United Kingdom Economy-GDP, PMI, CPI, Unemployment Rate

United Kingdom

The United Kingdom economy is considered highly developed. The United Kingdom of Great Britain and Northern Irelands or the UK is a country located in North-Western Europe. The UK is composed of four different countries like England, Scotland, Wales, and Northern Ireland. Presided over by a queen, the UK is considered a constitutional monarchy but is governed via a parliamentary form of government. Its capital is London. The country is the result of a series of annexations, unions, and separations of constituent countries over several centuries. Great Britain was formed through a Treaty of Union between the kingdoms of England and Scotland in 1707. Its union with the kingdom of Ireland gave birth to the United Kingdom (UK) in 1801. The nearby Isle of Man, Guernsey, and Jersey is not officially part of the UK but is managed as crown dependencies. There are also 14 overseas territories that Britain manages. The United Kingdom used to be a founding member of the European Union but has come out after British citizens voted it out in a referendum.

United Kingdom Economy

It is considered the world’s sixth-largest economy and second-biggest in Europe after Germany. The UK is the country where the industrial revolution has taken place. In modern times, the UK is considered a relevant global power. Back in 2019, the UK was the fifth-largest exporter in the world and also the fifth-largest importer of goods and services. It also had the third-largest inward foreign direct investment, and the fifth-largest outwards foreign direct investment. In 2020, its trade with the EU member countries consisted 49% of the national exports and 52% of the national imports.

Like any other highly developed country, the service sector dominates the economic activity with this sector consisting 81% of the total GDP. The financial services industry is very crucial for the British economy as its capital London is considered the second-largest financial center of the world after New York. Its aerospace industry is the second-largest and the pharmaceutical industry the tenth-biggest in the world. Not only that, 26 of the world’s 500 largest companies are located in the UK.

Monetary and Fiscal Policy of the United Kingdom

The Bank of England (BoE) is the central bank of the United Kingdom. This is the sole monetary authority of the nation which has a dual mandate of controlling inflation and making sure that the economy is growing. The bank is supposed to keep the inflation rate at 2% of the consumer price index (CPI). On the other hand, fiscal policy is the exclusive domain of the UK government. The British government does it by altering the rate of taxation and public spending. Fiscal policy, in turn, government borrowing.

Fiscal and Monetary Policy Objectives include

The Monetary Policy Committee (MPC) of the BoE is tasked with conducting the nation’s monetary policy. In the past, the interest rate used to be decided by the Chancellor of the Exchequer but now the bank has been given complete power to decide it. If the MPC thinks that inflation will shoot up in near future then they may go for increasing the interest rate. Higher lending rates would reduce the demand for goods and services and would prevent the economy from growing too fast. On the other hand, if the situation is opposite and the MPC thinks that the economy is growing at a very slow pace then it will reduce the interest rate and the economy will gain pace.

The BoE has a history of resorting to unconventional monetary policy in times of extraordinary uncertainty. For instance, between the years 2009 – 17, when the economy was not picking up due to sluggish growth despite low-interest rates, the bank went for quantitative easing. It was a policy that involved increasing the money supply and purchasing government bonds through that money.

Though the fiscal policy is the exclusive domain of the government, these are not used often. Raising or reducing the tax rate is politically controversial. However, there is a mechanism called “automatic fiscal stabilizers” which plays a very important role in moderating the economic cycle. In times of a recession, the government automatically gets less revenue and spends more on unemployment benefits. In other circumstances, the government may go for pursuing an expansionary fiscal policy. For instance, during the great recession of 2008 – 09, the UK government cut the rate of value-added tax (VAT) to stimulate the economy. This act of the British government triggered the rise of borrowing to over 10% of the GDP.

Indicators that Affects The United Kingdom Economy

The legal tender of the United Kingdom is called the Pound Sterling or GBP. Like other currencies, the value of GBP is also affected primarily by the internal dynamics of the United Kingdom economy. Those dynamics are discussed below one by one.

Consumer Price Index (CPI)

Consumer Price Index or CPI is the measure of the level of inflation prevailing in an economy. When the British economy is experiencing higher levels of CPI, it means the central bank may raise the lending rate to slow down the inflationary pressure.

Unemployment Rate

The rate of unemployment is a good measure to know whether an economy is functioning nicely or not. Positive employment data from the United Kingdom will have a positive impact on the value of GBP.

Gross Domestic Product (GDP)

The single most important measure to know the health of the economy is the measure of GDP. This indicator calculates the amount of all the goods and services that have been produced in the United Kingdom economy. Good GDP figures will have a positive impact on the value of GDP and vice versa.

Purchasing Managers Index (PMI)

Like CPI, there exists PMI to measure the level of price rise for business managers. Any score above 50 points indicates improving economic conditions which may lead to expansion, while a score below 50 signals a possible contraction.

Gfk Consumer Confidence Report

This report depicts the consumers’ confidence about the current and near-future economic conditions.

Factors that Affect the GBP

Factors that have the largest bearing on the price action of the pound sterling are discussed below.

Changes in Monetary Policy

Carry trade is a significant factor here. People go for GBP for high-yielding assets. Any change in the British lending rate will have a sizable effect on the yield of British securities. In addition, changes in the repo rate will also have a significant effect on BoE’s economic outlook.

Developments of United Kingdom Economy in the Eurozone and US

Developments in the UK neighborhood and across the pond or in the US have the most significant effect on the value of the GBP after the interest rate decision by BoE. Positive or negative data will make market participants move either towards GBP or against it.

The Spillover Effect

Since the UK trades more with the Eurozone than any other country or trading block, any development in that front will have a great impact on the value of the GBP.

GBP/USD Trading Tactics

British pound reacts more strongly to economic reports. For instance, if the GDP figures from the UK are strong then you should think to go short for this pair. On the other hand, GBP/USD and GBP/JPY pairs are the most volatile among the majors. In fact, GBPUSD moves around 160 pips per day on average. Here you will have to set bigger stop-loss orders to tolerate the moves in the market.