me start to decipher that by segmenting some of the answers. So, I think the view from the top is that the economic outlook has moderately improved over the past six months. On the positive side of things, we have avoided recession, as we said back a few months ago, and also, the headline inflation rate has been consistently trending downwards. Also, the labour market has been cooling, but we can see the wage growth is still significantly above longer-term trends. So, we are now in a position, actually, where real earnings are growing in the UK economy after a long time. On the more challenging side of things, we are increasingly seeing the effects of monetary policy tightening on the economy, in anything, really, from asset prices to the labour market, and also, general demand in the economy, but let me just start off with the growth picture, Ellie. So, on growth, I think the main surprise we had over the past few months has been the ONS revisions to the GDP data and particularly over the pandemic period. So, these revisions had significant implications on what we thought was the UK's post-pandemic performance. We now know that UK output or UK GDP is higher than what it was compared to pre-pandemic levels, which is a quite different story than what we thought a few months back. We actually thought then that pre-pandemic levels we were actually slightly over. So, this does mean that we've fared better, relative to our international peers, than we initially expected, but for businesses, nothing has really changed.

These are retrospective changes. So, the historic performance that businesses have experienced, they've already experienced it. The statistical changes don't really affect that. Now, I should also point out that there are other economies that are undergoing the same types of revisions, and most, if not all, seem to point out to larger output numbers than we originally thought. Now, going into our projections, we still think that the UK outlooks is quite subdued. So, in our main scenario, we expect the UK economy will grow by about 0.5% this year and probably next as well. So, in a nutshell, quite subdued growth, below potential growth, I would also say, for the next couple of years. Now, I would like to caveat these. These are conditional projections. So, we're assuming that oil prices remain relatively stable and that fast-paced geopolitical changes could actually change this assumption, depending on how they pan out in the future, and actually, we have a box in our report which touches on this point. Finally, the other point I think worth mentioning is that future economic activity in the UK will be increasingly dominated by the actions that were carried out by the Bank of England, which started tightening it's monetary policy at the end of 2021. So, as economists, we know that it takes time for households, businesses, and sometimes even government, to change their behaviour in response to tighter financial conditions. So, right now, we estimate that we've only felt about half of the impact of tighter monetary policy on the economy.

So, I suppose my main point here is that there will be considerable headwinds to the UK outlook going forward, a lot of which will emanate from higher interest rates.

Ellie: So, you've mentioned headline inflation has turned a corner. I know these rising prices are at the forefront of many people's minds, at the moment, especially energy prices, as everyone's homes start to get a little bit colder. What does this mean for the UK economy and how likely are we to meet the government's target to halve inflation by the end of this year?

Barret: So, Ellie, I would say that 80% of the conversations I have with clients are still dominated about inflation. So, there is quite a lot of need to educate our stakeholders about where inflation is headed, because that story keeps on changing. Now, I think, if we take a step back, inflation is currently high, but it is also important to remember that we have made a lot of progress. So, headline inflation, right now, is at about 6%, which is a third lower than what it was at the 11% rate when it hit its peak in October. Now, this was broadly and is broadly in line with our expectations, but interestingly, the composition of where the decrease in headline inflation has come through has been quite different. So, if we think through the numbers, you will see that lower energy inflation has accounted for almost all of the fall in the headline inflation rate that I just talked about, whereas services inflation and core goods inflation have been much more persistent. So, returning to your question about the outlook, in our main scenario outlook, we think that we will close this calendar year with headline inflation rate of just under 5%, which, barring any major surprises, means that the government hits its target to halve inflation. Of course, we will still be above the 2% target of the Bank of England.

So, we have two targets now. Now, we expect most of the deceleration of the headline inflation rate to be driven by lower energy inflation, because the household energy price cap will be cut by 7% in October, and also, last year's price rises wills start to drop out from the annual calculation, but again, I would say, I would caveat this projection. It is a main scenario projection, and some of the ongoing geopolitical instability could mean that this outlook could change. You know, if I was a risk manager, oil price volatility would be one of the key things I would want to monitor and get a better understanding of how it affects my business.

