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United KingdomMacro Economic Analysis
Submitted By:Pankesh Sethi (P1130)
Harshal Tripathi (M1159)
Bharat Mittal (P1136)
SYDENHAM INSTITUTE OF MANAGEMENT STUDIES RESEARCH
AND ENTREPRENEURSHIP EDUCATION
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Table of Contents
1. An Introduction .................................................................................. 3
2.
Economic Indicators for UK (2011) ...................................................... 4
3. Macroeconomic Factors...................................................................... 5
Gross Domestic Product ............................................................................................................... 5
Inflation ........................................................................................................................................ 7
Interest Rate ................................................................................................................................. 8
Unemployment rate ..................................................................................................................... 9
Current Account ......................................................................................................................... 10
Balance of Trade ........................................................................................................................ 12
6. Euro Zone & UK ................................................................................ 14
7. References:....................................................................................... 16
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Introduction
The United Kingdom of Great Britain and Northern Ireland (commonly known as the United
Kingdom, the UK or Britain) is a sovereign state located off the north-western coast of continental
Europe. The country includes the island of Great Britain, the north-eastern part of the island of
Ireland and many smaller islands. Northern Ireland is the only part of the UK that shares a land
border with another sovereign state — the Republic of Ireland.
The UK is a developed country and has the world's sixth-largest economy by nominal GDP
and seventh-largest economy by purchasing power parity. It was the world's first industrialised country
and the world's foremost power during the 19th and early 20th centuries. The UK remains a great
power with leading economic, cultural, military, scientific and political influence. It isa recognised nuclear weapons state and its military expenditure ranks third or fourth in the world.
The UK has been a permanent member of the United Nations Security Council since its first session in
1946.
The UK is one of the world's most globalised countries. London is the world's largest financial
centre alongside New York and has the largest city GDP in Europe. As of December 2010, the UK
had the third-largest stock of both inward and outward foreign direct investment (in each case after
the United States and France). The aerospace industry of the UK is the second- or third-largest
national aerospace industry, depending upon the method of measurement. The pharmaceutical
industry plays an important role in the UK economy and the country has the third-highest share of
global pharmaceutical R&D expenditures (after the United States and Japan).The British economy
is boosted by North Sea oil and gas reserves, valued at an estimated £250 billion in 2007. The UK is
currently ranked seventh in the world (and third in Europe) in the World Bank's Ease of Doing
Business Index.
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Economic Indicators:
Unit 2009 2010
Production and income
Gross domestic product (GDP)Bln USD curr.
PPPs2 172.0 2 233.9
GDP per capitaUSD current
PPPs35 151 35 917
Gross national income (GNI) per capitaUSD current
PPPs35 648 36 427
Economic growth
Real GDP growthAnnual growth
%-4.9 1.4
Gross fixed capital formation % of GDP -15.4 3.7
Government deficits and debt
Government deficit % of GDP -10.8 -10.3
General government revenues % of GDP 40.3 40.7
General government expenditures % of GDP 51.2 51.0
Trade
Imports of goods and services % of GDP 30.1 32.8
Exports of goods and services % of GDP 28.0 29.4
Goods trade balance: exports minus imports of goods Bln USD -132.2 -153.9
Imports of goods Bln USD 484.7 558.6
Exports of goods Bln USD 352.4 404.7
Service trade balance: exports minus imports of services Bln USD 82.1 76.2
Imports of services Bln USD 173.1 175.5Exports of services Bln USD 254.5 251.6
Current account balance of payments % of GDP -1.7 -2.5
Foreign direct investment (FDI)
Inflows of foreign direct investment Mln USD 44 424 11 016
Outflows of foreign direct investment Mln USD 71 208 44 696
Prices and interest rates
Inflation rate: all itemsAnnual growth
%2.2 3.3
Purchasing power and exchange rates
Purchasing power parities GBP per USD 0.64 0.65
Exchange rates GBP per USD 0.64 0.65
Unemployment
Unemployment rate: total civilian labour force % 7.6 7.8
Unemployment rate, men: male civilian labour force % 8.6 8.6
Unemployment rate, women: female civilian labour force % 6.4 6.8
Population
Total population '000 persons 60 930 61 349
Population growth rates % 0.7 0.7
http://www.oecd-ilibrary.org/economics/country-statistical-profile-united-kingdom_20752288-table-gbr
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Macro Economic Factors:
With an economy very open to investment and trade, and highly exposed to developments in global
financial markets, the UK was hard hit by the economic and financial crisis. A modest recovery is
now under way, but the effects of the crisis, on output, on employment and on government
accounts, linger. Potential output may have fallen by up to 3 per cent, in large part as a result of the
shrinking of the financial sector. Unemployment, currently at 8 per cent, is about 3 percentage
points above the 2000-2007 average and is expected to fall only modestly in the next couple of
years. Last but not least, fiscal accounts have deteriorated sharply, with large deficits and rising debt
levels. Some of factors are explained below:
Gross Domestic Product (GDP):
The United Kingdom Gross Domestic Product is worth 2246 billion dollars or 3.62% of the world
economy, according to the World Bank. Historically, from 1960 until 2010 the United Kingdom's
average Gross Domestic Product was 862.04 billion dollars reaching an historical high of 2810.97
billion dollars in December of 2007 and a record low of 72.33 billion dollars in December of 1960.
