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Economic Analysis

Overview of UK Economy
The economy of the United Kingdom is the sixth largest national economy in the world measured by nominal GDP and eighth largest as per Purchasing power parity and the third largest in Europe measured by nominal GDP. The British economy encompasses the economies of England, Scotland, Wales and Northern Ireland. In 18th century UK was the first country in the world to industrialize and during the 19th century possessed a dominant role in the global economy. From the late 19th century the Second Industrial Revolution in the United States and Germany presented an increasing economic challenge to Britain. Despite victory, the costs of fighting both the First World War and Second World War further weakened the accountability of UK's public finance and resulted in the collapse of the British Empire, and by 1945 it had been superseded by the United States as the world's dominant economic power. However, it still maintains a significant role, such as the area of financial industry in the world economy. The UK has one of the world's most globalised economies. London is the world's largest financial centre 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, The Bank of England is the UK's central bank and its Monetary Policy Committee is responsible for setting interest rates. The currency of the UK is the pound sterling, which is also the world's thirdlargest reserve currency after the U.S. dollar and the euro. The UK economy has been weak in recent years following the late 2000s recession with growth largely flat since 2010. The UK experienced a double dip recession which was the longest and deepest in 50 years between Q4 2011 and Q2 2012; however recent figures have shown the UK economy improving, unemployment fell to 7.6%. UK economy started to grow again in Q3 2012, growing by 1.0% - the fastest rate of GDP growth since Q3 2007. Latest unemployment statistics from the ONS show unemployment falling at its fastest rate since 2001. Economic Indicator GDP (%) QOQ GDP Interest Rate Unemployment Rate CPI PPI Balance of trade (total) Goods Services Budget deficit Retail sales Industrial production Debt Foreign exchange reserves Current statistics -0.3% $ 2.4 trillion 0.5% 7.7% 2.7%(124.4 index) -0.3% $(5.6) billion $(14.83) billion $9.19 billion $189.4 billion 0.3% (2.4) % $ 2115.21billion. $104.8 billion

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Waris Hussain

UK PESTLE Analysis

Type of Economic System

The United Kingdom operates a diversified economy that is one of the largest in the world. The British economic system exhibits the characteristics of a mixed system, combining market based features with some socialist characteristics. UK has a distinct private sector, where resources are allocated primarily by market forces, such as the grocery sector of the UK economy. Mixed economies may also have a distinct public sector, where resources are allocated mainly by government, such as defense, police, and fire services. In many sectors, resources are allocated by a combination of markets and panning, such as healthcare and, which have both public and private provision. The CIA World Fact book reported that the United Kingdom's economy had a total gross domestic product (GDP) of nearly $2.34 trillion in 2012; making it the world's seventh largest. Service industries account for 75 percent of the U.K.'s economic output, according to the CIA. Industry accounts for 23.8 percent of output while agriculture represents 1.2 percent. Overall, the United Kingdom's mixed economy has mostly free market features but retains some socialist characteristics, such as the government owning a stake in some industries. The British capital, London, is an important center of world financial activity. It is home to the London Stock Exchange, founded in 1801 and one of the world's largest stock exchanges. In addition, more than 100 of Europe's largest companies have their headquarters in London. Since the 1980s, under Prime Minister Margaret Thatcher, the British government privatized many industries, including British Rail, British Petroleum and British Airways. The world economic crisis of 2008 pushed the British economy into a recession, leading to a series of stimulus and reform measures by the government, including nationalization of part of the country's banking industry.

Government Intervention in Market

UK government intervene in free market in some areas and this is a justified rational for government intervention. Identify the set of policy goals to be achieved. This involves an assessment of the Government's strategic goals and objectives, and the way in which they are translated to individual policy areas. The Government intervenes when there is lacking of perfect competition in the market, in case of Externalities effects, when there is a information failure by the market and in the case of rare public goods. Where there is an issue of equality amongst the citizens. It is the case of health services, distribution of income etc issues.
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Equity, which is to do with the delivery of social or distributional objectives. Even where markets are working efficiently, they may result in a distribution of income that is unacceptable to society. This will often arise through a lack of incentives to improve equity, or because the necessary information is available only to government. Whether the costs of government intervention are justified. This is concerned with the cost analysis of the intervention both positive and negative and the cost of not intervening.

