Quarterly Bulletin
Performance of the UK Economy Articles

Durables and the recent strength of household spending (69k)
(by Robert Hamilton of the Bank's Structural Economic Analysis Division and Beverley Morris of the Bank's Inflation Report and Bulletin Division). Household consumption in the United Kingdom grew by about 4% during 2001. This was largely accounted for by unusually strong spending on durable goods—growth in spending on other goods and services slowed to around a six-year low. This article discusses why spending on durable goods needs to be analysed differently from that on other types of goods, and provides some possible explanations for its recent unusual strength. In addition, an alternative estimate of consumption is presented that replaces the expenditure on durable goods with the flow of services derived from them. Over the past year, this alternative measure has grown less strongly than the standard consumer spending series.

Working time in the United Kingdom: evidence from the Labour Force Survey (126k)
(by Fergal Shortall of the Bank's Structural Economic Analysis Division). This article examines the evolution of working time from a macroeconomic perspective using data from the Labour Force Survey. Average hours worked are still falling, after abstracting from the effects of overtime. This can largely be accounted for by the rise in the proportion of part-time workers. Above and beyond the full-time/part-time split, changes in employment composition by industry, gender, occupation, employment status and age explain little of the downward trend in average hours worked. Overtime has shifted from being paid towards being unpaid. Changes in the occupational mix can account for some of this shift. The article shows that paid overtime is the only component of hours with strong cyclicality. All other components lag GDP and in some cases lag employment too. This is consistent with aggregate changes in hours being the result of compositional effects, rather than employees in the same job changing their hours.

Why are UK imports so cyclical? (72k)
(by Valerie Herzberg, Maria Sebastia-Barriel and Simon Whitaker of the Bank's Structural Economic Analysis Division). The recent economic slowdown in the United Kingdom has been characterised by declines in business investment and exports. The impact on domestic output has been alleviated by robust household spending, but also by a sharp decline in imports of goods and services. This article shows that these divergent trends in the components of demand, and differences in their import content, can help explain the weakness in imports during 2001. More generally, close attention to the relative contribution of the components to aggregate demand can help explain fluctuations in imports. The analysis has been aided by the recent publication of updated information from the ONS on the import content of different expenditure categories.

Can differences in industrial structure explain divergences in regional economic growth? (74k)
(by Beverley Morris of the Bank's Conjunctural Assessment and Projections Division). The Bank of England has a responsibility to monitor regional and sectoral information for the purposes of formulating monetary policy. Examining the differences in economic activity between the regions can improve understanding of the nature of economic cycles, and of the transmission of policy changes through the national economy.

During the early to mid-1990s, the pace of economic growth in the South was broadly comparable with that in the rest of the United Kingdom. During 1996-98, however, the pace of activity in the South strengthened considerably relative to the rest of the country. This article investigates one possible explanation for divergences in growth between the two regions—namely differences in the relative importance of the manufacturing and service sectors. The results suggest that such differences in industrial structure do not account for the majority of the regional divergences in growth. Rather, it appears that they are explained mostly by a pick-up in population growth and stronger service sector activity in the South relative to that in the rest of the country over the period.

Public sector debt: end March 1999 (116k)
This article continues the annual series in the Quarterly Bulletin analysing the debt position of the UK public sector. It looks at market and statistical developments in the financial year to end March 1999, and examines some of the domestic and European issues that have influenced these measures. It also analyses the composition and distribution of the national debt.

• Public sector net debt fell by £3.7 billion to £349 billion, at nominal value, during the financial year to end March 1999. This was the first annual reduction since 1989/90 At end March 1999 public sector net debt stood at 40.6% of GDP, the lowest end-March figure since 1994, and 2 percentage points lower than at end March 1998.
• General government gross debt—the 'Maastricht' measure—also fell during the year, to £399 billion at end March. At 47.4% of GDP, this is comfortably below the 60% reference value in the Maastricht Treaty. The general government had a financial surplus of 0.9% of GDP in 1998/99, well within the Maastricht reference value, which allows a deficit of up to 3% of GDP.
• All data presented in this article reflect the transition to the latest international statistical standards, the European System of Accounts (ESA95). This is consistent with the UK National Accounts, published by the Office for National Statistics. However, as before, government debt figures are still presented on a nominal, rather than a market, valuation. The box on pages 356­57 gives details of the changes and shows the impact on the measurement of the public sector debt position.
  

