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United Kingdom - Economy

The UK and US remain poor societies with pockets of rich people. In 2023 the lowest-earning bracket of British households had a standard of living that was 20 per cent weaker than their counterparts in Slovenia. For decades, the City has acted as a vortex for domestic British investment, draining wealth away from the country’s peripheries – Northern England, Central Scotland, South Wales – and redirecting it towards the asset-rich English South East. Or, just as often, out of the UK altogether and into offshore tax havens. Under the Conservatives, spending cuts hit poor northern cities twice as hard as they did prosperous southern ones, amplifying health inequalities and pushing local services to the limit.

The United Kingdom has dropped out of the list of the world’s top ten industrial countries for the first time, against the backdrop of the “redrawing” of the global economy… The United Kingdom has fallen below Mexico and Russia.” According to The Times, data for 2022 shows that Britain is ranked 12th among the largest industrial economies, down four places compared to the previous year. At the same time, Russia has moved up the rankings, to eighth place due to increased defense production. Against this backdrop, Make UK has called for a long-term industrial strategy to support the manufacturing sector in the British economy. China topped the list of the top ten industrialized countries, followed by the United States of America, then Japan.

As the United Kingdom geared up for a general election on 04 July 2024, one issue emerged at the forefront of voters’ minds – the state of the economy. Since the ruling Conservative Party entered office 14 years earlier, the UK’s economy had slowed dramatically. The slowdown is particularly stark when immigration-driven population growth is accounted for and the period before the start of the global financial crisis is included. Gross domestic product (GDP) per capita grew just 4.3 percent from 2007 to 2023, compared with 46 percent growth over the previous 16 years, according to research released earlier this month by the Resolution Foundation think tank. That is the lowest growth rate since 1826, according to it. While UK Prime Minister Rishi Sunak has insisted the economy has “turned a corner” amid a return to growth and falling inflation, Britons are projected to dump the Conservatives in favour of the Labour Party, led by human rights lawyer-turned-politician Keir Starmer. Above all, the UK’s economic troubles can be traced to its dismal record on productivity growth. A rise in productivity – the ability of workers to produce more with less – is the key driver of economic growth and improving living standards. GDP per hour worked increased by an average of 0.6 percent annually in the 2010s, compared with 2.2 percent in the decade before the financial crisis – the worst performance among the Group of Seven economies except for Italy, according to the Resolution Foundation. The UK’s productivity gap has been widely attributed to years of chronically low investment relative to other developed nations. The UK’s investment spending from 2017 to 2021 amounted to the equivalent of 18 percent of GDP compared with 25 percent of GDP in Japan, 23 percent in France and 21 percent in the US, according to a PwC analysis of World Bank figures. Private businesses have remained too reliant on making profit at the expense of investing in capital and people. The result is that the UK finds itself in a low growth, low productivity and low wage economy. By mid-2022 much of the world was confronting a cost of living crisis amid post-lockdown supply chain crunches, the energy shock from the war in Ukraine and the consequences of loose monetary policy as economies surged back from the Covid shock. But Britain’s economic problems were especially acute. Of all G20 economies, only sanctions-hit Russia will perform worse than the UK in 2023, the OECD forecast in June 2022. UK inflation reached 9.1 percent in May, its highest level in four decades and the highest in the G7 at present. The same month, the pound sank to its lowest level against the dollar since the pandemic started, dipping under $1.20. Governor of the Bank of England Andrew Bailey told a conference of central bankers he was unsurprised by the drop in sterling’s value, attributing it to Britain’s flagging economic outlook. “I think the UK is probably weakening rather earlier and somewhat more than others,” he put it. Economically right-wing Tories have made much of the British tax burden reaching its highest level since Labour prime minister Clement Attlee’s 1945-1951 government – notably Commons leader Jacob Rees-Mogg.

Productivity growth is the pre-eminent factor in raising the standard of living, economists point out. The late 2000s financial crisis transformed Britain from a leader to a laggard in this regard. Britain’s productivity growth was the second-highest in the G7 from 1997 to 2007. It was the second-lowest in the G7 from 2009 to 2019.

Businesses have long warned that elevated housing costs are a major factor behind the UK’s productivity problem, making it harder for companies located in high-productivity areas to recruit and retain skilled workers. The price of the average home is running at a record 7.1 times the average of annual wages. While London is by far the most productive British region, it is also the least affordable in terms of property, with prices 9.7 times the typical annual salary.

The U.K. economy contracted by 9.9% in 2020, its largest annual contraction since the Great Frost of 1709. In the final quarter of the year, the U.K.’s GDP grew by 1%, according to the Office for National Statistics, as the country reimposed nationwide lockdown measures in a bid to combat a resurgence of Covid cases. Economists polled had expected an 8% annual decline in 2020.

