Question 2:

The Global Economy

Extract 4: UK economy slows more than expected as inflation hits spending

The UK economy slowed even more sharply than first thought in the opening months of this
year as rising prices in the wake of the Brexit vote took their toll on consumer spending.

The Office for National Statistics said GDP grew just 0.2% in the first quarter of 2017, a
marked change of pace from the 0.7% growth in the final three months of 2016. Statisticians
had previously estimated the economy grew 0.3% in the first quarter.

There was no growth at all in the first quarter in GDP per head, which is generally seen as a
better guide to prosperity than mere GDP.

The figures provide the latest evidence that the early resilience to the EU referendum result
last June is now wearing off as higher inflation puts consumers under pressure. Prices have
been picking up pace since the Brexit vote because it sent the pound sharply lower and has
raised the cost of imports to the UK. That higher inflation has hit household budgets and
dented the key driver of UK growth, consumer spending.

The Bank said earlier this month that it expected GDP growth would edge up marginally to
1.9% for 2017 as a whole from growth of 1.8% in 2016. But it warned that living standards
would fall this year because inflation would be higher than pay growth.

Kallum Pickering, economist at the bank Berenberg was among those commentators
predicting growth would pick up again after the first-quarter lull.

Should we be concerned? No, the dip is probably temporary, he said.

Ian Stewart, chief economist at the consultancy Deloitte was also optimistic the economy
could continue expanding despite the pressure on household incomes.

High inflation is hitting consumers, but a weak pound and a recovering global economy are
helping businesses. UK growth is likely to tilt away from the consumer towards exports,
manufacturing and investment this year. This should keep the UK economy growing at a
similar rate to last year, he said.

Source: Guardian, 26 May 2017

Extract 5: Singapore economy to remain sluggish in 2017

Singapore's small, trade-dependent economy is going through a protracted cyclical downturn

and is not expected to pick up significantly next year, the country's central bank said. The
global economy is likely to expand at a "steady but mediocre pace" in 2017 and, on the back
of this, demand remains uneven across Singapore's key export markets.

This means trade-related sectors will continue to struggle, the Monetary Authority of
Singapore (MAS) said in its twice-yearly macroeconomic review released yesterday. This
has been further compounded by Singapore's exposure to some of the hardest-hit sectors,
such as oil and gas, semiconductors and transport services.
The weak trade outlook means that growth in 2017 will depend largely on its domestically-
oriented industries and the services sector, the MAS added.

Government spending on information and communications technology initiatives, a stream of

public infrastructure projects and robust demand for essential services, such as healthcare,
should also provide some support to the economy.

Government forecasters expect economic growth to come in at the lower end of 1 to 2 per
cent this year, and only slightly higher in 2017 due to elevated global economic uncertainty.
The central bank added that business sentiment in Singapore remains poor, especially
among small and medium-sized enterprises.

Risks remain in the economies of major trading partners such as China and the euro zone,
and while the United States economy is showing signs of improvement, it will take time for
this to translate into real demand for Singapore exports, Mr Seah added.

This means that the slowdown is likely to be long-drawn, making the health of the labour
market a key concern for policymakers.

"In terms of monetary policy we have already done what needs to be done. The focus should
shift towards the fiscal response," he noted.

The upcoming 2017 Budget is expected to "provide more support to companies to mitigate
further retrenchments, and support retrenched workers", added Mr Seah.

Source: The Straits Times, Oct 2016

Figure 2: Singapore growth vs World Growth vs GDP growth (%)

Source: World Integrated Trade Solution

Figure 3: Illustration of the circular flow of income

Source: tutor2u.net

Questions:

(a) (i) Explain why GDP per head is generally seen as a better guide to prosperity than
mere GDP (Extract 4)
[2]

(ii) Describe the relationship between Singapore GDP growth and World Growth
[1]

(b) Using an appropriate diagram, explain the presence of inflation in extract 4.

[2]

(c) Discuss whether UK should be concerned about its higher inflation.

[5]

(d) With reference to the Figure 3 assess the relative importance of the various
components of the circular flow of income in driving economic growth in UK and
Singapore.
[8]

(e) In terms of monetary policy we have already done what needs to be done. The
focus should shift towards the fiscal response - Extract 5

(i) Describe and explain what MAS has likely done to its currency.
[2]
(ii) Discuss whether the emphasis towards fiscal response will be able to tackle
the challenges faced by the Singapore economy.
[10]
[Total 30
marks]