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United Kingdom - Economy

Britain's economy shrank by a fifth in the second quarter, higher than any European neighbour, as the coronavirus pandemic slammed businesses and plunged the country into a record recession. "It is clear that the UK is in the largest recession on record," the Office for National Statistics said after gross domestic product (GDP) contracted by 20.4 percent in April-June. Britain's recession -- its first since 2009 amid the global financial crisis -- was confirmed after two quarterly contractions in a row. GDP shrank 2.2 percent in the first three months of the year.

The UK -- which has the highest death toll in Europe from the coronavirus -- appeared to be paying a heavier price for locking down later than its continental neighbors. The British economy also relies more heavily on the hard-hit services sector than other European countries. While officially in recession, the UK economy was beginning to rebound as the government eases strict restrictions. GDP output growth was 8.7 percent in June as the economy slowly emerged from its lockdown implemented in late March,

The United Kingdom's economy saw nearly 20 years worth of growth wiped out as a result of the coronavirus lockdown measures. The Office for National Statistics said on 12 June 2020 that the economy shrank by 20.4 percent in April, the first full month that the country was under lockdown to contain the spread of the virus. With much of the economy still mothballed in May and June, the UK was heading for one of its deepest recessions ever - the Organisation for Economic Cooperation and Development (OECD) warned that the country is set to be the hardest-hit developed economy.

After the British "Brexit", France replaced the United Kingdom in 2019 becoming the world's sixth largest economy. The UK's Center for Economic and Business Research reminded in the World Economic Rankings that Brexit would inevitably lead to confusion in light of factors such as reduced business investment. However, the report pointed out that the UK after Brexit will regain its status as the sixth largest economy by 2020. The report expects that the UK will retain the sixth largest economic title in the world until 2033.

Indian Union Finance Minister Arun Jaitley on 30 August 2018 said India was expected to surpass Britain next year to become worlds fifth largest economy. This year, in terms of size, we have overtaken France. Next year we are likely to overtake Britain. Therefore, we will be the fifth largest [economy], he said in New Delhi. India became the globe's sixth-biggest economy in 2017, pushing France into seventh place, according to figures released by the World Bank in July 2018. India's gross domestic product (GDP) was $2.597 trillion at the end of 2017, against $2.582 trillion for France. The United States is the world's top economy, followed by China, Japan and Germany. Britain was the world's fifth-biggest economy with a GDP of $2.622 trillion in 2018.

Brexit had a substantial impact in terms of reducing the UK's total GDP in US dollar terms, since the British pound depreciated significantly since the Brexit referendum. This resulted in UK GDP actually declining in US dollar terms in 2016 compared to the previous year, even though the UK economy was estimated to have shown positive GDP growth in British pound terms.

Credit ratings agency Moody's downgraded the UK Government's bond rating from stable to negative in light of Britain's 23 June 2016 decision to leave the European Union. Moody's said: "Moody's expects a negative impact on the economy unless the UK government manages to negotiate a trade deal that largely replicates its current access to the Single Market."

"The majority vote in favour of leaving the European Union (EU) (Aaa, Stable) in the referendum held on 23 June will herald a prolonged period of uncertainty for the UK, with negative implications for the country's medium-term growth outlook. During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody's expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth. Over the longer term, should the UK not be able to secure a favourable alternative trade arrangement with the EU and other countries, the UK's growth prospects would be materially weaker than currently expected.

While the UK's institutional framework will not change, Moody's considers that policy predictability and effectiveness of economic policy-making -- an important aspect of institutional strength - might be somewhat diminished as a consequence of the vote. The UK government will not only need to negotiate the UK's departure from the EU but will likely also aim to embark on significant changes to the UK's immigration policy, broader trade policies and regulatory policies. While we consider the UK's institutional strength to be very high, the challenges for policymakers and officials will be substantial."

The United Kingdom has the seventh-largest economy in the world, has the second-largest economy in the European Union, and is a major international trading power. A highly developed, diversified, market-based economy with extensive social welfare services provides most residents with a high standard of living.

The UK has one of the most unequal economic models in the developed world: since 1975 income inequality among working-age people has increased faster in the UK than in any other country in the OECD. The increasing geographical imbalance concentrates jobs, population growth and investment in London and the South East of England, but no action has been taken to address this by successive Westminster governments.

The UK economy has performed relatively well in recent years, with economic growth consistently near the top among major advanced economies and the employment rate at a record high. However, growth has slowed somewhat in the first part of 2016, as heightened uncertainty ahead of the referendum on EU membership appears to be weighing on investment and hiring decisions. In a baseline scenario in which the UK remains in the EU, growth was expected to recover in late 2016, as referendum-related effects wane, and to average around 2.2 percent over the medium term. Inflation is expected to rise gradually from its current low level (0.3 percent as of May 2016), as disinflationary effects from past commodity price falls dissipate and as tighter labor markets and minimum wage hikes help push up wages.