The external balance sheet of the United Kingdom: recent developments (83k)
This article summarises the development of the international investment position of the United Kingdom between 1988 and the first half of 1999. It continues an annual series begun in 1985.

The article describes how financial flows and changing asset values affect the United Kingdom's external balance sheet. It relates investment income flows and capital gains to stocks of assets and liabilities, and compares the United Kingdom's international investment position with those of other major economies. A box gives details of the UK participation in the IMF-sponsored coordinated portfolio investment survey.

The Bank's use of survey data (66k)
(by Erik Britton of the Bank's Structural Economic Analysis Division, and Joanne Cutler and Andrew Wardlow of the Bank's Conjunctural Assessment and Projections Division). The Bank of England's Monetary Policy Committee (MPC) is charged with the task of achieving the Government's inflation target. A central part of this task involves interpreting information about the current state of the UK economy, and assessing its medium-term prospects. Surveys form part of the broad range of information available to the MPC, along with official statistics, data from financial markets, and the information provided by the Bank's regional Agencies. In this sense, surveys complement other sources of information. But importantly, the forward-looking nature of many survey responses means that they often provide information that is additional to official and other sources of data.

This article outlines how Bank staff use state-of-trade type surveys: as a timely indicator of forthcoming official data; as an independent cross-check on official data and other information; as forward-looking information on the economy, particularly up to the short-term horizon; and to provide additional information to explain economic behaviour. It discusses a variety of approaches the Bank uses to assess survey information, and to identify news about the economy. The article outlines how simple observation can be useful, and explains how qualitative survey information is transformed into quantitative estimates and how incremental news might be extracted from surveys. The approaches described illustrate how surveys help the MPC to interpret economic conditions, and resolve puzzles and uncertainties about the economic outlook.

Surveys complement official and other information; they are not a substitute for it. Many surveys are based on smaller, and less representative, samples than the official statistics. So they may be subject to bias, or to a higher degree of measurement error than the official data. The MPC has to form a judgment based on all available information, of which survey evidence is one valuable source. The techniques described reflect the Bank's aim to use this evidence as systematically as possible to inform the MPC's policy decisions.

The financing of small firms in the United Kingdom
(66k)
(by Melanie Lund and Jane Wright of the Bank's Domestic Finance Division). Economists have often argued that imperfections in the financing of small firms arise because of information asymmetries: the small business owner generally has much better information than the bank on his firm's performance. This is fundamentally different from the situation with large companies. This article examines the developments over the past decade in the financing of small businesses in the United Kingdom. It notes the sector's reduced dependence on external funds and increased use of a range of financing products. The article also assesses the current risks faced by the small firms sector and its providers of finance, suggesting that this sector is now more resilient to a downturn in the economy than in the early 1990s, thus reducing the likelihood of a recurrence of the high levels of business failures experienced in that recession.

The article looks at the economic theory on the provision of finance in the small firms sector, indicating how market failures in the financing of small firms could arise from information asymmetries, leading to problems of adverse selection and moral hazard. Empirical evidence provides little conclusive support for the existence of such imperfections, but the theory highlights banks' problems in undertaking risk assessment of these firms.

The article examines how the patterns of small firms financing have changed over the past decade, making it less likely that the high levels of business failures and bank losses experienced in the previous recession will recur. It was noted that small businesses are now more appropriately financed than in the early 1990s. They are more dependent on internal sources of finance - with many of the smallest businesses being net creditors to the banking sector - and businesses that do require external finance now use a wider range of finance products. Traditional bank finance does, however, remain the most important source of external finance for small businesses.

Market competition in the provision of finance to small firms was identified as a means of facilitating and maintaining the momentum for improvement. The providers of bank finance to small businesses operate in a concentrated industry, but the degree of competition in this market is increasing, because of technological changes and new entrants.

One area where improvement in the provision of finance is less evident is in the supply of risk capital for technology-based small firms. Problems appear to arise at the start-up stage, where supplies of 'seedcorn' and early-stage equity finance are limited. Many formal venture capital firms tend not to invest in small enough amounts for these companies, and the informal venture capital market (business angels) is still underdeveloped compared with that in the United States.