Economic Relationship between Qatar and UK - Example

Qatar and UK Student’s Name University Affiliation Background of relationship between the two countries For Qatar Airways, the United Kingdom is one of the best destinations where huge investment can be made at lower risks but high, sustainable profits. At the outset, it is imperative to note that relationship between the two countries has lasted for many decades. However, in the recent past, economic relationship has increased due to various reasons that would be clearly underlined within the essay. Economic relationship between Qatar and UK has blossomed in the recent past because the two economies have a lot in common. Their relationship can be traced to colonial era where Qatar was part of the British Protectorate. The nature of rapport between the two countries is trade partnership. The two countries hold strategic importance to each other because of immense resources that could be exchanged for mutual benefit. Economic relationship between the two countries affords them a great deal of expediency in relation to exchanging both financial, material and human resources. Qatar is of great strategic importance to the UK because of its immense wealth and vast natural resources. In the year 2012, Qatar was ranked as the world’s wealthiest nation with approximately $106,000 GDP per capita (O’Brien, 2014). Because of its vast energy resources, it can provide the United Kingdom with close to 20 percent of its gas needs. In addition, the immense wealth of the nation provides an opportunity for the UK to acquire financial resources in terms of direct foreign investment. On the other hand, the UK is perceived to be of strategic importance to many Qatari investors because of immense business opportunities in the nation. Notably, UK has been ranked severally as the best business destination in Europe. The influence of Qatar in the UK has been growing rapidly in the recent past because Qatari investors have been pumping huge financial resources as investments. The country generates billions from its massive natural gas reserves, thereby it is vital to acquire good investment opportunities. In the recent past, investment of Qatari investors in UK has seen sale of property, such as Harrods, Britain’s aristocratic shop, Number 1 Hyde Park, the most expensive property in UK, the Shard, which is London’s tallest skyscrapers among others. Bilateral commerce between the two economies has been rising rapidly and steadily for the past 4 years. Bilateral trade in goods and services touched 6.6 billion pounds in 2011. The figure represented a stunning 71 percent increase from bilateral trade in goods and services in 2010. Visible exports from UK to Qatar increased from 1.12 billion pounds to 1.31 billion pounds in 2012, which represented a 16 percent increase. Qatar has increasingly demanded UK goods and services; while on the other hand, UK is increasingly demanding Qatar’s financial resources in terms of direct investment. In 2005, exports from UK to Qatar stood at 363 million pounds, meaning that trade between the two countries have been rising rapidly. Currently, Qatar is the third largest export market for UK within the Gulf region. Bilateral service trade flow between the two countries was valued at 673 million pounds in the year 2011. In the same year, investment from Qatari government in the United Kingdom was valued at 20 billion pounds. In addition, a further investment worth 10-15 billion pounds was expected (Dinh, 2012). Major macroeconomic influences of UK The figures provided above clearly indicate that the two countries have a vibrant economic relationship, which is mutually beneficial. In that respect, if Qatar Airways can invest in UK, then there is a high chance that its business will blossom. Nevertheless, industry-based investment can differ greatly from the nature of investment made by governments. Numerous considerations, particularly concerning macro-economic variables, have to be made. Macro-economic variables, including unemployment rates, inflation, balance of payment, exchange rates, competitive advantage, macroeconomic policy and growth rate have to be analyzed to acquired information that could support decision-making. Although a market might seem to hold numerous opportunities, in-depth analysis on macro-economic variables has to be done to uncover risks and uncertainties that might be encountered. Economic growth of UK The United Kingdom was part of the economies that were vastly affected by the global economic recession of 2008. Nevertheless, the country succeeded to rise from the downturn. At present, the United Kingdom is graded as the seventh largest economy in the world. Just like many other developed nations, the service industry is the largest within the economy and accounts for approximately 75 percent of GDP. Principle segments within the service industry are government, health and education, which accounts for 20m percent of total GDP and transport, hotels and restaurants, which accounts for 18 percent of total GDP. Other fundamental segments within the UK service industry include professional and support, financial and insurance and real estate. The United Kingdom is documented as one of the leading manufacturers in the world. Surprisingly, production from manufacturing industry accounts for only 10 percent of its total GDP. Construction is another fundamental element in the structure of UK economy that constitutes 7 percent of its total GDP. The global financial crisis, which activated in 2008, greatly destabilized the economic growth of the economy. During the peak of the economic the recession in 2009, the economy slammed by 7.2 percent. However, since then, economic growth has been gradually improving. Recently, economic experts noted that economic growth would be expected to reach pre-global crisis limit within the next few months. In 2012, GDP was at 0.3 percent, while in 2013, it was at 1.7 percent (O’Brien, 2014). During the first section of 2014, the GDP of UK economy improved by 0.8 percent. The improvement represented a fifth straight economic expansion, meaning that the country will soon experience a full economic