Services, particularly banking, insurance, and business services, account by far for the largest
proportion of GDP while industry continues to decline in importance. Over the past two decades the
government has greatly reduced public ownership and contained the growth of social welfare
programs.
The U.K. economy contracted more than forecast in the final quarter of 2011. GDP fell 0.2% q/q,
following a robust 0.6% q/q expansion in the third quarter. In annual terms, GDP rose 0.7% in the
fourth quarter, up from 0.5% previously. Weaker industrial activity was the key drag. Output of the
production industries decreased by 1.2 per cent in Q4 2011, compared with an increase of 0.2 per
cent in the previous quarter. Construction sector output decreased by 0.5 per cent in Q4 2011,
compared with an increase of 0.3 per cent in the previous quarter. Output of the service industries
was unchanged in Q4 2011, following a rise of 0.7 per cent in the previous quarter. The economy is
expected to slip back into a mild recession in 2012 as exports weaken and fiscal austerity weighs on
domestic demand.
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The Government Debt in the United Kingdom was last reported at 80.0 percent of the country´s
GDP. From 1980 until 2010, the United Kingdom's average Government Debt to GDP was 44.96
percent reaching an historical high of 80.00 percent in December of 2010 and a record low of 31.30
percent in December of 1991. Generally, Government debt as a percent of GDP is used by investors
to measure the United Kingdom's ability to make future payments on its debt, thus affecting the
United Kingdom's borrowing costs and government bond yields.
The GDP per capita in the United Kingdom was last reported at 27321 US dollars in December of
2010, according to the World Bank. Previously,the GDP per capita in the United Kingdom stranded
at 27138 US dollars in December of 2009. The GDP per capita in the United Kingdom is obtained
by dividing the country’s gross domestic product, adjusted by inflation, by the total population.
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Inflation:
The inflation rate in United Kingdom as reported in January of 2012 was 3.6 percent. From 1989
until 2010, the average inflation rate in United Kingdom was 2.72 percent reaching an historical
high of 8.50 percent in April of 1991 and a record low of 0.50 percent in May of 2000. Inflation rate
refers to a general rise in prices measured against a standard level of purchasing power. The most
well known measures of Inflation are the CPI which measures consumer prices, and the GDP
deflator, which measures inflation in the whole of the domestic economy.
In addition to the impact of VAT, smaller increases in the cost of commodities and oil than seen a
year earlier also helped to bring the inflation rate down. The average price of petrol in January rose
by 0.6p a litre, compared with a 5.4p rise last year. Diesel was up 0.7p a litre, compared with a 5.8prise in January 2011. The month-on-month comparison showed small falls in the cost of clothing
and footwear, furniture and household goods and transport whilst alcohol, household services and
health rose slightly. Inflation is still above target of 2%.
In the light of its most recent economic projections, weak near-term growth outlook and associated
downward pressure from economic slack meant that, without further monetary stimulus, it is more
likely than not that inflation would undershoot the 2% target in the medium term.
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Interest Rate:
The benchmark interest rate in the United Kingdom was last reported at 0.50 percent. In the United
Kingdom the Bank of England has operational independence and decisions on interest rates are
made by the Monetary Policy Committee (MPC). The BoE's official interest rate is the BoE repo
rate. This repo rate applies to open market operations of the BoE with a group of counterparties
(banks, building societies, securities firms). From 1971 until 2010 the United Kingdom's average
interest rate was 8.58 percent reaching an historical high of 17.00 percent in November of 1979 and
a record low of 0.50 percent in March of 2009.
