Economy of the United Kingdom

2008/9 Schools Wikipedia Selection. Related subjects: Economics

Economy of the United Kingdom
Currency 1 Pound Sterling (£) = 100 pence (p)
Fiscal year 6 April – 5 April
Trade organizations EU, BCN, WTO and OECD
Statistics
GDP ( PPP) ranking (2006) 6th
GDP (PPP) per capita ranking (2006) 11th
GDP (PPP) (2006) $2.1 trillion
GDP growth rate (2007) 3.1%
GDP (PPP) per capita (2006) $35,000
GDP (PPP) per square kilometre (2006) $8,577,750
GDP per barrel (2005) $3,400
GDP by sector (2006) agriculture (1%), industry (26%), services (73%)
Inflation rate on CPI (2006) 2.3% (2006)
Poverty rate (2002) 17%
Labour force (2006) 31m
Labour force by occupation (2006) services (81%), industry (18%), agriculture (1%)
Unemployment rate (2007) 5.4%
Main industries machine tools, industrial equipment, scientific equipment, shipbuilding, aircrafts, motor vehicles and parts, electronic machinery, computers, processed metals, chemical products, coal mining, oil production, paper, food processing, textiles, clothing, and other consumer goods
Trading Partners
Exports (2006) $470 billion
Main partners (2004) USA 15%, Germany 11%, France 10%, Ireland 7%,Netherlands 6%, Belgium 6%, Spain 5%, Italy 4%
Imports (2006) $600 billion
Main partners (2004) Germany 14%, USA 9%, France 8%, Netherlands 7%, Belgium 6%, Italy 5%, the People's Republic of China 4%, Ireland 4%
Public finances
Public debt / public sector net cash requirement (PSNCR) / public sector borrowing requirement (PSBR) (2006) $39 billion
Public debt (2007 est) $864 billion (36% of GDP) (2006)
Revenues (2006) $0.97 trillion
Expenses (2006) $1.04 trillion
Economic aid donor (2006) $8 billion

The United Kingdom has the fifth largest economy in the world in terms of market exchange rates and the sixth largest by purchasing power parity (PPP). It has the second largest economy in Europe after Germany. The United Kingdom is one of the world's most globalised countries, ranking fourth in one recent survey. The capital, London (see Economy of London), is one of the three major financial centres of the world, along with New York City and Tokyo.

The British economy is often described as an ' Anglo-Saxon economy'. It is made up (in descending order of size) of the economies of England, Scotland, Wales and Northern Ireland. The UK has been a member state of the European Union since 1973.

In the 1980s, under the Government of Margaret Thatcher, most state-owned enterprises in the industrial and service sectors, which since the 1940s had been nationalised, were privatised. The British Government now owns very few industries or businesses - Royal Mail is one example.

The British economy has in recent years seen the longest period of sustained economic growth for more than 150 years, having grown in every quarter since 1992. It is one of the strongest EU economies in terms of inflation, interest rates and unemployment, all of which remain relatively low. Consequently, the United Kingdom, according to the International Monetary Fund, now has the seventh highest level of GDP per capita in the European Union in terms of purchasing power parity, after Luxembourg, Ireland, the Netherlands, Denmark, Austria and Finland. However, in common with the economies of other English-speaking countries, it has higher levels of income inequality than many European countries. The UK also has the world's third largest current account deficit, despite significant oil revenues.

Although the UK's "labour productivity per person employed" has been progressing well over the last two decades and has overtaken productivity in Germany, it lags around 20% behind France's level, where workers have a 35-hour working week. The UK's "labour productivity per hour worked" is currently on a par with the average for the "old" EU (15 countries).

The United Kingdom currently ranks 16th on the Human Development Index.

Recent economic growth

The most recent official figure, from the ONS, for annual UK GDP growth is 3.3% (2006 Q4 - 2007 Q3).

According to official Treasury estimates, British GDP grew by 2¾% in 2006 and is expected to grow by 3% in 2007. Growth is expected to slow slightly in 2008 to between 2% and 2½%. The forecast for 2009 and 2010 is for the economy to return to trend growth of between 2½% and 3%.

