UK economic growth for the period 2000-2007
The U. K economy is among the worlds largest and has been ranked fifth behind the US economy, Japan, Germany and China. The World Bank has also estimated UK’s people to be the twelfth richest in the world. Some of the major sectors which have contributed immensely to the growth of economy include industrial and allied, agriculture , mining , manufacturing, the property market and its financial market which is one of the strongest market in the world(Bamford & grant, 2000).
In looking at its GDP growth for the east five years we can see that it has been growing steadily over the last seven years. UK GDP growth at current market price Source: (Ingham, 2004) This growth in GDP is due to the relative growth in key sectors supporting the economy particularly the manufacturing sector and that of industrial and allied. The 2 manufacturing industry in the year 2003 accounted for 16% of the country’s national output and furthermore contributed to 13% of employment according to statistics produced by the office of national statistics.
This sector is also believed to have contributed to 83% of exports in the year 2003 therefore an important sector in for overseas trade and the economy as a whole. GDP grew by 2. 75% in year 2006 followed by a 3. 1% growth in year 2007 compared to 2006 the current growth in GDP has been caused by an increase in foreign direct investment in the country particularly from the years 2004 onwards. In comparing the graph between foreign direct investment inflows and outflows during this period the their contribution to the economy can be clearly be shown
Foreign direct inflows and outflows 2001 2002 2003 2004 Source: (great & Dunwoody, 2008) 3 Therefore from the graph above it can be seen that foreign direct investment inflows exceeded outflow from the year 2004 which have contributed to the growth in the economy. An increase in foreign direct investment have been occasioned due to the relative stability of the UK economy which have been able to withstand the recession experienced in the global market.
Furthermore its taxation and regulation policies have created a good environment for business to thrive in due to the ability of the government to control inflation which have been increasing at a low rate this was created confidence among the international community of the ability of the economy to grow thereby attracting more foreign investors in the country (Peterson & begg, 2003). An increase in GDP has consequently led to an increase in per capita income over the same period which has increased the standard of living and reducing the poverty level.
UK GDP per capita at current market rate 2000 2001 2002 2004 2005 Source: (sawyer, 2004) Increase in per capita income means that the disposable income on the hand of the household (consumers) increases. As disable income increases then aggregate demand 4 will also increase. In order to meet the growing demand for goods then businesses are forced to increase output thereby causing growth and expansion. This in return causes unemployment level to decrease as business absorbs more workers to help in production of goods and services (Conway, 1998).
Increase in disable income is also associated with increase in saving. As the saving level increases, it will avail sufficient fund to be used by business for growth and expansion. Therefore the UK market which consists of consumers who are able and willing to buy has attracted foreign investment. The financial system in UK is another determinant that have been critical in attracting foreign investment some the study conducted have concluded that a vibrant financial system is key in determining or making a final decision on whether to invest in foreign market or not (prest, 1968).
The inflation rate during the period 2000 to 2007 have been maintained at a relative low rate which have been favorable for the performance of business and the stability in the economy. The average annual inflation for the period 2001 / 2002 was 2. 6% while between period 2005 / 2006 it was 1. 9% in total the annual inflation rate from year 2001 to 2006 was 11. 2%. Therefore compared to other countries which are members of European Union therefore the U. K can be considered to be the best in terms of inflation, unemployment and interest rate which have been maintained at a relatively low rate.
Low levels of inflation rate means that the consumer purchasing power has remained stable over that period therefore they are able to buy more thereby increasing aggregate demand which boost business and the economy as a whole. Further more business which produces goods for export is able to manufacture goods at low cost thereby increasing their competitiveness in the global market. 5 Due to the fact that businesses have been able to borrow at a low interest rate they have been able to grow since there are available fund for investment.
The low level of interest rate was able to caution the country against the global down turn experienced in most of the countries. Though the exchange rate has remained stable in recent years which have enabled the sterling perform better than major currencies such as the Japanese yen and the US dollar U. K. has the largest account deficit which have been ranked third in the world. This has resulted from low levels of export in finished goods and commodities. In addition exports of financial services which account to a greater portion of UK revenue have been affected due to financial turmoil experienced(Wallis & Andrew, 1984).