Comparative Advantage in UK
Foreign Investment:
Foreign Investment is the biggest driving force of International economy. Direct investment by multinationals has increased by 25% in United Kingdom according to the United Nations Conference on Trade and Development. The UK doesn't discriminate between foreign individuals and nationals in formation and operation of private companies. The British Government defends the rights of any British registered company in the EU without giving any importance to nationality of ownership. Also, it doesn't discriminate between UK firms or foreign nationality owned firms. US firms prefer investing in the UK due to factors such as common language, similar business cultures and legal heritage. Japanese firms prefer the UK as an investment destination because it acts as an export platform to export manufacturing goods to other European countries. Long term economic and political stability, regulator stability coupled with relatively low taxation rates and inflation make the UK an attractive destination for foreign investors. The government is committed to economic reform which includes deregulation, privatization and support for healthy competition.

Simple Tax System:

The tax system of the UK is simple. Corporations are taxed 28 percent on profits over 1.5 million GBP while small companies pay tax at a rate of 21 percent on profits up to 300,000 GBP. Small companies are given marginal tax benefits on profits ranging from 300,001-1,500,000 GBP. This tax system also allows tax deductions on expenditures and depreciation of assets used for trade. The assets over which tax deductions are accepted are industrial buildings, machinery, plant equipment and assets used for research and development purposes. Unit trusts and open ended investment companies are required to pay 20 percent tax on profits earned.

Services Industry
The service sector is the dominant sector of the UK economy, and contributes around 73% of GDP. The creative industries accounted for 7% GVA in 2005 and grew at an average of 6% per annum between 1997 and 2005. In 2008 the education, health and social work sector had a total gross value added of around 170 billion, of which around 145 billion was compensation to employees. In 2008 health and social work had a gross value added of around 93.7 billion. This industry added gross value of 86,145 million to the UK economy in 2004.The UK's exports of financial and business services make a significant positive contribution towards the country's balance of payments. London is a major centre for international business and commerce and is one of the three "command centers" of the global economy. There are over 500 banks with offices in London. London's financial services industry is primarily based in the City of London and Canary Wharf. The City houses the London Stock Exchange,
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the London International Financial Futures and Options Exchange, the London Metal Exchange, Lloyds of London, and the Bank of England. Several other major UK cities have large financial sectors and related services. Edinburgh has one of the large financial centers in Europe

London Stock Exchange

The London Stock Exchange or LSE is a stock exchange located in London, United Kingdom. Founded in 1801, it is one of the largest stock exchanges in the world, with many overseas listings as well as British companies. The London Stock Exchange is at the heart of global financial markets and is home to some of the best companies in the world. The Exchange provides a highly active and efficient market for trading in a wide range of securities, including UK and international equities, debt, covered warrants, exchange traded funds (ETFs), fixed interest, contracts for difference (CFDs) and depositary receipts.

Economic and Financial Risk

The United Kingdom (UK) is a CRT-1 country with very low levels of risk across all three categories (economic, financial and political). Despite its excellent risk profile, the UK was hit particularly hard by the global financial turmoil, partially due to its sizeable financial sector. The UKs service industries, including financial services and real estate activities, represent three quarters of economic production. With inflation contained and growth stubbornly sluggish, the Bank of England is expected to maintain low interest rates until mid-to-late 2014 as well as pursuing further quantitative easing. While positive economic growth has resumed in the 3Q of 2012, driven largely by the Olympic Games, it is only very slight. The financial sector has generally stabilized, following government intervention and increased supervision in the wake of the financial crisis. Banks have agreed to increase lending to businesses in 2012. UK has very low risk rating as compare to other EU countries.

UK Trading Partners
UK currently have budget deficit of GBP 3.5 billion. The main reason behind this is the UK Industrial sector which has decline after 19th century but UK services industry has a trade surplus of about GBP 5.7 billion. The chart given below show the UK major trade partners

Trade Year to date 2012

12,000 10,000 8,000 6,000 4,000 2,000

Trade Year to date 2012

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UK PESTLE Analysis

% Change 2012/ 2011


% Change 2012/ 2011




















-20 -40 -60

Detail Chart of UK trading partner and trade for 2012 us given in Appendix (B)

Exchange rates & stability of UK currency

Pound sterling is the official currency of United Kingdom. British pound is one of the most important currencies in the world and it is the oldest currency currently being used and also a highly valued currency among the major currencies of the world. Bank of England is the only bank in the United Kingdom allowed for issuing banknotes as a legal currency. Pound sterling is the 4th most traded currency in the foreign exchange market, its volume of trading is about 12.9%. One of the reasons for the heavy trade in the currency is the location of the largest foreign exchange trading hub. The currency uses a floating rate regime and can be easily traded in the foreign exchange markets. The contraction of the British economy has led to a highly volatile monetary system and that is why the value of the currency fluctuates frequently in comparison with the United States dollar and Deutsche Mark. This attracts the attention of the investors resulting in more of investment and more of hedging in the currency. Sterling is also the third most held reserve currency in global reserves (about 4%). Movement in exchange rate in terms of British Pound (GBP) per US Dollars is given below. The data is taken on year date exchange rate basis.

