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Economy of the UK

2016.09.23

Economy of the United Kingdom

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Economy_of_the_United_Kingdom

 

Economy of United Kingdom

The City of London is the financial hub of the UK.

Currency

Pound sterling (GBP)

Fiscal year

6 April – 5 April

Trade organisations

European Union (preparing to exit), OECD, AIIB and World Trade Organization

Statistics

GDP

$2.849 trillion (nominal; 2015)[1]
$2.679 trillion (PPP; 2015)[1]

GDP rank

5th (Nominal) / 9th (PPP)

GDP growth

+0.6% Q2 2016 ONS[2]
+2.2% for year 2016[2]

GDP per capita

$43,770 (nominal; 13th; 2015)[1]
$41,158 (PPP; 27th; 2015)[1]

GDP by sector

Agriculture: 0.6%
Construction: 6.4%
Production: 14.6%
Services: 78.4% (2014 est.)

Inflation (CPI)

0.3% (April 2016)[3]
RPI: 1.2% (April 2016)

Base borrowing rate

0.25%

Population below poverty line

15% (2014 est.)[4]

Gini coefficient

0.32 (2014)[5]

Labour force

31.75 million (June 2016) (Employment rate 74.5%, record high.)[6]

Labour force by occupation

Agriculture: 1.5%
Industry: 18.8%
Services: 79.7% (2011 est.)[7]

Unemployment

4.9%, 1.64 million (June 2016)[6]

Average gross salary

£2,480 / €3,373 / $3,814 monthly (2014) (8th highest)

Average net salary

£1,730 / €2,064 / $2,793 monthly (2011) (6th highest)

Main industries

List[show]

Ease-of-doing-business rank

6th[8]

External

Exports

$442 billion (11th; 2015 est.)[9]

Export goods

List[show]

Main export partners

2015:[10]
 United States 14.6%
 Germany 10.1%
  Switzerland 7%
 China 6%
 France 5.9%
 Netherlands 5.8%
 Ireland 5.5%

Imports

$617 billion (6th; 2015 est.)[11]

Import goods

List[show]

Main import partners

2015:[12]
 Germany 14.8%
 China 9.8%
 United States 9.2%
 Netherlands 7.5%
 France 5.8%
 Belgium 5%

FDI stock

Inward: $1.321 trillion (2012)(3rd)[13]
Outward: $1.884 trillion (2013)(2nd)[14]

Current account

−£96.2 billion (2015)[15]

Gross external debt

$9,591 billion (2014) (2nd)

Net international investment position

−£182 billion / 9.1% GDP (2012)

Public finances

Public debt

£1.58 trillion (January 2016) (82.8% GDP)[16]

Budget deficit

£56 billion (2016–2017 FY)[17]

Revenues

£716 billion (2015–2016 FY)
$1.030 trillion (2016 est. CIA-WFB)[17]

Expenses

£772 billion (2016–2017 FY)
$1.111 trillion (2016 est. CIA-WFB)[17]

Economic aid

0.7%, $19.0 billion (2015) (donor)

Credit rating

Standard & Poor's:[18]
AA (domestic)
AA (foreign)
AA (T&C Assessment)
Outlook: Negative[19]
Moody's:[20]
Aa1
Outlook: Negative
Fitch:
AA[21]
Outlook: NEGATIVE

Foreign reserves

$159.34 billion (1 January 2016, IMF) [22]

The economy of the United Kingdom is the fifth-largest national economy in the world measured by nominal gross domestic product (GDP) and ninth-largest in the world measured by purchasing power parity (PPP), comprising 4% of world GDP. It is the second-largest in the European Union by both metrics.[23] The UK has been the fastest growing economy in the Group of Seven (G7) for four consecutive years, with 2.2% year-on-year growth in the second quarter (Q2) of 2016.

In 2015 the UK was the ninth-largest exporter in the world and the sixth-largest importer, and had the second-largest stock of inward foreign direct investment and the second-largest stock of outward foreign direct investment.[24][25] The UK is one of the world's most globalised economies,[26] and is composed of (in descending order of size) the economies of England, Scotland, Wales and Northern Ireland.

