The UK series: Economy talk 1/6

16 September, 2013

The United Kingdom has the 6th largest GDP in the world, but it is no hidden secret that the UK economy greatly suffered during the financial crisis. Many were astounded when the UK came dramatically close to a double dip recession. The IMF also stated that the UK economy was recovering with less success than 23 of the 33 advanced countries that they monitor.

However, there are strong signals that the UK economy is becoming vibrant once more. They have produced a collection of impressive results during the summer months, including a 0.7% second quarter GDP growth rate.  This makes it fundamentally essential to gain an understanding as to what makes the UK economy tick.

The Services Sector:

Services equates to three quarters of the UK GDP, employing around 80% of the UK workforce. It is essential for this section of the economy to maintain growth, as it has such severe consequences for the UK employment rates. The Services sector in the UK is predominately occupied by financial and professional services such as; banking, insurance, management consultancy and law. However, services can also be stretched towards transport, communication, hotels, restaurants and government services.

Fortunately, not only is the services sector very sustainable for the UK economy, but there are strong indications that it is set to continue its expansion. Only last month, it was reported that UK services growth was at a six year high, and heading back towards pre-recession levels. The more this sector shows growth, the faster employment opportunities will arise.

Additionally, higher employment opportunities will boost consumer confidence and lead to increased spending. This will further stimulate the UK economy.

Manufacturing and Construction:

Alarming manufacturing statistics in March raised fears that the UK may again be heading for trouble. The PMI showed a reading of 47.9, below the 50 level which seperates growth from contraction. However, manufacturing has been picking up since then. The PMI index has now expanded for a consecutive five months, with the latest reading being 57.2.

Manufacturing equates to around 10% of UK GDP and is a very valuable contributor for employment opportunities. The latest growth signs will create more employment in the near future, potentially uplifting the value of the UK currency.

Construction was another element of the UK economy which consequently suffered during the recession. The decrease in demand for new buildings led to mass redundancies across the sector. However, the latest Construction Purchasing Managers Index reading was at its strongest level in nearly six years. It is being hoped that this new level of growth will create employment for those people who were unfortunate to lose their job previously.

Future Indications:

Overall, there are clear signs that the UK economy is growing again at an impressive rate. Forecasts for the economy are set to improve throughout the rest of the year. Although there might perhaps be a conflict of interest over a stronger sterling possibly overpricing exports and potentially decreasing demand from outside the UK, there is no disputing that an increase of demand for UK products and services will correlate to additional employment opportunities.

One thing is for certain, the future is looking brighter for the UK than it has done for some time. This is resulting in the BoE and their new leader, Mark Carney facing increasing pressure over their monetary policy.  Will an increase in interest rates be on the horizon?

By Jameel Ahmad, Research Analyst at Blackwell Global


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