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2007

Exchange Rate

Exchange Rate






Detail Chart of exchange rate is given in Appendix (C)

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UK PESTLE Analysis



United Kingdom Financial Market

London is arguably the worlds largest and most significant financial centre. The following summary provides a brief overview of its share of global markets: London is the worlds number one centre for foreign exchange. The market capitalization of London Stock Exchange (LSE) was $ 3.266 trillion at December 2011. London is an important centre for both capital raising and secondary market trading, with active domestic commercial paper and euro commercial paper markets as well as an estimated multitrillion Eurobond market. London maintains a leadership position with 45.8% of total global interest rate OTC (nonexchange traded) derivatives turnover (BIS 2010). The London Metals Exchange (LME) is the largest metals exchange in the world. Figures from International Financial Services London (IFSL) indicate that the UK fund management industry was responsible for 4.8 trillion of funds at the end of 2010.

Infrastructure Quality
The United Kingdom has one of the most developed and extensive infrastructure systems in the world but many of those infrastructure aspects require maintenance. Because of constraints on the government's budget, London has endeavored to transfer responsibility for the maintenance and construction of new roads to local and regional governments. There are also increasing efforts to transfer control of infrastructure projects to private industry. The United Kingdom has 371,603 kilometers of roadways. This includes 3,303 kilometers of expressways. The kingdom also has 16,878 kilometers of railways. The majority of this track is standard gauge and one-quarter of it is electrified. There is also an extensive network of canals and waterways which total 3,200 kilometers. Since the United Kingdom is an island, it is dependent on the maritime and air transport of goods. The nation has some of the world's busiest ports such as London, Glasgow, Manchester, and Portsmouth. One of the most significant infrastructure projects in the history of the kingdom was the completion in 1994 of the Channel Tunnel, popularly known as the "Chunnel." This 35-kilometer tunnel under the English Channel connects England and France. For the first time in its history, the United Kingdom had a direct, if limited, land route for the transport of goods and people to and from the continent. Since its opening, the amount of goods that are transported through the Chunnel has grown by almost 20 percent per year.

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UK PESTLE Analysis

Business Cycle Stage and Economic Growth

UK enters in economic recession in second quarter of 2008 when its GDP falls 0.9%. This recession was result from crisis in financial services industry. Manufacturing output reduced by 7% by end 2008. It was the deepest recession since the war. It has affected many sectors including banks and investment firms, and seen many well known and established businesses fold.

GDP Growth rate

1.5 1 0.5 0 -0.5 -1 -1.5 -2 -2.5

GDP Growth rate

Britain has notably struggled to come out of the latest recession, with much speculation of a 'double dip' recession during the 2010s. In quarter four of 2010 GDP fall 0.4%, unemployment rate rose to 8.1% in August. Economic growth in Q3 2012 was 1.0% helped by an Olympic ticket sales boost. But, in Q4 2012, the economy went back into negative growth. Manufacturing fell 1.5%, service sector growth was flat, and construction rose 0.3% in the final quarter. If growth is negative in first quarter 2013, the UK will be officially in a triple dip recession.

GDP annual gowth rate

6 4 2 0

GDP annual gowth rate

2008 Q2

2011 Q3

2006 Q1

2006 Q2

2006 Q3

2006 Q4

2007 Q1

2007 Q2

2007 Q3

2007 Q4

2008 Q1

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q4

2012 Q1

2012 Q2

2012 Q3

-2 -4 -6 -8

Detail chart of Economic growth rate and GDP annual growth rate is given in Appendix (D)

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UK PESTLE Analysis

2012 Q4

Skill Level of Workforce

As demand for skilled labor increases, there has been a rapid decline in skilled labor supply in the UK. In addition, employers also claim that there is an apparent skill gap amongst the existing work force for certain occupations. The expansion of knowledge-based industries has raised the general demand for skilled workers across a range of sectors and occupations.

