United Kingdom Economy

With 1.96 trillion British Pounds as its total gross domestic product (GDP) in 2020, the United Kingdom’s economy is ranked the fifth largest in the world ⁽¹⁾. This article provides an overview of the UK economy, its size, economic growth, and the type of economy it operates as. It then concludes with the United Kingdom economy forecast.

United Kingdom economy overview

With a population of over 66 million people, the United Kingdom’s economy in 2020 was worth 1.96 trillion British Pounds in total GDP. It is also currently ranked the fifth largest economy globally behind the United States, China, Japan, and Germany, and ranked the second largest in Europe behind Germany⁽¹⁾. The United Kingdom’s economy includes that of England, Scotland, Wales, and Northern Ireland, and has developed into an independent international trading economy. The United Kingdom’s currency is the British Pounds Sterling, and it has the Bank of England as its central bank.

The UK economy has a high quality of life, and a well-diversified economy, with contributions coming from manufacturing and industry, agriculture and services, and hospitality. The major contributors to the United Kingdom's GDP are services, tourism, construction, and manufacturing. The service sector, which includes entertainment services, financial services, and retail services, contributes the most to the United Kingdom economy, with a 72.79 percent contribution in 2020⁽²⁾. The industry sector is the second largest contributor with a contribution of 16.92 percent in 2020, the agriculture sector contributes 0.57 percent.⁽²⁾

In 2020, the United Kingdom's net import value was 50 percent higher than its export value making the United Kingdom’s economy an importing economy. It is ranked 12th among world exporting countries, and sixth in Europe. The United Kingdom's biggest trading partners are the European Union and the United States. Machinery, transportation equipment, chemicals, fuel, food, live animals, and miscellaneous goods top the list of the United Kingdom’s imported goods. Cars, crude oil, pharmaceuticals, electrical machinery, and mechanical equipment are at the top of the list of the United Kingdom’s exported goods⁽³⁾.

Figure 1. Import value of top goods imported into the UK, StudySmarter Originals.Source: Statista, www.statista.com

Practicing a free market economy, the United Kingdom’s economy scored a 78.4 rating in the latest freedom score, and the economy was ranked the 7th freest in the world and 3rd among other European countries in 2021⁽⁴⁾. Another characteristic of the United Kingdom’s economy is its open market. An open market is a market within an economy that has few or no restrictions towards free market activities. Exports-oriented economies such as economies of East Asian nations have the United Kingdom as an important channel due to its open market. This has led to significant investment from countries like America and Japan in trading and local productions.

United Kingdom’s economy post-Brexit

The result of the United Kingdom's exit from the European Union, popularly referred to as Brexit, has been costly to the United Kingdom’s economy. This has so far cost a drop in economic growth of the fifth largest economy in the world. Some of these effects are seen in:

1. Economic growth
2. Labour
3. Finances

United Kingdom Economy: Economic growth

According to the office of budget responsibility, pre-Brexit, the size of the United Kingdom economy dropped by an estimated 1.5 percent due to reduced business investment and a transfer of economic activities to the European Union in preparation of strong trade barriers between the EU and UK⁽⁶⁾.

Post-Brexit, after the agreement of the free trade deal, the reduction in the amount of trade will cost a drop of about 4 percent in the UK economy over time. This is also according to the office of budget responsibility.⁽⁶⁾

United Kingdom Economy: Labour

Due to rigid immigration rules and the worst economic drop experienced by the UK in over three centuries, according to Boomerang over 200,000 European immigrants left the United Kingdom⁽⁶⁾. This led to staff shortage in many sectors especially the services and hospitality sector which employs mostly immigrants from European countries.

United Kingdom Economy: Finances

Pre-Brexit, financial firms moved some of their services out of the UK to other European countries. This has led to a loss of employment in the financial sector.