In October 2007, the IMF forecast British GDP to grow by 3.1% in 2007 and 2.3% in 2008.

Macroeconomic trend

This is a chart of trend of gross domestic product of United Kingdom at market prices estimated by the International Monetary Fund with figures in millions of British Pounds Sterling.

Year Gross domestic product US dollar exchange Inflation index (2000=100)
1925 4,466 £0.21
1930 4,572 £0.21
1935 4,676 £0.20
1940 7,117 £0.26
1945 9,816 £0.25
1950 13,162 £0.36
1955 19,264 £0.36
1960 25,678 £0.36
1965 35,781 £0.36
1970 51,515 £0.42
1975 105,773 £0.45
1980 230,695 £0.42 43
1985 354,952 £0.77 60
1990 557,300 £0.56 76
1995 718,383 £0.63 92
2000 953,576 £0.65 100
2005 1,209,334 £0.54 107

For purchasing power parity comparisons, the US Dollar is exchanged at £0.66.

Industries

Agriculture, hunting, forestry, and fishing

Agriculture is intensive, highly mechanised, and efficient by European standards, producing about 60% of food needs with less than 2% of the labour force. It contributes around 2% of GDP. Around two-thirds of the production is devoted to livestock, one-third to arable crops. The main crops that are grown are wheat, barley, oats, oilseed rape, maize for animal feeds, potatoes and sugar beet. New crops are also emerging, such as linseed for oil and hemp for fibre production. The main livestock which are raised are cattle, chickens (the UK is the second largest poultry producer in Europe after France) and sheep. Agriculture is subsidised by the European Union's Common Agricultural Policy.

The UK retains a significant, although vastly reduced, fishing industry. Its fleets bring home fish ranging from sole to herring. Kingston upon Hull, Grimsby, Fleetwood, Great Yarmouth, Peterhead, Fraserburgh, and Lowestoft are among the coastal towns that have fishing industries.

The Blue Book 2006 reports that this sector added gross value of £10,323 million to the UK economy in 2004.

Production

UK exports of goods in 2005
UK exports of goods in 2005

Mining and quarrying

The Blue Book 2006 reports that this sector added gross value of £21,876 million to the UK economy in 2004.

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Manufacturing

In 2003, the manufacturing industry accounted for 16% of national output in the UK and for 13% of employment, according to the Office for National Statistics. This is a continuation of the steady decline in the importance of this sector to the British economy since the 1960s, although the sector is still important for overseas trade, accounting for 83% of exports in 2003. The regions with the highest proportion of employees in manufacturing were the East Midlands and West Midlands (at 19 and 18% respectively). London had the lowest at 6%.

Engineering and allied industries comprise the single largest sector, contributing 30.8% of total Gross Value Added in manufacturing in 2003. Within this sector, transport equipment was the largest contributor, with 8 global car manufacturers being present in the UK – BMW (MINI, Rolls-Royce), Ford ( Premier Automotive Group), General Motors ( Vauxhall Motors), Honda, Nissan, Toyota and Volkswagen ( Bentley) with a number of smaller, specialist manufacturers (including Lotus and Morgan) and commercial vehicle manufacturers (including Leyland Trucks, LDV, Alexander Dennis, JCB, Manganese Bronze and Case-New Holland) also being present. A range of companies like Brush Traction manufacture railway locomotives and other related components. Associated with this sector are the aerospace and defence equipment industries. The UK manufactures a broad range of equipment, with the sector being dominated by BAE Systems, which manufactures civil and defence aerospace, land and marine equipment, VT Group, GKN and Rolls Royce who manufacture aerospace engines and power generation systems.

Another important component of Engineering and allied industries is electronics, audio and optical equipment, with the UK having a broad base of domestic firms like Amstrad, Alba, ARM, Dyson, Glen Dimplex, Invensys, and Linn, alongside a number of foreign firms manufacturing a wide range of TV, radio and communications products, scientific and optical instruments, electrical machinery and office machinery and computers.