The service sector dominates the UK economy, contributing around 78% of GDP; the financial services industry is particularly important, and London is the world's largest financial centre.[27] Britain's aerospace industry is the second- or third-largest national aerospace industry depending on the method of measurement.[28][29] Its pharmaceutical industry plays an important role in the economy and the UK has the third-highest share of global pharmaceutical research and development.[30][31] The automotive industry is also a major employer and exporter. The British economy is boosted by North Sea oil and gas production; its reserves were estimated at 2.9 billion barrels in 2015.[32] There are significant regional variations in prosperity, with South East England and southern Scotland being the richest areas per capita. The size of London's economy makes it the largest city by GDP in Europe.[33]

In the 18th century the UK was the first country to industrialise,[34][35][36] and during the 19th century it had a dominant role in the global economy.[37] From the late 19th century the Second Industrial Revolution was also taking place rapidly in the United States and the German Empire; this presented an increasing economic challenge for the UK. The costs of fighting World War I and World War II further weakened the UK's relative position. In the 21st century, however, it remains a great power with global strengths and an influential role in the world economy.[38][39][40][41][42][43]

In 2008, the UK entered the Great Recession during the financial crisis of 2007–08, its first for nearly two decades and its longest and deepest recession since World War II. Since 2013, the UK has been in a nascent economic recovery and is firmly in expansion territory. The economy is now (Q1 2016) 7.7% bigger than its pre-crisis peak and 14.8% bigger than its lowest point in 2009.[44]

Government involvement in the British economy is primarily exercised by Her Majesty's Treasury, headed by the Chancellor of the Exchequer, and the Department for Business, Innovation and Skills. Since 1979 management of the economy has followed a broadly laissez-faire approach.[45][46][47][48][49][50] The Bank of England is the UK's central bank and its Monetary Policy Committee is responsible for setting interest rates.

The currency of the UK is the pound sterling, which is also the world's third-largest reserve currency after the United States dollar and the euro,[51] and also one of the ten most-valued currencies in the world.

The UK is a member of the Commonwealth of Nations, the European Union (although it has voted to leave), the G7, the G8, the G20, the International Monetary Fund, the Organisation for Economic Co-operation and Development, the World Bank, the World Trade Organisation, Asian Infrastructure Investment Bank and the United Nations.

History

Main article: Economic history of the United Kingdom

1945 to 1979

Following the end of the Second World War, the United Kingdom enjoyed a long period without a major recession (from 1945 to 1973) and a rapid growth in prosperity in the 1950s and 1960s, with unemployment staying low and not exceeding 500,000 until the second half of the 1960s. According to the OECD, the annual rate of growth (percentage change) between 1960 and 1973 averaged 2.9%, although this figure was far behind the rates of other European countries such as France, West Germany and Italy.[52]

However, following the 1973 oil crisis and the 1973–1974 stock market crash, the British economy fell into recession and the government of Edward Heath was ousted by the Labour Party under Harold Wilson, which had previously governed from 1964 to 1970. Wilson formed a minority government on 4 March 1974 after the general election on 28 February ended in a hung parliament. Wilson subsequently secured a three-seat majority in a second election in October that year.

The UK recorded weaker growth than many other European nations in the 1970s; even after the early 1970s recession ended, the economy was still blighted by rising unemployment and double-digit inflation, which exceeded 20% more than once after 1973 and was rarely below 10% after this date.

In 1976, the UK was forced to request a loan of £2.3 billion from the International Monetary Fund. The then Chancellor of the Exchequer Denis Healey was required to implement public spending cuts and other economic reforms in order to secure the loan, and for a while the British economy improved, with growth of 4.3 per cent in early 1979. However, following the Winter of Discontent, when the UK was hit by numerous public sector strikes, the government of James Callaghan lost a vote of no confidence in March 1979. This triggered the May 1979 general election which resulted in Margaret Thatcher's Conservative Party forming a new government.