Effects of COVID-19 on the United Kingdom economy

After imposing a lockdown to ease the spread of the COVID-19 virus from March to July 2020, the GDP of the United Kingdom took a hit. The United Kingdom economy recorded a 20.4 percent GDP drop in the second quarter of 2020, after the 22.1 percent GDP drop it recorded in the first quarter⁽⁷⁾.

This drop was mostly evident in the services sector, construction sector, and production sectors where the effects of the COVID-19 restrictions and lockdowns were most prevalent.

After a further easing of restrictions in 2021, the UK economy grew by 1.1 percent over three quarters⁽⁷⁾. With the largest contributions coming from recreation services, hospitality, art, and entertainment. There was a drop off in the contributions from the production and construction sectors.

The United Kingdom's economic growth rate

Using population growth and GDP, we show the United Kingdom’s economic growth rate in the last five years. An economy's gross domestic product, GDP, is the total value of goods and services produced within a country annually. This includes all goods and services produced within an economy regardless of the origin of its ownership.

England is the biggest contributing nation to the UK economy GDP among the four countries that make up the United Kingdom, grossing an annual GDP of about 1.9 trillion British Pounds in 2019. In the same year, Scotland grossed around 166 billion British pounds in GDP, Northern Ireland grossed over 77.5 billion British pounds in GDP, while the Welsh economy grossed over 77.5 billion British pounds⁽⁸⁾.

According to the world bank, the UK population grew by 0.6 percent in 2020, and its GDP had a growth rate of -9.8 percent mostly due to the backlash of the COVID-19 pandemic. Below is a figure showing an insight into the United Kingdom’s economic growth rate in the past five years.

Figure 2. UK GDP growth rate from 2016 - 2021, StudySmarter Originals.Source: Statista, www.statista.com

Post-lockdown, the highest contribution to the United Kingdom economy comes from the service sector, particularly from hospitality, recreation, entertainment, and arts. With production and construction falling, and household consumption increasing.

United Kingdom's GDP by sector contribution

As we see in the overview of the UK's economy, there are many sectors that contribute to the UK's large GDP. Table 1 below shows the various sectors' contribution to UK GDP over the past five years.

Table 1. UK's GDP by sectors - StudySmarter

The services sector is the largest sector in the United Kingdom. It contributed around 72.79 percent to the growth of the United Kingdom's economy in 2020. The services sector comprises different industries including industries in the retail, food and beverages, entertainment, finance, business service, real estate, education and health, hospitality, and tourism industry. It has been the highest contributor to the UK economy over the past five years.

Manufacturing and industry is the second largest sector in the economy, contributing 16.92 percent in 2020, and an average of 17.8 percent over the past five years.⁽¹⁰⁾

The agricultural sector contributed 0.57 percent to the economy in 2020, and an average of 0.57 percent over the past five years. This makes the agricultural sector the smallest contributor to the United Kingdom's economy. ⁽¹⁰⁾

United Kingdom economic forecast

Due to the emergence of the Omicron virus and rising inflation, according to forecasts by OECD, the United Kingdom’s GDP is expected to grow by 4.7 percent in 2022, representing a drop from 6.76 percent in 2021^(9)(11). This however shows a strong improvement from the United Kingdom GDP dip in 2019, where a -9.85 growth was recorded.

Also, according to the Bank of England, there is an expected inflation peak of 6 percent due to increases in raw materials costs and delays in supply chains.

In conclusion, the United Kingdom’s economy is the 5th largest economy in the world with a population of over 66 million people. England is the largest of the four countries that made up the UK, with its GDP contribution to the United Kingdom economy being the largest.

The United Kingdom's open and free market has led to numerous investments into the UK economy thereby driving economic growth.

Despite the effects of Brexit on the economy, and a forecasted slowdown in GDP growth for 2022, the United Kingdom economy still remains one of the world’s strongest economies, ranking fifth behind the US, China, Japan, and Germany, and tourists attraction due to its services sector which contributes the most to the economic growth and GDP.