Chemicals and chemical-based products are another important contributor to the UK's manufacturing base. Within this sector, the pharmaceutical industry is particularly successful, with the world's second and third largest pharmaceutical firms (GlaxoSmithKline and AstraZeneca respectively) being based in the UK and having major research and development and manufacturing facilities there.

Other important sectors of the manufacturing industry include food, drink, tobacco, paper, printing, publishing and textiles. The UK is also home to three of the world's biggest brewing companies: Diageo, Sabmiller and Scottish and Newcastle, other major manufacturing companies such as Unilever, Cadbury Schweppes, Tate & Lyle, British American Tobacco, Imperial Tobacco, EMAP, HarperCollins, Reed Elsevier, Ben Sherman, Burberry, French Connection, Reebok, Pentland Group and Umbro being amongst the largest present.

The Blue Book 2006 reports that this sector added gross value of £147,469 million to the UK economy in 2004.

Electricity, gas and water supply

The Blue Book 2006 reports that this sector added gross value of £17,103 million to the UK economy in 2004. Great Britain is expected to launch the building of new nuclear reactors to replace existing generators and to boost UK's energy reserves.

Construction

The Blue Book 2006 reports that this industry added gross value of £64,747 million to the UK economy in 2004.

Service industries

UK exports of services in 2005
UK exports of services in 2005

The service sector is the dominant sector of the UK economy, a feature normally associated with the economy of a developed country. This means that the Tertiary sector jobs outnumber the Secondary and Primary sector jobs.

Wholesale and retail trade

This sector includes the motor trade, auto repairs, personal and household goods industries. The Blue Book 2006 reports that this sector added gross value of £127,520 million to the UK economy in 2004.

Hotels and restaurants

The Blue Book 2006 reports that this industry added gross value of £33,074 million to the UK economy in 2004.

Transport, storage and communication

The Blue Book 2006 reports that the transport and storage industry added gross value of £49,516 million to the UK economy in 2004 while the communication industry added a gross value of £29,762 million.

Real estate and lettings

The UK property market has been booming for the past seven years and in some areas property has trebled in value over that period. The increase in property prices has a number of causes — sustained economic growth, an expansion in household numbers (including high immigration into certain regions), low interest rates, the growth in property investment, and restriction in the supply of new housing (through planning restrictions).

The UK property market initially peaked in July 2004 and had been static or falling in the capital and some other areas until late 2005. This had led many to start worrying about the possibility of a house price crash, many predicting the end of a major British property bubble. However, the property market strengthened considerably in the first half of 2006, showing particular strength in the capital. This has led many analysts to revise previously negative assessments of the market, with most now predicting continued modest growth in prices in the mid-term.

A house price crash would be very damaging at the present time due to record levels of household debt. There are an increasing numbers of bankruptcies and home repossessions which has worried some economists. This has led many to propose that a correction in house prices would lead much of the country into a lengthy recession. In contrast however, first time buyers who currently have assets not consisting of residential property, but with no way of attaining residential property (in some cases at all, and in others without undertaking unsustainable debt amounting to on average up to 5 times their annual salary), would be better off, and able to enter the property market.

The rapid increase in Buy to Let speculators since 2000 of has created an artificial shortage of homes. The effect has been to price many first time buyers out of the market; they have declined from around 50% of sales to 25%, virtually equal to the expansion in Buy to Let. In London a survey in 2006 found that 67% of new properties were sold to Buy to Let speculators. This and planning restriction requiring builders to use brown field sites, has led to rapid growth in one and two bedroom apartments in cities such as Manchester, Leeds and Nottingham, creating an over supply of this type of property. Banks have relaxed their lending requirements for Buy to Let buyers from 75% of the value the of property in 2003 to 85%, effectively creating a highly gear investment that relies on rising prices. The perception of a housing shortage, despite there being little evidence of any shortage of property to rent (if not buy), means that most UK buyers believe property prices will always rise and any fall only be small and temporary.

