Economy and Trade
The United Kingdom is the fifth-largest economy in the world, with a forecast GDP of US$2.8 trillion in 2008. This highly developed, diversified, market-based economy has extensive social welfare services, and is a leading trading power and financial center.
Over the past two decades, the government has greatly reduced public ownership. Private enterprise now accounts for approximately four-fifths of employment and output. The United Kingdom has large coal, natural gas, and oil resources, but its oil and natural gas reserves are declining, and the United Kingdom became a net importer of energy in 2005. The economy is increasingly services-based, with its capital, London, a leading international financial center. The country is the world’s second-largest foreign direct investment destination. Unemployment and inflation levels are among the lowest within the European Union. Britain remains outside the European Economic and Monetary Union (EMU) and public opinion is largely opposed to joining the euro.
London will host the 2012 Olympics, which is set to make it a focus of regeneration and improvements in transportation infrastructure.
Economic Policy over 12 Months
The global economic slowdown, tight credit, and falling home prices pushed Britain into recession in the latter half of 2008, and prompted the center-left government to implement a number of new measures to stimulate the economy, and stabilize the financial markets; these included part-nationalizing the banking system, cutting taxes, suspending public-sector borrowing rules, and bringing forward public spending on capital projects.
In February 2008, Northern Rock became the first British bank to be nationalized since the 1970s. This development was followed by significant bailouts of other banking institutions, and an injection of £37 billion of new capital into the Royal Bank of Scotland, Halifax Bank of Scotland, and Lloyds TSB, giving the government a significant stake in the banking sector. In October 2008, the government announced a plan to recapitalize banks, guarantee interbank lending, and extend liquidity provisions. The government offered up to £200bn in short-term lending support. The level of individual savings guaranteed by the government was also raised to £50,000.
This program of bailing out stricken banks continued into 2009. In January 2009, Prime Minister Gordon Brown announced the government would implement a capital investment program totaling £40 billion in 2009. Education, transport, and housing have been highlighted as key areas to benefit from the investment. The government also announced new measures to support the United Kingdom banking system, and increase the amount of credit available to consumers and business. Measures included an asset-protection scheme to protect financial institutions against exposure to exceptional losses on certain portfolio assets, an increased stake in the Royal Bank of Scotland, and a £50 billion Bank of England scheme to boost lending by banks through bond purchases. In March 2009, the government increased its stake in the Lloyds Group to 77%, in return for underwriting £260bn of toxic assets.
To support the government’s efforts to recapitalize the banking system, the independent Bank of England slashed the key interest rate down from 5.25% in March 2008 to 0.5% in March 2009, the lowest rate on record.
In fiscal measures, the government reduced taxes to spur consumer spending. VAT was cut by 2.5% to 15% for the period of one year from November 2008, the basic rate of tax was reduced from 22% to 20%, and, after significant public pressure, the lowest rate of tax of 10% was reinstated. To support the ailing housing market, stamp duty on property purchases up to the value of £175,000 was also suspended until September 2009.
Economic Performance over 12 Months
The United Kingdom proved susceptible to the global economic downturn in 2008. gross domestic product (GDP) contracted by 1.5% in the fourth quarter of 2008. The contraction followed a 0.6% fall in economic growth in the third quarter, and signaled that the United Kingdom was officially in recession. Reasons attributed to this sharp decline were lower spending by businesses and consumers in the United Kingdom, its ailing financial-services sector, and the falling housing market. For 2008 as a whole, GDP rose by 0.7%, down from 3.0% in the previous year.
Output of the production industries fell 4.5% in the fourth quarter of 2008, compared with a fall of 1.7% in the previous quarter, mainly due to declining manufacturing output. Construction output fell 1.1% over the quarter. Output in the service industries fell by 0.9% in the fourth quarter. The trade deficit in real terms decreased from £9.8 billion in the third quarter of 2008, to £8.8 billion in the fourth quarter of 2008.
The second half of 2008 and the beginning of 2009 saw the pound sterling slide against the dollar, and reach new lows against the euro. Chancellor Alistair Darling’s plan to increase public borrowing to help the country deal with the recession is set to leave the country’s deficit at 8% of GDP—the highest level in post-war history. Rising commodity prices stoked inflation in the first half of 2008. Gas and electricity bills jumped sharply, squeezing disposable income. Inflation reached 5.2% in September—the highest since 1992, and far beyond the Bank of England’s target. The subsequent fall in the price of oil helped reduce inflation to an annualized rate of 3% as of January 2009. As consumer spending fell, interest rates were reduced to 0.5%, an all time low.
House prices fell by 2.3% in February 2009, according to the Halifax House Price Index, a fall of 17.7% over the year. Prices fell 16.2% in 2008, thanks largely to the contraction of credit in the mortgage market. The United Kingdom FTSE 100 index declined as banking and mining sectors suffered, falling by 31% over the course of 2008.
Growth is projected to resume only in late 2009. Unemployment is set to rise rapidly, but is expected to stabilize in 2010. Fears over inflation have been receding, reflecting the recent falls in energy and food prices and the increasing output gap.
Support for Inward Investment and Imports
The World Bank has ranked the United Kingdom the easiest place to set up a business in Europe, with the average business taking 13 days to set up, against an average of 32 days for the continent. United Kingdom Trade and Investment is the government body focused on maximizing foreign direct investment in the United Kingdom. More information on setting up a United Kingdom business and on support provided by the organization can be found on its website.
Tax Exemptions
In a deteriorating economy, all tax breaks have been aimed at lower-to-middle-income families, with a reduction of 2% on the second-lowest band of tax to 20%. There are few corporation-tax exemptions, though the top rate of corporation tax is a relatively low 28%. Capital gains tax has been reduced from a tapering system, capping at 40%, to a standard rate of 18%. Further information is available from the Inland Revenue.
Statistics
GDP growth: 0.7% (2008, National Statistics)
GDP per capita: US$37,400 (2008, est.)
CPI: 3.0% (January 2009, National Statistics)
Key interest rate: 0.5% (March 2009)
Exchange rate versus dollar: pound sterling per US dollar—0.5302 (2008, est.)
Unemployment: 6.3% (2008, National Statistics)
FDI: US$1.409 trillion (2008, est.)
Current account deficit/surplus: −US$72.54 billion (2008, est.)
Population: 60,943,912 (July 2008, est.)
Source: CIA Factbook except where stated
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