1979 to 1997

A new period of neo-liberal economics began in 1979 with the election of Margaret Thatcher who won the general election on 3 May that year to return the Conservative Party to government after five years of Labour government. During the 1980s, most state-owned industries and utilities were privatised, taxes cut, union reforms passed and markets deregulated. GDP fell by 5.9% initially,[53] but growth subsequently returned and rose to 5% at its peak in 1988, one of the highest rates of any country in Europe.[54][55]

Thatcher's modernisation of the economy was far from trouble-free; her battle with inflation, which in 1980 had risen to 21.9%, resulted in a substantial increase in unemployment from 5.3% in 1979 to over 10.4% by the start of 1982, peaking at nearly 11.9% in 1984 – a level not seen in Britain since the Great Depression.[56] The rise in unemployment coincided with the global early 1980s recession, after which UK GDP did not reach its pre-recession rate until 1983. In spite of this, Thatcher was re-elected in June 1983 with a landslide majority. Inflation had fallen to 3.7%, while interest rates were relatively high at 9.56%.[56]

The increase in unemployment was largely due to the government's economic policy, which resulted in the closure of outdated factories and coal pits which had not been economically viable for many years. This process continued for most of the 1980s, with newer industries and the service sector enjoying significant growth. Many jobs were also lost as manufacturing became more efficient and fewer people were required to work in the sector. Unemployment had fallen below 3 million by the time of Thatcher's third successive election victory in June 1987 and by the end of 1989 it was down to 1.6 million.[57]

Britain's economy slid into another global recession in late 1990, and this caused the economy to shrink by a total of 6% from peak to trough,[58] and unemployment to increase from around 6.9% in the spring of 1990 to nearly 10.7% by the end of 1993. However, inflation dropped from 10.9% in 1990 to 1.3% three years later.[56] The subsequent economic recovery was extremely strong, and unlike after the early 1980s recession, the recovery saw a rapid and substantial fall in unemployment, which was down to 7.2% by 1997,[56] although the popularity of the Conservative government failed to improve with the economic upturn.

The government won a fourth successive election in 1992 under John Major, who had succeeded Thatcher in November 1990, but soon afterwards came Black Wednesday, which damaged the Conservative government's reputation for economic competence, and from that stage onwards, the Labour Party was ascendant in the opinion polls, particularly in the immediate aftermath of Tony Blair's election as party leader in July 1994 following the sudden death of his predecessor John Smith.

In May 1997, Labour won the general election by a landslide after 18 years of Conservative government, and inherited a strong economy with low inflation, falling unemployment and a current account surplus.

1997 to 2008

The Labour Party, led by Tony Blair since the death of his predecessor John Smith three years earlier, returned to power in May 1997 after 18 years in opposition.[59] During Blair's 10 years in office there were 40 successive quarters of economic growth, lasting until the second quarter of 2008, helped by Blair's decision to keep taxes relatively low and abandon traditional Labour policies including public ownership of industries and utilities. The previous 15 years had seen one of the highest economic growth rates of major developed economies during that time and certainly the strongest of any European nation.[60] GDP growth had briefly reached 4% per year in the early 1990s, gently declining thereafter. Peak growth was relatively anaemic compared to prior decades, such as the 6.5% pa peak in the early 1970s, although growth was smoother and more consistent.[55] Annual growth rates averaged 2.68% between 1992 and 2007 according to the IMF,[54] with the finance sector accounting for a greater part than previously.

This extended period of growth ended in 2008 when the United Kingdom suddenly entered a recession – its first for nearly two decades – brought about by the global financial crisis. Beginning with the collapse of Northern Rock, which was taken into public ownership in February 2008, other banks had to be partly nationalised. The Royal Bank of Scotland Group, which at its peak was the fifth-largest in the world by market capitalisation, was effectively nationalised on 13 October 2008. By mid-2009, HM Treasury had a 70.33% controlling shareholding in RBS, and a 43% shareholding, through UK Financial Investments Limited, in Lloyds Banking Group. The recession saw unemployment rise from just over 1.6 million in January 2008[61] to nearly 2.5 million by October 2009.[62]