This sector includes letting of dwellings and other related business support activities. The Blue Book 2006 reports that the lettings industry added gross value of £83,037 million to the UK economy in 2004 while other real estate and business support activities added gross value of £175,333 million.

Public administration and defence

The Blue Book 2006 reports that this sector added gross value of £55,280 million to the UK economy in 2004.

Education

The Blue Book 2006 reports that this sector added gross value of £61,786 million to the UK economy in 2004.

Health and social work

The Blue Book 2006 reports that this sector added gross value of £75,817 million to the UK economy in 2004.

Other social and personal services

This sector includes value added by private households with employees and extra-territorial organisations. The Blue Book 2006 reports that this sector added gross value of £55,543 million to the UK economy in 2004.

Currency

There is a debate over whether or not the UK should leave the Pound Sterling and join the Euro. The British Prime Minister, Gordon Brown, had pledged to hold a public referendum if membership meets the " five economic tests" he set as Chancellor of the Exchequer.The tests are:

  1. Are business cycles and economic structures compatible with European interest rates on a permanent basis?
  2. If problems emerge, is there sufficient flexibility to deal with them?
  3. What impact would entry into the euro have on the UK's financial services industry?
  4. Would joining the euro create better conditions for firms making long-term decisions to invest in Britain?
  5. Would joining the euro promote higher economic growth, stability and a lasting increase in jobs?

When assessing the tests, Gordon Brown concluded that while the decision was close, the United Kingdom should not yet join the Euro. In particular, he cited fluctuations in house prices as a barrier to immediate entry. The tests will be reassessed in the future. Public opinion polls have shown that a majority of Britons have been opposed to joining the single currency for some considerable time. The main opposition party, the Conservative party, are opposed to membership.

Exchange rates

(average for whole of each year), in USD (US Dollar) and EUR (euro) per GBP; and inversely: GBP per USD and EUR. ( Synthetic Euro XEU before 1999). Caution: these averages conceal wide intra-year spreads. The Coefficient of variation gives an indication of this. It also shows the extent to which the pound tracks the euro or the dollar. Note the effect of Black Wednesday in late 1992 by comparing the averages for 1992 with the averages for 1993.

Year  £/USD  USD/£  C.Var    £/XEU  XEU/£ C.Var
1990 £0.5633 $1.775 £0.7161 1.397
1991 £0.5675 $1.762 £0.7022 1.424
1992 £0.5699 $1.755 £0.7365 1.358
1993 £0.6663 $1.501 £0.7795 1.283
1994 £0.6536 $1.530 £0.7742 1.292
1995 £0.6338 $1.578 £0.8200 1.220
1996 £0.6411 $1.560 £0.8029 1.245
1997 £0.6106 $1.638 £0.6909 1.447
1998 £0.6037 $1.656 £0.6779 1.475
Year  £/USD  USD/£  C.Var    £/EUR  EUR/£ C.Var
1999 £0.6185 $1.617 £0.6595 €1.516
2000 £0.6609 $1.513 £0.6099 €1.640
2001 £0.6943 $1.440 £0.6223 €1.607
2002 £0.6664 $1.501 £0.6289 €1.590
2003 £0.6123 $1.633 £0.6924 €1.444
2004 £0.5461 $1.832 2.26% £0.6787 €1.474 1.92%
2005 £0.5500 $1.820 3.47% £0.6842 €1.462 1.27%
2006 £0.5435 $1.842 3.79% £0.6821 €1.466 1.11%
2007 £0.4999 $2.001 1.97% £0.6848 €1.461 2.40%
Source: OANDA.COM
For consistency and comparison purposes, coefficient of variation is measured on both the "per pound" ratios, although it is conventional to show the forex rates as dollars per pound and pounds per euro.

Regional variation

The strength of the UK economy varies from region to region. GDP, and GDP per capita is highest in London. The following table shows the GDP (2004) per capita of the 12 NUTS:2 areas, with data supplied by Eurostat.