Britain's economy shrank by a fifth in the second quarter, higher than any European neighbor, 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 world’s 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.

The UK has long pursued a different economic path to that of most countries in northern and western Europe, and the policy choices it has made have resulted in different – often radically different – outcomes. The various components of the UK model combine in ways that help distinguish the UK from the comparator countries and explain its weak performance across a range of indicators. For example, a number of commentators have attributed relatively weak productivity and relatively high income inequality to the short-termism resulting from the UK's distinct approach to ownership and governance, the failure to develop effective institutions and lack of commitment to industrial strategy.

It is also important to note that the UK's distinguishing characteristics are to a large extent the results of a deliberate set of policies pursued since the 1980s. As one commentator has put it "the growth of finance, a flexible labour market, and a smaller state imprint on the economy than most western European countries were all components of the decision to chart a course towards a mid-Atlantic position".

The UK has a very distinct approach to ownership and corporate governance, one that differs markedly from msny other nations. It is much more open to foreign buyouts, low prevalence of public ownership and a particularly active market for corporate control. The UK has more fragmented shareholding (fewer 'blockholders') and a low prevalence of large family-owned firms.

The Bank of England's former Chief Economist Andy Haldane has argued that "there is both direct and indirect evidence of investment having been adversely affected by short-termism on the part of either investors or managers or both". His conclusion is supported by the review of UK equity markets undertaken in 2012 by John Kay, ex-member of the First Minister's Council of Economic Advisers, the work of the Purposeful Company Taskforce, Bank of England survey evidence ("80% of all the publicly owned firms agreed that financial market pressure for short-term returns to shareholders had been an obstacle to investment" 2017) and numerous analyses linking poor corporate governance to fragmented shareholding, weak employee engagement, low prevalence of family firms and a relatively high prevalence of hostile takeovers. The adverse outcomes include pay inequality and weak investment.

The UK's relatively low productivity has long been a concern of policymakers but a wide range of policy initiatives, including the deregulation and tax cuts of the 1980s and, more recently, a series of industrial strategies, have failed to close the gap with the best performing nations. The UK's approach to industrial policy has suffered from a lack of commitment, weak institutions and multiple coordination failures.

Diane Coyle and Adam Muhtar argued that: "the UK's industrial policy since the 1970s has been characterised by frequent policy reversals and announcements, driven by political cycles, while multiple uncoordinated public bodies, departments and levels of government are responsible for delivery…A consequence of the policy inconsistency and poor coordination identified here is that UK industrial policy lacks adequate information feedback channels from outcomes to the policy process; there is a failure to learn or to build on successes".

The UK's labor and product markets are among the most deregulated in the advanced world. It has been argued that the low regulation environment encourages firms to adopt 'low road' approaches to competitiveness through cost minimisation and work intensification rather than 'high road' approaches based on patient investment and greater focus on skills formation/utilisation. The UK Internal Market Act 2020 opened the door to the possibility of forced deregulation across the UK nations, where market access principles risk driving down standards and threaten devolved policy choices to maintain alignment with high EU standards on social, environmental and public health issues. Further deregulation relative to current EU standards is now an explicit goal of the UK Government.

One consequence of deregulation, relatively low trade union density, inadequate industrial policy and a low rate of capital investment is a labor market more polarised in terms of wage distribution than other advanced nations: the UK has a relatively high proportion of both low wage workers and very high earners (and therefore high income inequality). Research for the Institute for Fiscal Studies argues that "the balance of bargaining power between employers and workers must be an essential part of a credible explanation for observed differences in the structure and change of national earnings distributions". Again, the current balance of bargaining power in the UK reflects deliberate policy choices.

The UK also has few of the deliberative and co-ordinating institutions common in Europe's co-ordinated market economies (e.g. national Economic and Social Councils, sectoral collective bargaining, works councils). The UK's few remaining institutions of social partnership have in recent years been abolished (e.g. the UK Commission for Employment and Skills) or weakened (e.g. the role of the Low Pay Commission has diminished as government has started playing a direct role in setting the national minimum wage). The lack of such institutions is particularly damaging in designing and implementing effective industrial policy.

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 would 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 Kingdom’s 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 coalition’s 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, London’s financial exports contribute greatly to the United Kingdom’s 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 Germany’s 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 Britain’s 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 supply–chain 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 UK’s position as the world leader in off–shore energy, with capacity expected to double by 2020, and investment is tipped to reach US$ 11.5 billion in 2017–21 – more than expenditure on broadband infrastructure. However, pressure on suppliers to cut costs risks sloppy workmanship and delays.