The UK economy had been one of the strongest economies in terms of inflation, interest rates and unemployment, all of which remained relatively low until the 2008–09 recession. Unemployment has since reached a peak of just under 2.5 million (7.8%), the highest level since the early 1990s, although still far lower than some other European nations. However, interest rates have reduced to 0.5% pa. During August 2008 the IMF warned that the UK economic outlook had worsened due to a twin shock: financial turmoil and rising commodity prices.[63] Both developments harm the UK more than most developed countries, as the UK obtains revenue from exporting financial services while recording deficits in finished goods and commodities, including food. In 2007, the UK had the world's third largest current account deficit, due mainly to a large deficit in manufactured goods. During May 2008, the IMF advised the UK government to broaden the scope of fiscal policy to promote external balance.[64] The UK's "labour productivity per hour worked" is currently on a par with the average for the "old" EU (15 countries).[65] In 2010, the United Kingdom ranked 26th on the Human Development Index.

2008 to 2015

Business investment (blue) and profits (red), both as proportion of gross domestic product, 1997–2012. (Compare to US data) In general, the level of economic output is set by business expenditure.[66]

The UK entered the Great Recession in Q2 of 2008 and exited it in Q4 of 2009, according to the Office for National Statistics (ONS). The subsequently revised ONS figures show that the UK suffered six consecutive quarters of negative growth, shrinking by 6.03% from peak to trough, making it the longest recession since records began, and the deepest recession since World War II.[58][67]

Support for the Labour government slumped during the recession, and the general election of 2010 resulted in a coalition government being formed by the Conservatives and the Liberal Democrats. In order to ease the large budget deficit which had accumulated due to the recession, the coalition made deep spending cuts. Within three years, this had led to public sector job losses well into six figures, but the private sector enjoyed strong jobs growth, and by October 2013 unemployment was below 2.5 million for the first time in four years.

In Q1 of 2012, the UK economy was thought to have entered a double-dip recession by posting two consecutive quarters of negative growth.[68] However, figures revised by the ONS[69] showed that the economy stagnated in Q1, with growth at 0.0%, thereby not meeting the official requirement of two consecutive quarters of negative growth for a recession. Following economic stagnation during 2013, by the end of 2014, UK growth had become the fastest in the G7 and in Europe, and employment was at its highest since records began.[70][71]

In May 2013, the Office for National Statistics revealed that over the six-year period between 2005 and 2011, the UK dropped from 5th place to 12th in terms of household income globally. The drop was partially attributed to the devaluation of sterling over this time frame. However, the report also concluded that, during this period, inflation was steady, the UK labour market had been more resilient compared to other recessions, and household spending and wealth in the UK was relatively strong in comparison with other OECD countries.[72]

In stark contrast to the early 2000s, the UK had one of the least productive workforces among the Group of Seven (G7), Ireland, Spain, Belgium, and the Netherlands in 2014. Of these countries, only Japan had lower economic output per hour worked. Output in the UK was 18% below the average for the rest of the G7.[73]

The Office for Budget Responsibility forecast in 2014 that individuals would have to borrow £360 billion (net, and excluding mortgages) over the next five years if the economy was to grow at the rate expected by the Government, taking unsecured debt as a proportion of household income to a record high of 55% by 2020.[74] Unsecured household debt rose by 24% between 2011 and 2015, adding to widespread questions over the sustainability of the economic recovery.[75][76][77][78] The Bank of England insisted there was no cause for alarm,[79] despite having said two years earlier that the economic recovery was "neither balanced nor sustainable".[80]

Between 2009 and 2015, the UK's current account deficit rose from 3% to a record high of 5.2% of GDP (£96.2bn), the highest by GDP in the developed world.[81][82][83]

2016

Following the UK's decision in June 2016 to leave the European Union, commonly known as Brexit, the pound fell to a 31-year low against the United States dollar,[84] and consumer confidence fell at the quickest rate since 1994 on concerns that a weaker pound may lead to an increase in the prices of imported goods. During the week after the vote, high street retail sales fell by 8.1%, resulting in the worst June performance for 10 years.[85] A month after the vote, the Purchasing Managers' Index suggested that Brexit had caused a "dramatic deterioration" in the economy, with output and orders falling by the most since the Great Recession.[86]