Ellie: Thank you, Barret. I know I came back to you with hundreds of questions when we were discussing this earlier, so I really would urge all our listeners to have their questions answered by reading the report, which we will link in the description. Right, okay, onto the special article about higher education. Jake, I know you focused a lot on this, so can you provide me with a bit of context and the motivations for choosing this topic.

Jake Finney: Sure, happy to, Ellie. So, firstly, I suppose, in terms of the, kind of, broader context for the article, I think the first thing I'd probably point out is, over the past twenty, 30 years or so, we've seen this huge expansion of the higher education sector. So, if we look at the numbers, we can see that the number of full-time students starting an undergraduate degree for the first time has risen from around one million a year at the start of the century to around 1.6 million now, and that's a really big increase. So, you know, roughly around 60%, and as a result, we see that now, more than one in two young people are going into higher education. So, I think what this means is that it's more important than ever before that, you know, kind of, university degrees are delivering value, both to the students that choose to do those degrees, and also for wider society and the economy more broadly. So, what we tried to do in the article is, you know, add to the evidence base on this topic by using eco-metric analysis to estimate the economic and wellbeing effects of undergraduate degrees, and we do this for a broad range of undergraduate degrees, so we can, kind of, get that broad spectrum of results.

Ellie: Thanks, Jake. I actually find this really interesting as it was something that was discussed a lot whilst I was at university. It sometimes does feel as if everyone has a degree and you'd, kind of, question where that standout value is. So, I'd be keen to hear what your findings were.

Jake: Yes, sure, happy to. So, I think they've probably got, you know, our main headline finding is that most of the undergraduate degrees that students will elect to take have a positive impact both on their earning power and also on their wellbeing relative to non-graduates. So, in terms of earnings, we find that graduates from all of the courses in our sample have higher earnings than their counterparts without a degree, even after we control for a selection of personal and work-related characteristics. In other words, so we can try and compare in a life-for-like basis, and these earning premiums are really quite substantial. So, the average graduate earned around 57% more than non-graduates that have, you know, similar demographic characteristics, and then, we also find strong evidence for what we call in the report a graduate wellbeing premium. So, for nearly all of the courses in our sample, we find that graduates have higher levels of self-reported life satisfaction, life-worth, and happiness.

Ellie: Interesting. I wouldn't have thought there would've been such strong evidence in favour of the graduate wellbeing premium, especially when I think of my friends of my friends who went to university versus the ones that didn't. Do you think this is indicative of the courses that you used in your sample and did you find any difference in terms of the economic and wellbeing effects of any particular courses?

Jake: Sure, yes. We do find quite significant differences between different courses. So, as you'd probably expect, we find that it's the STEM courses, so science, technology, engineering, and maths, that generate those highest earnings premiums. So, for instance, medicine and dentistry, kind of, comes out with the highest earnings premium. So, graduates from medicine and dentistry courses earn more than twice as much as their counterparts without a degree, but perhaps what I found, kind of, more interesting is that there's not necessarily a one-for-one relationship between the courses that have the largest effect on earnings and those that have the largest effect on wellbeing. So, many of the courses with the highest wellbeing effects have relatively lower earnings premiums. So, I'll give you a couple of examples. So, for instance, Celtic studies ranked number one for its life satisfaction effect, while sports science ranks second, and that's even though both these courses have, you know, relatively low earnings premiums, when you compare them to some of the other courses. In general, I'd say that it tends to be the more vocational courses, such as nursing, that have the most positive impact on wellbeing, rather than necessarily the courses where graduates earn the most.

Ellie: Amazing. Thank you so much. Unfortunately, that is all we have time for in this episode, so if you have lots of questions, as I did, then I really do urge you to read our report. It goes into depth on the topics we've covered today, the growth rates expected in your region, and a whole host of other macroeconomic insights. The full report can be found in the description of this podcast, or alternatively, you can find it on the internet, but searching, 'PwC UK economic outlook for November 2023.' Thank you both so much for joining me today. I've loved having you on the podcast, and if our listeners have enjoyed this podcast, then please make sure you subscribe on iTunes and Spotify. We have some really exciting podcasts coming up on the different projects that our team have been working on. Thank you for listening and have a lovely day.

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