recovery. The service and manufacturing industry were the biggest gainers at 0.9 percent and 1.3 percent respectively. Improvement from various sectors in the economy implies that the country presents numerous opportunities for investment. If all factors are kept constant, the economic growth of UK will continue to expand dramatically. Inflation In 2008, when the global financial crisis emerged, prices began to rise at a yearly rate of 5 percent. In 2009, the rate of price rise was at 1 percent as measured by consumer prices index (CPI), but falling at the rate of 1.5 percent as measured by retail price index (RPI). During the late 2011, prices were rising again as measured by CPI at the rate of 5.2 percent. Since then inflation rate has been dropping gradually towards the limits desired by policy makers. In December 2012, inflation stood at 2.7 percent as measured using consumer price index and 3.1 percent as measured by retail price index. During that time, electricity prices rose to 3.9 percent as compared with figures collected in December 2011. Other factors that were considered during the financial period were gas prices, which rose by 5.2 percent and food and non-alcoholic drinks that rose by 3.8 percent. During the same period, air transport reduced by 6.8 percent while motor fuel costs decreased by 0.2 percent. In 2012, the Bank of England hoped that inflation rate was to remain within 2 percent for the next two years. Their prediction appeared to have been true because inflation has been reducing steadily in the past few months. In February 2014, inflation was at 1.7 percent. The result was largely attributed to falling petrol prices, which was estimated at 0.8p a liter as compared to 4p a liter a year ago. Reducing inflation has huge repercussion on the economy, particularly on purchasing power of its citizens. Ideally, falling rate of inflation means a narrowing gap between rise in prices and pay increase. Because of that, total earnings increased by 1.4 percent in the course of the first quarter of 2014. The degree of inflation was anticipated to be sustained because of long-term economic strategies that have been laid down by the UK government. The nation’s long-term economic plan is expected to provide citizens with desired levels of security and stability. Reduced rate of inflation has a huge benefit to investors because consumers within the economy will have increased purchasing power. Unemployment The term unemployment covers people who are laid off, fresh students from college, period of transition from one job to another and misplaced human resources. Unemployment is a fundamental element in every economy because it directly indicates the rate of development and productivity of an economy. Just like many other macroeconomic element, the rate of unemployment in the UK was destabilized by the global financial crisis of 2008. Unemployment was not immediately felt after the inception of the global financial crisis because businesses normally delay laying-off people with the hope that underlying circumstances might change. Soon after the global financial crisis, unemployment rose sharply to reach 1.6 million of 5 percent. By the expiration of 2009, unemployment had stretched to 8 percent, meaning that close to 2.5 million people were unemployed. The highest limit of unemployment was recorded in 2011 when almost 2.7 million people were out of employment in the UK (Botham, 2012). From a historical point of view, rate of unemployment in the UK has averaged 7.26 percent from 1971. Since the global economic crisis, rate of unemployment has been steadily decreasing. By March 2014, the rate of unemployment was at 6.80 as compared with a rate of 6.9 during the previous period. The lessening of the level of unemployment was vastly attributed to self-employment and increased pay-growth as compared with inflation rate. Between January and March 2014, close to 2.21 million UK citizens remained unemployed. Although the figure appears high, 133 000 people were thought to have been employed as compared to period between October and December 2013. As compared to similar period in 2012, 309 000 people had been employed. Statistics collected during the first quarter of 2014 indicated that there were 8.85 economically docile characters between the age of 16 and 64. The figure represented a reduction by 85,000 individuals as compared to the last quarter of 2013. On the other hand, 30.43 million people were employed during the first quarter of 2014. The figure represented a 72.7 percent of characters between the age of 16 and 64 years. The rate of unemployment within the economy may not be at its best limit (Kent, 2013). Nonetheless, it indicates that the economy is doing well because a large portion of its citizens is employed. The rate of unemployment is good for investors because it guarantees that labor will be easily available at lower rates. Having a high rate of unemployment can be a positive indicator for investors because it ensures that high-quality personnel will be acquired at lower cost. The statement implies that Qatar Airways may find UK as a favorite destination for doing business because highly educated individuals can be easily acquired to assist in running the business in the country. Competitive advantage The United Kingdom has managed to make foreign investment its greatest driving force of international economy because of its competitive nature. According to fresh evidence from the United Nations Conference on Trade and Development, UK documented a rise in direct investment by multinationals by 25 percent. The fact that UK continues to lead other European economies in terms of attracting foreign investment shows that it has a competitive edge (InvestinUK.net, 2014). There are numerous reasons why many international businesses prefer the United Kingdom. To begin with, UK economy is characterized by openness to foreign investment. Policies and structures constituting the UK economy do not provide a chance for discrimination between nationals and foreign individuals in terms of opening and operating private companies. In case a foreign company is incorporated in the UK, it will enjoy a number