Overview of the UK economy

Excellent article written by one of my private students, Zoe Read:

One of the tasks I set for my private students is to write a brief report about each of the major currencies’ economies. When trading the GBP/USD for example we are trying to value one country’s economy versus the other. The more you know the better trader you will become.

Think of this type of study being comparable to buying stocks. What does the “company” produce? To whom does it sell?  What is its balance sheet like (this is an odd situation as 95% of countries would rate as bankrupt). Does it have a good management team?- you know my feeling on this, most politicians and central bankers do not pass the test!

This then is a detailed review of UK PLC:

OVERVIEW OF THE UK ECONOMY

The United Kingdom of Great Britain has one of the world’s leading economies, particularly in banking, insurance, and business services, which remain key drivers of GDP growth. However, the economy has struggled to emerge from the economic slowdown. The expansion of government and growth of government spending have damaged Britain’s competitive edge. Public debt is now almost 100 percent of GDP, and budget deficits persist.

In 2022, the UK economy was the fifth-largest global economy, behind the United States, China, Japan, and Germany.

Trade

UK is a net importer of goods (including energy). The value of UK total trade in the 12 months to the end of November 2023 was GBP 1,768.6 Billion, up 3% on the previous 12 months. This trade figure is made up of: UK Exports of GBP 870.4, (5.4% change on previous 12 months); UK imports of GBP 898.3 billion (0.8% change on previous 12 months).

Exports

In the 12 months to November 2023, the UK exported GBP 870.4 Billion comprising: GBP 398.7 B in goods and GBP 471.6 B in services. The top 10 goods exported were:

 

 

 

 

 

 

 

1 World Bank
2 ONS UK trade November 2023
3 Ibid

The UK was the world’s biggest exporter of Hard Liquor ($7.74B), Antiques ($556M), Collector’s Items ($394M), Scrap Nickel ($116M), and Scrap Lead ($94.6M) in 2021 .

The top 5 UK services exports in the year to September 2023 were:

 

 

 

 

 

The top export markets for UK goods and services as at end of four quarters to June 2023:

 

 

 

 

 

 

 

 

Challenges

Inflation

High inflation rates have led to the largest two-year fall in living standards since records began.  The UK has endured its worst cost of living crisis since the 1970s, driven by rising prices, tax increases, and geopolitical instability.  The cost of living increased sharply across the UK during 2021 and 2022. The inflation rate reached a 41-year high of  11.1 % in October 2022, before subsequently easing.[1]

Food prices rose sharply during 2022 and 2023, as global supply chain disruptions and the effects of Russia’s full-scale invasion of Ukraine increased the input costs of food producers. Over the two years from December 2021 to December 2023, food prices rose by 26.2%. It previously took over 13 years, from July 2008 to December 2021, for average food prices to rise by the same amount.

Inflation fell during 2023 and was 4.0% as of December 2023.  This rate is above the Eurozone average (2.9%), the US (2.5%) and Italy (0.5%).

While global factors were the original drivers of high inflation, price rises in many areas of the domestic economy have also accelerated. This is partly due to strong pay growth, with labour costs making up a large share of costs for many firms, particularly in the services sectors.

High inflation rates have led to interest rate rises with the Bank of England increasing interest rates to try to get inflation back to its 2% target. Interest rates have risen from 0.1% in December 2021 to 5.25% in August 2023.

Government debt and public sector borrowing

The UK government has a long history of spending more than it receives in taxes and other revenues so it has had to borrow to cover the difference. The borrowing, known as ‘public sector net borrowing’, is often referred to as the deficit. Since 1971-72, budget surpluses have been achieved in only 5 years, and in only 12 years since 1948.

The UK has faced high inflation, higher interest rates, and a relatively slowly growing economy. The Government has spent a lot supporting households and businesses with high energy prices and other cost of living pressures. At the same time, government spending on debt interest is higher than in recent years[2].

At the end of 2022/23, public sector net debt was GBP 2,540 billion (i.e. GBP 2.5 trillion), or 96% of GDP. This is equivalent to around GBP 37,900 per person in the UK.[3]

In the financial year to December 2023, the UK Government borrowed GBP 119 Billion, GBP 11 billion more than in the same period in 2022. (These figures include Bank of England loans to banks and building societies). Interest payable on the debt was GBP 4.0 billion in December 2013, GBP 14.1 billion less than in December 2022 and the lowest figure since 2020. Changes in interest payable are largely the effect of Retail Price Index (RPI) movements on index-linked gilts[4].

Productivity slowdown

UK has seen a decade of 15 years of slow productivity growth since the Global Financial Crisis (GFC) in 2008. Historically, UK labour productivity has grown by around 2% per year[5] but since the 2008/2009 recession, growth has been weak and has never fully recovered to post-GFC levels.

The causes of the UK’s productivity slowdown are complex and difficult to unpick. It is considered that the financial services and insurance sectors didn’t recover particularly well after the GFC, and the economic composition of the UK meant that manufacturing and industry could not make up for that loss[6]. A lack of growth in capital investment in the UK compared to other G7 countries, together with the uncertainty caused by the Brexit result, has impacted productivity and business confidence.[7]

References

Statista

House of Commons Library Research Briefing: The budget deficit: a short guide, published 15 January 2024

Ibid.

Office of National Statistics: Public sector finances December 2023.

House of Commons Library Research Briefing on productivity: Key Economic Indicators, published 24 November 2023.

Understanding the UK’s productivity problem, ICAEW, published 26 September 2023.

OEC UK

Statista British economy