LIBOR: The Libor is the average interest rate that leading banks in London charge when lending to
other banks. It is an acronym for London Interbank Offered Rate. Banks borrow money for one day,one month, two months, six months, one year, etc., and they pay interest to their lenders based on
certain rates. The Libor figure is an average of these rates. The official LIBOR interest rates are
announced once per working day at around 11:45 a.m. (London time) by the British Bankers'
Association (BBA).
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Unemployment Rate:
The unemployment rate in the United Kingdom was last reported at 8.4 percent in December of
2011. From 1971 until 2010 the United Kingdom's Unemployment Rate averaged 7.22 percent
reaching an historical high of 11.90 percent in April of 1984 and a record low of 3.40 percent in
December of 1973. The labour force is defined as the number of people employed plus the number
unemployed but seeking work. The non-labour force includes those who are not looking for work,
those who are institutionalised and those serving in the military.
However, with the number of job vacancies rising to 476,000 in the three months to January,
economists suggested the worsening employment outlook had eased. This supports hopes that the
economy will return to modest growth in the first quarter and avoid recession. Due to high
vacancies, it seems they are moving in right direction, but it is a neutral situation. On one hand
vacancies increased, but earnings are also squeezed due to high inflation rate. UK is neither looking
to go into recession, nor recovery mode.
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Current Account:
The difference between a nation's total exports of goods, services and transfers, and its total imports
represent current account. Current Account is the sum of the balance of trade (exports minus
imports of goods and services), net factor income (such as interest and dividends) and net transfer
payments (such as foreign aid). The balance of trade is typically the most important part of the
current account. This means that changes in the patterns of trade are key drivers in the current
accounts of most of the world's economies.. The balance of the current account tells us if a country
has a deficit or a surplus. Positive net sales to abroad generally contribute to a current account
surplus; negative net sales to abroad generally contribute to a current account deficit. Because
exports generate positive net sales, and because the trade balance is typically the largest component
of the current account, a current account surplus is usually associated with positive net exports.
The United Kingdom reported a current account deficit equivalent to 15.2 Billion of GBP in the
third quarter of 2011. The United Kingdom is the world's fifth-largest trading nation, highly
dependent on foreign trade. It must import almost all its copper, ferrous metals, lead, zinc, rubber,
and raw cotton and about one-third of its food. The United Kingdom's exports manufactured items
like telecommunications equipment, automobiles, automatic data processing equipment, medicinal
and pharmaceutical products and aircraft. Its main trading partners are European Union countries,
The United States, China and Japan.
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From 1980 until 2010, the United Kingdom's average Current Account as percent of GDP was -1.55
percent reaching an historical high of 1.90 percent in December of 1981 and a record low of -4.90
percent in December of 1989. Usually, when the United Kingdom records a strong current account,
its Gross Domestic Product expands boosted by exports revenues. Also, the United Kingdom's
exchange rate appreciates as investors begin to expect higher interest rates going forward. However,
when the United Kingdom reports a stronger than expected current account to GDP, it may also
lead to economic overheating and a general rise in prices, also known as inflation, which will make
the United Kingdom's products less competitive when sold abroad.
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Balance of trade:
It is the measure of difference between a country's imports and its exports. Balance of trade is
the largest component of a country's balance of payments. Debit items include imports, foreign aid,
domestic spending abroad and domestic investments abroad. Credit items include exports, foreign
spending in the domestic economy and foreign investments in the domestic economy. A country has
a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus.
Balance of trade is one of the most misunderstood indicators. For example, many people believe
that a trade deficit is a bad thing. However, whether a trade deficit is bad thing is relative to the
business cycle and economy. In a recession, countries like to export more, creating jobs and
demand. In a strong expansion, countries like to import more, providing price competition, which
limits inflation and, without increasing prices, provides goods beyond the economy's ability to meet
supply. Thus, a trade deficit is not a good thing during a recession but may help during an
expansion.
The U.K.'s goods trade deficit shrank to its smallest size in 22 months in December, with support
from record foreign sales of oil and the strongest ever exports to South Korea. That helped the
U.K.'s overall trade deficit, including service; shrink to its smallest since April 2003.
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The goods trade deficit narrowed to £7.1 billion ($11.23 billion) in December from increased
estimate of £8.9 billion in November, marking the smallest deficit since February 2010. The data
showed exports of goods increase 0.9% from November to £25.6 billion in December while imports
fell 4.6% to £32.7 billion. The drop in imports highlights the continued weakness of the U.K.
economy.
