The United Kingdom is one of the most developed and influential countries in Europe and in the world on the whole. The UK is the world’s seventh largest economy. As it is the same with many other developed nations, the service sector in the UK constitutes the largest sector of the British economy, and it comprises more than 75 % of total GDP. The main segments concerning services are restaurants, hotels, distribution and transport (which constitutes 18 percent of total GDP); education, health and government (20 percent); support and professional (11 percent); insurance and financial (9 percent) and also real estate (9 percent). Even though the UK remains one of the largest manufacturers in the world, the production comprises just 10 percent of the GDP. Last considerable component of the British GDP is construction, which accumulates about 7 percent of the total output (UK national statistics).
Let us take a closer look at monetary and fiscal policies as well as the general macroeconomic situation in the United Kingdom of Great Britain and Northern Ireland.
While talking about the crisis in Greece and discussing the future of the eurozone, the modern economic community has left without proper attention the fact that the UK, one of the largest economies of the Old World, can fall into a period of a serious recession.
Last autumn the largest strike of civil servants became the herald of the real problems in the economy of the United Kingdom of Great Britain and Northern Ireland. The state employees were the first who started to feel the hardness of the policies aimed to reduce public spending in the social sector. It was the biggest strike in the last thirty years (UK national statistics).
However, this is not the only anti-record of the British economy. Over the 16 quarters of 2008-2012, the real GDP of the country cannot get a stable, constant growth, showing the decline of 0.3% for two consecutive quarters. Over the last 83 years, it has been the maximum period of stay of the economy in the red, so it is difficult to speak about the painless and the upcoming release from the occurred situation. Meanwhile, the comparative statement of independent forecasts published by the Treasury of the United Kingdom shows a hint of optimism on the basis of the results of 2012. The average economic growth has been lowered from 0.6 to 0.4% per annum. In 2013, the International Monetary Fund and the National Institute of Economics and Social Research predict different rates of GDP growth, i.e. 0.8% and 0% respectively (UK parliament official page).
The real sector of the economy has given a clear failure. Industry of the United Kingdom fell in April 2011, and at the beginning of the 2012 the recession hit the annual rate of four percent. The UK manufacturers blame the sluggish demand in the national and European market. Nowadays the fight for customers is becoming increasingly difficult due to the fact that the positive effect of lower production costs is decreased by the growth of the pound to euro. Today the lagging industry includes the power generation, mining and gas. In this case, it is difficult to determine which of the industries should be an engine of the economic growth (UK parliament official page).
Meanwhile, the Bank of England holds the waiting position. The limit of 325 billion pounds to buy government bonds is exhausted. The last meeting of the Monetary Policy Committee has made it clear that the central bank does not intend to increase the cash infusion until resolution of the dilemma with the creditworthiness of Greece. The reducing rate of consumer price inflation allows to take a break in this issue. However, the rise in prices by three percent per year remains palpable for consumers.
Market makers expressed conflicting opinions about the economic prospects of the UK. The most dismal prognosis of change in real GDP is provided by Standard Chartered Bank and Capital Economics, i.e. -0,5% by the end of the year. The most optimistic prospect is provided by Credit Suisse and RBS Global Banking & Markets, i.e. +0,7% and +0,6% respectively. The first category of sceptical forecast has been made on the basis of expectations that the domestic demand along with the exports is going to reduce. The second category highlights the opposite, encouraging the idea that the domestic demand and exports are going to grow, which will be one of the main levers that will raise the country's economy (Socyberty).
However, the current dynamics points to the preponderance of the pessimistic arguments. Thus, the retail sales fell by 2.3% in 2012 while the predicted values did not exceed 0.8%. Based on the fact that the main foreign economic partners of the UK are the largest countries in the eurozone, the risk of reduction in exports to the region is still higher than ever before. The governmental plans of Europe development in case of Greece’s refusal from the euro, and the hovering uncertainty in solving of the Greek problem makes euro less attractive to investors and speculators, and thus contribute to growth in the value of the pound. From the beginning of the Greek problem, the British currency has strengthened by more than five percent compared to euro (UK Parliament Official Page).
