National Institute Economic Review

World overview: Forecast summary

  • Increases in tariffs and uncertainty about both future tariff impositions and their potential implications for production activity have continued to have negative effects on global trade and industrial production.
  • Several central banks, facing below target inflation, have loosened monetary policy to mitigate the effects of slower economic growth and a deterioration in the prospects for trade. While we expect that further monetary loosening will occur, fiscal policy could be more effective in boosting demand.

Prospects for the UK economy: Forecast Summary

  • The economic outlook is clouded by significant economic and political uncertainty and depends critically on the United Kingdom’s trading relationships after Brexit. Domestic economic weakness is further amplified by slowing global demand.
  • We would not expect economic activity to be boosted by the approval of the government’s proposed Brexit deal. We estimate that, in the long run, the economy would be 3½ per cent smaller with the deal compared to continued EU membership.

Value chains and domestic competitiveness

With international trade increasingly undertaken within vertically fragmented supply chains, this paper considers the impact of changes in trade costs on domestic output. In the context of the UK’s exit from the EU we show that the negative impact on UK output will depend on changes in both domestic and export competitiveness. Since for many firms the majority of their sales are to the domestic market, the domestic competitiveness impact may be quantitatively more important.

Brexit and impact routes through global value chains

We analyse the trade routes between the UK and EU countries. Our results show that the relative importance of the UK as a trading partner in the EU has slightly decreased. We further decompose the total value added into components that quantify the value added that is generated through direct trade with the UK and the indirect trade that is channelled through third countries. Close to one third of the total value added is generated through indirect trade and two thirds through direct trade.

The EU’s shrinking share in global manufacturing: a value chain decomposition analysis

The EU´s falling share in global manufacturing has fuelled concerns about an overall loss of EU competitiveness, in particular vis-à-vis China. We analyse the empirical evidence underlying these concerns by applying a newly developed decomposition technique to global input-output data spanning the years 2000 to 2014.

On the relevance of global value chains and the intra-European division of labour

This article first introduces the concept, the rationale, the causes and the genesis of global value chains from a worldwide perspective in the form of a brief overview. In the second empirical section, a closer look is taken at the intermediate trade integration in the EU. In particular, the employment effects of the intermediate trade connections for each EU member state and for selected sectors are highlighted. In the concluding section, it is explained why global value chains are particularly susceptible to rising protectionism.

Introduction: Global value chains and economic dislocations

The world is undergoing an unprecedented shock as a result of the Covid-19 pandemic and the resulting lockdowns in nearly all economies. As major world economies are being put on hold, millions of jobs and incomes are being lost, which has created an imperative for economic policy actions. Government healthcare responses have so far been aimed at containment with measures aimed at slowing the rate of infection and limiting social and work-related interactions, accompanied by fiscal and monetary policies to support businesses and protect people’s incomes.

Prospects for the World Economy

  • The effects of the coronavirus pandemic and the control measures taken to combat its spread have changed the short-term global economic outlook in an unprecedented manner from that forecast just three months ago.
  • In these highly uncertain times, we now expect widespread falls in GDP, particularly in the first half of this year, as the lockdowns pause many forms of economic activity. Our outlook scenario assumes that the measures to control movement and social contact will be eased gradually, permitting a wider range of economic activities to be undertaken as 2021 dawns.

Prospects for the UK Economy

  • Measures to limit the spread of Covid-19 are causing a severe contraction in economic activity of uncertain magnitude. In our main-case scenario, GDP falls by 7 per cent in 2020 and public sector borrowing rises above £200 billion in 2020–21, over £150 billion more than in the OBR's forecast at budget time.
  • The government’s announced measures to limit the long-term economic effect of Covid-19 are estimated to add about £75 billion to the deficit in our main-case scenario. It is estimated that without these measures GDP would have fallen by a further 2 per cent.