of privileges including guaranteed defense from UK government within EU. Investors from commonwealth nations have particular advantage because they will have legal heritage, similar business culture and common language. In a bid to improve openness to foreign investment, UK government made a commitment to ensure economic reform including supporting healthy competition, privatization and deregulation. Second, the UK has competitive edge over other investment destinations in Europe because of its simple tax system. Specific rates and limits of taxation have been provided for corporations and small companies. Taxes are based on earnings, but the tax system also allows tax deductions on depreciation of assets and expenditures. The tax system has listed Tilbury, Southampton, Sheerness, Prestwick and Liverpool as free ports or foreign trade zones. Third, the UK economy is characterized by fewer restrictions. Doing business in UK does not require complex business processes and activities, such as local management participation, technology transfer, joint venture, performance bonds and guarantees. Lastly, there is room for expropriation and compensation. If a business is to be nationalized, then the British government is obliged to abide by regular international law by providing effective, prompt and adequate compensation. The UK economy has other business friendly aspects including skilled workforce, good transportation links, cultural amenities and latest technologies. All the factors have made the United Kingdom to be an investment hotspot in Europe and one of the prominent business terminuses in the world (InvestinUK.net, 2014). Balance of payment The pink books of UK show that the economy is experiencing a balance of payment deficit. In 2011, the current account discrepancy was recorded at 22.5 billion pounds. However, in 2012, the gap widened to 59.2 billion pounds. The deficit recorded in 2012 was the highest since 1989 because it was paralleled with 3.8 percent GDP at current market price. Trade deficit was at 23.3 billion as at 2011, but widened to 33.9 billion in 2012. In 2011, the income balance was a surplus of 22.5 billion. Nevertheless, the income balance changed to a deficit of 2.3 billion in the year 2012 (Giudice, 2014). At the culmination of 2012, international investment position of the economy has accumulated net liabilities of 141.6 billion. Exchange rates Because of the prevailing economic conditions, the policy formulators at the Bank of England have been forced to make tough decisions concerning interest rates. In a meeting that was held in July 2012, the Monetary Policy Committee (MPC) of the Bank of England elected to uphold the interest percentage at an unparalleled low of 0.5 percent. During that time, the MPC also announced a quantitative easing worth 50 billion pounds. Since then, no additional quantitative easing has been announced, although the interest rate is still held at that level. Decision to stop the use of quantitative easing was made because of rising consumer price index inflation. According to the International Monetary Fund (IMF), the UK monetary policy makers need to consider reintroducing quantitative easing because of its economic weakness. In addition, the IMF noted that the Bank of England needed to reconsider efficacy of reducing its interest rate below 0.5 percent. The Bank of England defended its decision by claiming that it was necessary for achieving substantial progress in reducing fiscal risks and attaining sustainable budgetary position. Macroeconomic policy The fact that policy formulators within the economy chose to eliminate quantitative easing and peg the interest rate at 0.5 percent meant a variety of implications both for its citizens and for investors. Relationship between Qatar and UK is likely to be enhanced because of its prevailing monetary and fiscal policies. The reason is that the policies greatly reduced government spending and interest rates. Because the government hopes to enhance its economic growth, foreign direct investment is a welcome relief. The low interest rates make the country a lucrative destination for Qatari investors because low interest rates are normally associated with low cost of operating business. With the low interest rate, investors can easily access cheap loans in case of financial challenges. Thus, if Qatar Airways starts operations in UK, financial risks involved are low because of low interest rates. Through the Qatar British Business Forum (QBBF), which was established in 1992, better economic relationship between the two countries has been enhanced. The QBBF provides an opportunity for Qatari investors to influence macroeconomic policies in UK by exchanging views and opinions with policy makers. Views and opinions that are commonly exchanged in the forum concerns existing and potential business opportunities between the two countries. Other macroeconomic policy meant to improve trade between Qatar and UK is implemented with the help of British Embassy in Doha. The embassy is tasked with the responsibility of providing necessary information to investors. In addition, the embassy is tasked with the duty for formulating defense, economic and political relations between UK and Qatar. References Botham, R. (2012). Does the UK need a SCORE? US and UK SME advisory services compared. Local Economy, 27(3), 265-278. Dinh, M. T. (2012). Macroeconomic factors influencing UK household loan losses. Journal of Financial Regulation and Compliance, 20(4), 385-401. Giudice, G. (2014). UK economy: the crisis in perspective : essays on the drivers of recent UK economic performance and lessons for the future. London: Routledge. InvestinUK.net. (2014). Competitive advantage of UK. Retrieved from http://investinuk.net/competitive-advantage-uk Kent, D. W. (2013). UK Instrumentation & Control Manufacturing Sector: A Report Highlighting the Dynamics of This Industry and its Vital Importance to the Sustainability of the UK Economy. Measurement and Control, 41(2), 43-48. O’Brien, G. (2014). Doing business in Qatar. Retrieved from http://www.qatar.doingbusinessguide.co.uk/forewords/introduction-by-director-of-trade-investment/ Read More