The United Kingdoms economy continues to recover from turmoil in the financial markets. It entered a recession in the third quarter of 2008 and exited recession in the fourth quarter of 2009. Growth since then has been patchy, held back by weak credit growth, a contraction in real incomes, and the poor economic outlook in the U.K.s major trading partners. The U.K. economy contracted on a quarterly basis in the final quarter of 2010 and the final quarter of 2011. In response to the financial crisis, the British Government implemented a wide-ranging stability and recovery plan that included a fiscal stimulus package, bank recapitalization, and credit stimulus schemes.

Extraordinary monetary policy measures, including very low interest rates (0.5%) and a quantitative easing program (325 billion), remain in place. Despite this, domestic demand remains weak and unemployment has yet to return to pre-recession levels, standing at 8.4% in November 2011. The Conservative-Liberal Democrat coalition government that took power in May 2010 initiated a planned 5-year austerity program, which aims to lower the U.K.s budget deficit from over 11% of GDP in 2010 to near 1% by 2015. Poorer than expected growth has meant that the coalitions budget deficit plans would only be met in 2016/17.

As a leading international financial center, London was severely impacted by the financial crisis in 2008. U.K. banks laid off thousands of workers and scaled back their international operations during the crisis, although many are now rehiring. Two U.K. banks, Northern Rock and Bradford & Bingley, were nationalized, and the British Government took significant shares in the Royal Bank of Scotland and Lloyds Banking Group.

In November 2011, the U.K. government sold Northern Rock to Virgin Money. In spite of the damage caused by the financial crisis, Londons financial exports contribute greatly to the United Kingdoms gross domestic product and will continue to do so. Over 1 million people in the U.K. work in financial services, nearly 4% of total U.K. employment. About one-third are employed in London. The U.K.s financial services industry contributed 124 billion ($200 billion) to U.K. GDP in 2009, accounting for 10% of total economic output. London is a global leader in emissions trading, a center for Islamic banking, and home to the Alternative Investment Market (AIM).

he United States remains the primary source of foreign direct investment (FDI) into the UK. In FY 2011-2012, the United States contributed 24% of all inward investment projects to the UK and over 30% of all inward investment-generated jobs. In 2011, the United States contributed FDI inflows of USD 227 billion, an increase of 15% from 2010. The UK was the world's seventh largest recipient of foreign direct investment in 2011, slipping from fifth position in 2012, receiving USD 53.9 billion, according to the United Nations Conference on Trade and Development (UNCTAD). Despite the drop in ranking, however, inflows increased 7 percent over 2011. The UK attracted 17 percent of all European Union (EU) FDI inflows, the highest percentage for a single EU country, but this position is being challenged, with Germanys share of FDI rising for the fifth year in a row to reach 15 percent.

With a few exceptions, the UK does not discriminate between nationals and foreign individuals in the formation and operation of private companies. U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders, although at least one director of any company registered in the UK must be ordinarily resident in the UK. Once established in the UK, foreign-owned companies are treated no differently from UK firms. Within the EU, the British Government is a strong defender of the rights of any British- registered company, irrespective of its nationality of ownership.

The UK has a simple system of personal income tax. The basic income tax rate is 20 percent on income over a personal tax free allowance of GBP 8,105 (USD 13,010) and less than GBP 34,371 (USD 55,172). For earnings over GBP 100,000 (USD 160,500) and less than GBP 116,210 (USD 186,517), the tax free allowance is reduced by GBP 1 for every GBP 2 of over additional income. As part of the Coalition Government's plan to reduce the significant UK budget deficit, tax rates on income over GBP 35,000 will increase from 40 to 45 percent as of April 2013UK citizens also make mandatory payments of about 12 percent of income into the National Insurance system, which funds social security and retirement benefits. The UK requires non-domiciled residents of the UK to either pay tax on their worldwide income or the tax on the relevant part of their remitted foreign income being brought into the UK. If they have been resident for 7 years or more, and they choose to pay tax only on their remitted earnings, they may be subject to an additional charge of GBP 30,000 (USD 48,141).

Until recently, economists believed that power generated from offshore wind was an expensive and inefficient way of reducing carbon emissions, but in September 2017 this was blown apart by a massive fall in the cost of offshore wind in an UK government auction. This has led to suggestions that over the next 50 North Sea wind could be as important to the UK, as North Sea oil and gas were in the previous 50 years. Although wind power only accounts for 5% of Britains energy production, the auction showed how a commitment to wind power can lower its costs to the point where it can compete with gas and nuclear energy. Technological improvements in the industry have also improved its efficiency, and the British supplychain is catching up by producing more wind turbines. The reformed auction system also promotes competition by allowing companies to decide where they should locate their offshore wind farms, rather than governments. All this bolsters the UKs position as the world leader in offshore energy, with capacity expected to double by 2020, and investment is tipped to reach US$ 11.5 billion in 201721 more than expenditure on broadband infrastructure. However, pressure on suppliers to cut costs risks sloppy workmanship and delays.

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Page last modified: 12-08-2020 15:07:33 ZULU