Rank Place GDP per capita
in Euros
1 London, England 44 401
2 South East England 31 300
3 East of England 27 778
4 Scotland 27 669
5 South West England 27 348
6 East Midlands, England 26 863
7 West Midlands, England 25 931
8 North West England 25 396
9 Yorkshire and the Humber, England 25 300
10 Northern Ireland 23 319
11 North East England 22 886
12 Wales 22 567

Two of the richest 10 areas in the European Union are in the United Kingdom. Inner London is number 1 with a GDP per capita of €65 138, and Berkshire, Buckinghamshire and Oxfordshire is number 7 with a GDP per capita of €37 379.

Taxation and borrowing

Taxation in the United Kingdom may involve payments to at least two different levels of government: local government and central government ( HM Revenue & Customs). Local government is financed by grants from central government funds, business rates, council tax and increasingly from fees and charges such as those from on-street parking. Central government revenues are mainly income tax, national insurance contributions, value added tax, corporation tax and fuel duty.

These data show the tax burden (personal and corporate) and national debt as a percentage of GDP. Samples are taken at 10 year intervals (snapshots, but the rolling averages are very close).

Year Tax Debt
1975/6 54% 43%
1985/6 44% 43%
1995/6 43% 38%
2005/6* 46% 40%
(Source: HM Treasury Public Finances Databank)
(* — Projected)

The money Gross Domestic Product (GDP) for the United Kingdom, at market prices, in 2005 was £1,211 billion (or $2,431 billion) according to HM Treasury in March 2006.

GDP % GDP for selected years, 2002 — 2006 est.
Year GDP
in billions of USD PPP
1.9% (2005 est.) GDP Growth
2002 1575.906 2.0
2003 1640.829 2.5
2004 1736.377 3.2
2005 1825.837 1.9
2006 1910.818 2.2
Income distribution
 lowest 10%
 highest 10%
(1999)
2.1%
28.5%
Consumer prices inflation RPI: 3% (2004), CPI: 1.6% (2004)
Labour force composition
 services
 government
 manufacturing/construction
 energy
 agriculture
(2004)
46%
28%
24%
1%
1%
Industrial growth -0.3% (1999)
Electricity production 382.7 TWh (2004)
exports 0.77%
Electricity production composition
 fossil fuel
 hydro
 nuclear
 renewables
 imports
(2004)
74.13%
1.1%
19.26%
3.55%
1.96%
Electricity consumption 337.4 TWh (2003)
Electricity exports 2.959 TWh (2003)
Electricity imports 5.119 TWh (2003)
Agriculture products cereals, oilseed, potatoes, vegetables; cattle, sheep, poultry; fish
Exported commodities manufactured goods, fuels, chemicals; food, beverages (notably Scotch whisky), tobacco
Imported commodities manufactured goods, machinery, fuels; foodstuffs

Other statistics

Average total income of Indians is higher than that of any other ethnic group in the UK at per £30,211 annum. Reasons for such high income among Indians is that one in 20 Hindu men in the UK are doctors compared to 1 in 200 Christian men. Besides, Hindus along with Jews and Buddhists are more likely to do high end jobs ( managerial or professional occupations) whereas Jews are most likely to be selfemployed. Besides, there's a large Indian business community in the UK, including UK's richest man, Lakshmi Mittal. Together, that pulls the average of Indians higher. However, the unemployment rate for Indian men (7 per cent) was similar to those for White British or White Irish men. Whites, in general, have much lower unemployment rate than the non whites.

Bangladeshis and Pakistanis are the least economically affluent with their male unemployment rates being 20% and 16% respectively. One in seven Pakistani men in employment was a taxi driver, cab driver or chauffeur, compared with 1 in 100 White British men. Over a quarter of Bangladeshi men were chefs, cooks or waiters compared with 1 in 100 White British men. .

Rank Average total income
by ethnic group
1 Indian £30,211
2 Chinese £25,964
3 White £24,756
4 National average £24,568
5 Any other ethnic group £23,350
6 Black African £23,109
7 Black Caribbean £22,902
8 Bangladeshi £18,407
9 Pakistani £18,209

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