The current account deficit is expected to widen incase the government does not take steps to broaden the scope of fiscal policy which will help promote external balance. With countries like China and Japan commanding the global market due to their ability to supply goods at low cost their impact will hurt the U. K economy particularity engineering and allied industrial sector which contribute at least 30. 8% of the gross value added in manufacturing. Furthermore the global downturn will automatically affect business which deal with export of goods putting in mind that the eight global car manufacturers are found in U.
K which include the BMW, tata, General motors, Honda, Nissan, Toyota and Volkswagen and other smaller manufacturer e. g. lotus and Morgan. One of the other markets that have grown over the past seven years is the property Market. This has been caused by sustained economic growth, growth or expansion in household numbers which in some areas has been caused by a high migration rate, growth in property investment, low interest rate and the planning restriction which have restricted the supply of new housing, The growth in property market peaked in July 2004 6
and until late 2005 the market have been falling or static in the capital. However during the first half of 2006 the market started to strengthen showing improvement in the capital. From September 2007 their have been a fall in house price which have contributed to the negative economic growth of the economy. Although the global downturn has adversely affected the UK economy on the other side it contributed to foreign direct investment occasioned since the year 2004. While most of the economies in the world including the US started experiencing recession the U.
K economy remained stable and therefore attracted more foreign investors. Furthermore the political economic environment in UK looked favorable compared to the rest (Andersson & pettersson, 2007). The stock market unlike other market did not show any favorable improvement from January 2000 to December 2005 the price of share of major companies dropped by 28% while between January 2000 to December 2004 the FTSE 100 index which is a measure of share price of 100 of the largest and strongest performing UK companies shed 1841. 2 points by dropping from 6,662.
9 at January 2000 to 4820. 1 at the close on 30 December 2004. Te investors were pessimistic on the growth of the economy and followed by recession and down turn experience in many economies around the world particularly the US the investors expected a slow down in growth of the economy. Furthermore most industries started recording reduction in profit due to less export and the financial turmoil adversely affected the economy (Baumohl, 2007).. At present the rate of inflation have accelerated due to increase in price of both gas and electricity.
The increase in gas and electricity price will increases the cost of manufacturer particularly in manufacturing industries where energy cost constitutes a greater portion of manufacturing cost. Since the manufacturing sector account to a greater portion of GDP this will adversely affect the economy. Furthermore where prices of 7 goods increases due to increased production cost then workers will demand an increase in wages so as to maintain their purchasing power thereby creating a wage-price spiral which will further push inflation unless both fiscal and monetary policy measurers are put in place to deal with the problem.
The other major issue of concern that may affect the economy is heavy government borrowing in the recent past which has led a severe structural deficit. Such a move by government to borrow either locally or from abroad will affect the interest rate. Where the government result to domestic borrowing, it means that they will be competing with private investors on available saving which will result to a crowding out effect.
Furthermore there have been an increase in taxation and regulation on business which tend to reduce the favorableness of political-legal environment which will affect the UK industry and reduce the level of foreign direct investment as investors look for alternative investment opportunities in emerging economies such as Brazil where there are less control ad conductive business environment. Furthermore the UK economy has recorded its first quarter negative growth for over 16 years which have seen the economy shrank by 0.
5% therefore where positive growth is not recorded in the final quarter then the country will enter into a recession. Though the government has taken steps to stabilize the economy which involves a rescue package worth $ 400 which will support the U. K banking system such a move will not assist the housing market as it cannot prevent a reduction in credit to household. The current changes in the economy does not seem favorable for business and most businessmen are pessimistic on possible growth of the economy and unless any positive growth is recorded in the last quarter of the year then the future does not look bright for investors.
ANDERSSON, A. E. , PETTERSSON, L. , & STRO? MQUIST, U. (2007). European Metropolitan housing markets. Advances in spatial science. Berlin, Springer. BAMFORD, C. G. , & GRANT, S. (2000). The UK economy in a global context. Studies in economics and business. Oxford, Heinemann. BAUMOHL, B. (2007). The secrets of economic indicators hidden clues to future economic trends and investment opportunities. Upper Saddle River, N. J. , Wharton School Pub.Sample Essay of EduBirdie.com