Economy of U.K - Research Paper Example

?Analysis of the Current Economic Situation of the U.K The U.K. is one of the European economic giants. However, the economy has been struggling in the recent years following the global financial meltdown that has affected the country since 2007. The financial crisis affected almost all sectors of the U.K. economy. This has resulted in a sluggish economic growth marked by high unemployment rates, high inflation, high interest rates, a decline in the balance of payment and depreciation of the pound. This paper provides an in-depth economic analysis of the current U.K. economy with the aim of showing what lies ahead of the country in terms of economic performance. The entire world has suffered in one way or another following the financial crisis of 2007/2008. However, some countries have managed to recover faster than others. The U.K. is among the countries that were worst hit by the recent financial crisis (Osborne 5). The crisis affected almost all sectors of the U.K. economy. In fact, the country continues to feel the effects of the crisis through recession and depression every now and then. However, research indicates that the economy of the U.K. is on the right path to recovery even though it might take years to recover fully. GDP As earlier stated, the U.K. economy has been one of the worst hit by the global financial crisis in Europe. This resulted in a fall in the country’s gross domestic product (GDP) to an all time low. However, GDP figures released recently indicate that the U.K. economy is on the path to recovery. The country’s GDP as of 2012 by purchasing power parity stood at $2.375 trillion according to the CIA (par. 1). By official exchange rate, the GDP of the UK in 2012 stood at $2.441 trillion. The per capita income of the United Kingdom on the other had stood at $37,500 in 2012. Currently the country’s GDP growth rate stands at 1.6%, which is an improvement of 0.2% from the previous year’s 1.4%. The country’s GDP registered a growth of 0.8% during the first quarter of the year and 1.5% during the third quarter. Based on the current GDP figures, it is apparent that the recovery of the U.K. economy continues to solidify. Reports indicate that the expansion of the U.K. GDP became possible due to the contribution of all sectors of the economy during the third quarter (Conway 12). Employment situation The global financial crisis that hit the U.K. did impact of all sectors of the economy resulting in high employment rates. However, as the economy continues to solidify, additional jobs continue being created thereby resulting in a slight drop in unemployment rates. The latest employment figure shows that the unemployment rate in the U.K. stood at 7.6% in September 2013. This accounts for a drop of 0.1% compared to the previous quarter where the rate stood at 7.7%. CIA (par. 1). is worth noting that even though the unemployment rate continues to fall, it is unlikely that it will fall sharply due to the job losses experienced in the public sector. The welfare and pension reform introduced by the government is also likely to affect the rate of unemployment since it is likely to attract citizens to join the labor force (Osborne 5). Inflation Inflation is another major problem that U.K. citizens have been grappling with for the past six years. Reports show that the prices of commodities in the country have been increasing at an alarming rate. For instance, the inflation rate in the country was only 1.30% in 2004 and 2.30% in 2007 when the global economic crisis began (BBC News 2). However, the rate increased to 3.60% in 2008 due to rising prices of goods and services marked by hard economic times. Nevertheless, the U.K. government has managed to contain the situation as the country continues to experience a decline in inflation rates every quarter. The U.K. inflation rate fell to 2.20% in October, down from 2.7% the previous month (BBC News 2). In fact, this marks the lowest rate since 2012. The major decline was registered in the transport sector where transport price declined by whooping 1.5%. As the economy continues to stabilize, it is highly expected that the inflation rate will soon fall below the 2% target (BBC News 2). Foreign Trade The trade balance between the U.K. and other countries has not been good since 2007. This is attributable to trade deficit marked by an increase in the value of imports and lower value of exports. Research indicates that the U.K. has been importing goods more than it exports to other countries resulting in a wide trade deficit. The latest figures indicate that the British trade deficit widened by ?2 million pounds in September 2013. The U.K. trade deficit as at September stood at ?9.8, billion up from ?9.6 billion recorded in the month of August, 2013. This implies that the U.K. is heading into 2014 with a very wide trade deficit (Conway 12). The country had an external debt amounting to $10.09 trillion as of first January, 2013 according to the CIA (par. 1) Regarding imports and exports, the biggest U.K. exports for the past few years comprise of nuclear reactors, mechanical appliances, boilers, and nuclear reactors. The second biggest export items in the U.K. include mineral fuels and oils, and their derivatives including mineral waxes and bituminous substances. Vehicles and their parts have been the third biggest U.K. exports over the last few years. From October 2011 to date, the U.K. has exported vehicles worth at least ?23 billion. Apparently, vehicles and their parts were also the third biggest imports in the country for the same period in which the U.K. imported vehicles worth ?32 billion. The top U.K trade import partners include the U.S., Germany, France, Netherlands, Ireland, Belgium, Italy, Spain, and China. Its top export trading partners include Germany, the U.S. and China. The U.K. exported goods worth ?31.7 billion to the U.S in 2012 (Conway 12). The role and size of government spending The U.K. has one of the largest budgets in Europe. This has been the case for the past few years in an attempt to adequately finance all the government programmes. Since the economy is not able to fund government expenses fully, a significant part of the budget is financed by credit. Government budget for the 2013/2014 financial year totals ?718.8 billion (Chantrill par. 3). This resulted in a budget deficit of ?2.12 billion. According to the latest budget, ?144.1 billion was allocated to pension, ?129.7 billion to health care, ?88.6 billion to education, and ?46.6 billion to defense while ?112.5 billion was allocated for government spending to identify any deficits or surpluses. It is also worth noting that the national government incurs 76% of the deficit while the local government incurs 24% of the deficit (Chantrill par. 3). Assessment of current and proposed national policy of the U.K In order to ensure economic growth, the Bank of England (BoE) has formulated a raft of monetary policies. For example, the BoE formulated a monetary policy that has ensured that the interest rate is held steady at 0.5%, and that asset purchase does not exceed ?375 billion (CIA par 1). These measures are aimed at ensuring that the recovery continues to a self-sustained economic growth in the future. In addition, the BoE has committed to ensuring that interest rates are not increased before the rate of unemployment fall below 7%. Apart from the monetary policy, the U.K. government has also embarked on creating employment opportunities for its citizens. In addition, the U.K. government has formulated policies aimed at promoting export of its products to ensure a favorable balance of trade (Pym 3). Works Cited BBC News. UK Inflation Falls To 2.2% in October, BBC News, Nov. 12, 2013. Print. www.bbc.co.uk/news/business-24910587 ? Chantrill, Christopher. Total Planned-Public Spending Expenditure – CHARTS – GDP Debt. Web. Nov. 25, 2013 http://www.ukpublicspending.co.uk/ CIA. Word Fact Book: Europe: United Kingdom 2013. 2013. Web. https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html Conway, Edmund. The UK Economy: An Analysis and Some Predictions, The Telegraph, Jan 24, 2009. Web. http://www.telegraph.co.uk/finance/recession/4326173/The-UK-economy-an-analysis-and-some-predictions.html Pym, Hugh. UK Economy Will Take Years To Recover Says Boe's Dale. BBC News, Nov. 21, 2013. Web. www.bbc.co.uk/news/business-25042454 Osborne, George. UK Economic Growth Figures Hailed By George Osborne. The Guardian, October 25, 2013. 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