Labor Force - by occupation(%)

Agriculture Industry 2% 18% Services

Improving the skills of the workforce has, and will continue to be, a crucial aspect of government policy. Previous influential studies, based mostly on aggregate data, have shown that UK productivity lags behind some 80% of its competitors and that part of this gap is due to a lower stock of skills within the workforce. The UK has a strong economy and world-leading employment levels, but its productivity trails than many key comparator nations, poor skills are a key contributor to this problem as well as having wider impacts on social welfare. Over the last decade, the skills profile of working age people in UK has improved. For example, the proportion with a degree has increased from one fifth to over one quarter of the population. Despite these improvements, the UK still does not have a world-class skills base because over one third of adults in the UK do not have a basic school-leaving qualification, five million people have no qualifications at all and one in six do not have the literacy skills expected of an 11 year old and half do not have these levels of functional numeracy. Looking ahead to 2020, global, demographic and technological change will place an even greater premium on the UKs skills profile. New analysis conducted by the Review shows that, if the Government meets its current ambitious targets for improving the UKs skills, by 2020 the proportion of working age people without any qualifications will fall to 4 per cent; and the proportion holding a degree will increase from 27 per cent to 38 per cent, and this will have significant benefits for the economy increasing annual productivity growth by 0.2 per cent with a net benefit to the economy of 3 billion a year, equivalent to 0.3 per cent of GDP. However, even if the UK can meet these targets, the nations human capital will still fail to be world class. Considerable problems will remain; at least 4 million adults will still not have the literacy skills expected of an 11 year old and 12 million would not have numeracy skills at this level. In order to have strong skill level of workforce UK government has to tackle the stock of low skilled adults without qualifications, basic literacy, investing more in intermediate skills and further increasing the proportion of adults holding a degree.

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UK PESTLE Analysis

Labor Costs
Minimum wage set by the government that an employer is legally allowed to pay an employee. The minimum wage for an employee aged 21 or older is GBP 6 an hour. Workers aged 16 to 17 must be paid GBP 3.8 per hour. The development rate for those who aged 18 to 20 is GBP 5 per hour. A new minimum wage of 2.50 per hour is set to be introduced for apprentices who are either under 19 or in the first year of their apprenticeship. Labor costs index decrease to 105.4 indexes in 3rd quarter of 2012 from 105.50 Index Points in the second quarter of 2012. Historically, from 1959 until 2012, the United Kingdom Labor Costs averaged 49.13 Index Points reaching an all time high of 105.50 Index Points in May of 2012

Unemployment rate, Inflation rate and Interest rate

Unemployment Rate in the United Kingdom decreased to 7.70 percent in November of 2012 from 7.80 percent in October of 2012. Historically, from 1971 until 2012, the United Kingdom Unemployment Rate averaged 7.26 Percent reaching an all time high of 12 Percent in February of 1984 and a record low of 3.40 Percent in November of 1973. The current fall in the UK unemployment rate is due to the employment created by London Olympics which helps the UK economy to recover a bit. As per the CBI and PwC forecast UK Financial services companies are likely to cut a further 18,000 jobs across the UK over the next three months despite optimism that business volumes will rebound. The inflation rate (measured by CPI) in the United Kingdom was recorded at 2.70% in December of 2012. Inflation Rate in the United Kingdom is reported by the UK Office for National Statistics. In the United Kingdom, the most important categories in the consumer price index are Transport, Housing, Water, Electricity, Gas and Other fuels, Recreation and Culture, Restaurants and Hotels and Food and Non-alcoholic Beverages. This inflation rate in consistent from past 3 month. Decrease in inflation is due to decrease in the price of fuel and housing. The targeted inflation by BOE for future is 2.2%.
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Unemployment Rate %
9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%

Unemployment Rate % at year end 2005 2006 2007 2008 2009 2010 2011 2012

Inflation rate %
4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

Inflation rate % at year end 2005 2006 2007 2008 2009 2010 2011 2012

Waris Hussain

UK PESTLE Analysis

The benchmark interest rate in the United Kingdom was last recorded at 0.50 percent. Interest Rate in the United Kingdom is reported by the Bank of England. In the United Kingdom, the Bank of England has operational independence. Decisions on interest rates are taken by the Monetary Policy Committee (MPC). The current interest rate that is prevailing in market is unchanged since March 2009. Currently there are two opinions in the market regarding interest rate change. Some economist says that Interest rate will remain unchanged in UK till 2009 and some says that interest rate has to be increased in 2013 so that Banks can have solid recovery and BOE inflation target can be meet.

Interest rate %
6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2005 2006 2007 2008 2009 2010 2011 2012 Detail chart of Unemployment, Inflation and Interest rate is given in Appendix (E) Interest rate % at year end

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UK PESTLE Analysis