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Euro Zone and UK:
In the United Kingdom, the underlying pace of recovery slowed during 2011, with activity falling
slightly during the final quarter. Some recent business surveys have painted a more positive picture
and asset prices have risen. But the pace of expansion in the United Kingdom’s main export
markets has also slowed and concerns remain about the indebtedness and competitiveness of some
euro-area countries. A gradual strengthening of output growth later this year should be supported by
a gentle recovery in household real incomes as inflation falls, together with the continued stimulus
from monetary policy. But the drag from tight credit conditions and the fiscal consolidation together
present a headwind. The correspondingly weak outlook for near-term output growth means that a
significant margin of economic slack is likely to persist.
The UK's exposure to financial crisis was more immediate and more pronounced than that of some
other European countries, for at least three reasons. Firstly, the structure of the UK mortgage market
more closely resembled the liberal US model, leaving the UK to confront its own version of the
sub-prime problem. Secondly, given the relatively strong economic and financial linkages between
the UK and the US, UK investors had committed a large amount of funds to the American banking
system and stood to lose from the bad loans emanating from the US sub-prime mortgage sector.
Thirdly, British banks relied on global capital markets much more heavily in funding loans to firms
and households than did many European banks, which relied on more traditional sources of funds
such as deposits from savers. When the losses from the sub-prime crisis caused funds to be diverted
away from global capital markets, British banks were forced to pass on reductions in loan supply to
others in the private sector much more quickly. All of these factors contributed to the view that the
UK was more vulnerable to the credit crunch and global recession that originated in the US than
was the Euro area.
A second, and related, observation is that in responding to the recent crisis the United Kingdom has
made full use of its monetary autonomy outside the single currency area. This can be seen in at least
three ways. Firstly, since the onset of the financial crisis the pound sterling has depreciated
significantly against the Euro. During summer 2007 one pound purchased as much as 1.50 Euros,
compared to a current rate of approximately 1.15. The resulting fall in the price of British goods
exported to the Euro area has provided a much needed boost to the sales of the UK manufacturing
sector. Additionally, by increasing the price of goods imported from the Euro area to the UK, the
depreciation of sterling has prevented consumer price deflation. Policy-makers are particularly keen
to avoid such a scenario because declining prices encourage households to delay spending in the
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hope of better value for money in future, which in turn tends to prolong downturns in the real
economy through slowing economic growth and raising unemployment.
Secondly, the Bank of England responded to the crisis by reducing interest rates by 4.5 percentage
points in 5 months, whereas the European Central Bank cut rates by 3.25 percentage points, spread
across 7 months. Thirdly, in addition to the conventional monetary policy easing represented by
interest rate cuts, the Bank of England has introduced an Asset Purchase Facility (APF) through
which it has spent £125billion of newly created money, principally acquiring government bonds,
but also investing in a small amount of corporate bonds issued by firms seeking to raise liquid
funds. This policy was adopted by the Bank of England when it became clear that interest rate cuts
were failing to support aggregate demand during the recession. Although the Bank of England
policy rate (essentially the overdraft interest rate charged to commercial banks when they deal with
the Bank of England) had dropped to 0.5%, most bank loans are funded from investments in banks
by pension funds and other large investors, the supply of which remained limited in the aftermath of
the credit crunch. Quantitative easing is intended to address this problem through increasing the
share of cash in banks' total assets and thereby providing the liquid funds needed to support bank
lending to firms and households. The European Central Bank embarked upon a similar quantitative
easing in July 2009, but the amount committed is approximately £50billion for the entire 16 nation
Euro area, and at present just 10% of these funds have been invested. As in the case of interest rate
policy, the European Central Bank has been much more conservative in responding to the crisis via
quantitative easing than has the Bank of England. The lesson that appears to be emerging is that due
to the asymmetric responses of the UK and euro area economies to episodes such as the credit
crunch, different monetary policy reactions (underpinned by separate currencies) are central to
efficient macroeconomic management.
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References:
http://www.oecd-ilibrary.org/economics/country-statistical-profile-united-
kingdom_20752288-table-gbr
http://www.tradingeconomics.com/united-kingdom/balance-of-trade
http://en.wikipedia.org/wiki/United_Kingdom
http://data.worldbank.org/country