It should also be mentioned that the unhealthy political situation and social tension will not help either GDP growth or positive changes in economic indices.
In the last quarter of 2012 GDP growth declined by 0.3% compared to the third quarter of 2012, while the analysts expected a decline of only 0.1%. The annualized rate remained unchanged at zero level (UK national statistics).
According to experts, the growth was hindered by the adverse weather, which had the negative impact on the retail sales, as well as the main sectors of the UK economy, i.e. the service sector. The negative trend is predicted to be till the end of the first quarter of 2013. On the basis of the abovementioned data, Mervyn King, the head of the Bank of England, has promised to take steps in order to stimulate the British economy.
Immediately after the publication of the threat of recession, the quotation of pair GBP/USD fell sharply by 50 points, but the government hopes to stimulate the economy back to the earlier positions of the pound.
If the GDP decline continues in the first quarter of 2013, the United Kingdom will be in the third recession (two consecutive quarters of decline) since 2008. Reuters notes that the fourth quarter was worse than analysts had forecasted as they predicted the decrease in GDP by only 0.1 percent. The mining industry experienced the largest decline (10.2 percent) among other industrial branches.
Possible recession jeopardizes the budget goals and credit rates. Now the British government has a policy to reduce costs, which is criticized for the negative impact on economic growth. George Osborne, Prime Minister, emphasized that the fall in GDP in the fourth quarter of 2012 did not force the government to reconsider its plans for spending cuts. According to him, the United Kingdom is experiencing difficulties due to the large public debt and recession in the European Union, which is the largest buyer of British goods (UK national statistics).
The British economy was in a recession in 2008-2009. During that period, the GDP fell five consecutive quarters and eventually fell by more than seven percent. Then the British economy declined three quarters in a row at the end of 2011 and the first half of 2012. In the third quarter of 2012, the United Kingdom emerged from recession, i.e. the GDP grew by 0.9 percent (UK national statistics).
It also should be noted that the inflation in the UK has gone down dramatically, falling to the levels of more than two years ago. In 2012 consumer price inflation was 3%. However, the slowdown in prices for transportation by air and sea, clothes and alcohol reduced the inflation at the end of the year. According to the analysts, these figures should encourage the Bank of England to provide the new measures in order to stimulate the British economy in 2013.
According to Samuel Tombs, the British economist from Capital Economics, the trade data and reports on the UK industry for January show that the economy is still struggling to re-initialization.
According to the data published by the Office for National Statistics, the industrial production fell unexpectedly by 1.2 percent in January 2013. The steel industry achieved the lowest level for the past 21 years. The decline in total production was caused by the falling in oil and gas production by 4.3 percent after the closure of the oil platform. Capital Economics states that the industrial production is unlikely to recover in several following months as the oil platforms are expected to remain closed for another four or five years.
It should be noted that the volume of output in the main production fell by 1.5 percent, and hope for the restoration of production remains bleak as the recent studies have shown that the major trend in industrial production is weak. In addition, the experts state that the decline in the UK trade deficit from GBP2.8 billion in December 2012 to GBP2.4 billion in January 2013 is not as reassuring as this data fully reflects the improvement in the oil trading. The deficit in trade, excluding oil trade, increased in January 2013 from GBP1 billion to GBP7.8 billion (UK national statistics). However, the economists note that the overseas demand for goods and services from the UK remains weak.
Meanwhile, the National Institute of Economics and Social Research claims that the UK economy will expand by 0.7 percent in 2013 and 1.5 percent in 2014. However, currently the economy remains almost unchanged in the first three months of 2013, and the negative output gap continues to widen.
Fitch, International rating agency, downgraded the credit rating of the UK to the “negative” level. However, the accompanying statement indicates that the evaluation rating can be revised by the end of April (British economy).
The latest forecasts from the Office for Budget Responsibility show that the level of the UK public debt to GDP will grow faster and will reach the peak at the higher value than it has been expected. According to the new estimates, the total national debt will reach its peak during 2016-2017 at 100.8% of total GDP, and it will begin to decline only in 2017-2018 (Inman 2013).