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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.

http://en.wikipedia.org/wiki/Sovereign_state

http://en.wikipedia.org/wiki/Continental_Europe


http://en.wikipedia.org/wiki/Country

http://en.wikipedia.org/wiki/Great_Britain

http://en.wikipedia.org/wiki/Ireland

http://en.wikipedia.org/wiki/Northern_Ireland

http://en.wikipedia.org/wiki/Republic_of_Ireland_%E2%80%93_United_Kingdom_border


http://en.wikipedia.org/wiki/Republic_of_Ireland

http://en.wikipedia.org/wiki/Developed_country

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

http://en.wikipedia.org/wiki/Power_in_international_relations

http://en.wikipedia.org/wiki/Great_power


http://en.wikipedia.org/wiki/Nuclear_Non-Proliferation_Treaty

http://en.wikipedia.org/wiki/List_of_states_with_nuclear_weapons

http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures

http://en.wikipedia.org/wiki/Big_Five_(United_Nations)

http://en.wikipedia.org/wiki/United_Nations

http://en.wikipedia.org/wiki/United_Nations_Security_Council

http://en.wikipedia.org/wiki/United_Nations_Security_Council

http://en.wikipedia.org/wiki/United_Nations

http://en.wikipedia.org/wiki/Big_Five_(United_Nations)

http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures

http://en.wikipedia.org/wiki/List_of_states_with_nuclear_weapons

http://en.wikipedia.org/wiki/Nuclear_Non-Proliferation_Treaty



http://en.wikipedia.org/wiki/Power_in_international_relations

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

http://en.wikipedia.org/wiki/Developed_country

http://en.wikipedia.org/wiki/Republic_of_Ireland



http://en.wikipedia.org/wiki/Northern_Ireland

http://en.wikipedia.org/wiki/Ireland

http://en.wikipedia.org/wiki/Great_Britain

http://en.wikipedia.org/wiki/Country



http://en.wikipedia.org/wiki/Sovereign_state



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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























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