EXTERNAL SECTOR ANALYSIS OF UK

INTRODUCTION
United Kingdom is the fifth-largest national economy (second-largest in EU) measured in terms of
nominal GDP levels and the tenth largest in the world (third-largest in EU) measured in terms of
purchasing power parity (PPP).
UK has been the fastest growing economy in G7 nations for the third consecutive years as of October
2015. In 2014, the UK was the ninth-largest exporter in the world and fifth-largest importer. Also it had
the second largest stock of inward and outward foreign direct investment.
Since the beginning of the colonial era, foreign trade has been a major component of the UK economy.
Over 65% of its GDP is linked to trade higher than that of many other large advanced economies
including France (57%), Italy (59%) and Japan (31%) with 412.6bn of imports and 304.3bn of goods
and services being exported (2014).

ANALYSIS OF THE GOODS MARKET

EXPORTS, IMPORTS AND BALANCE OF PAYMENTS

Goods
In 2014, the exports of United Kingdom were 304.3 billion, a drop from 353 billion in 2013. During
the five year period from 2009 to 2014, the exports of the United Kingdom have decreased at an
annualized rate of -6.43%, from 454 billion GBP in 2009 to 304.3 billion GBP in 2014. The exports are
led by cars which represent 8.97% of the total exports of the United Kingdom, followed by refined
Petroleum, which account for 6.57%.
In 2014 the imports of United Kingdom were 412.6 billion GBP, making it the 6th largest importer in the
world. During the five year period from 2009 to 2014 the imports of the United Kingdom have decreased
at an annualized rate of -0.8%, from 430 billion GBP in 2009 to 412.6 billion GBP in 2014. The imports
are led by cars which represent 6.42% of the total imports of the United Kingdom, followed by crude
petroleum, which account for 6.31%. Currently, the manufacturing has weakened due to continued
sluggish growth in the euro area and the relatively strong pound against the euro, while the construction
growth has been volatile.
Thus this shows that UK follows a backward approach as well like India when it comes to exports as
they imports crude petroleum then refines it and finally exports it.

Services
UK is a very successful exporter of services. According to the WTO, it is the second largest exporter of
commercial services behind the United States. It had a 6.3% share of world trade in 2014, whereas the
goods trade was only 3%. UK exports of services account for 12% of its GDP, much higher than other
major European countries (Germany - 8%, France -7.9%) and the US(4%).The following service sectors
are the major contributors in the exports- financial services, business and professional services,
IT/communication and insurance. The UKs trade surplus in services has grown from 1.5-2% of GDP in
the late 1990s to 5% of GDP in 2015. The build-up of a substantial surplus in services trade since the mid1990s has offset the widening deficit in UK manufacturing trade.
These developments suggest that as markets have opened up in Europe and globally, the UK has been
able to exploit its competitive advantage and this advantage has sustained the financial crisis. The
services sector will remain the main engine of UK growth for both output and employment

Fig 1: UK exports of manufacturing and services

BALACE OF PAYMENTS
Clearly from the statistics above UK has a negative balance of payments as imports are greater than
imports and this trend has been the same over the years which has led to current account deficits.

Fig 2: Balance of Payments for UK

But whenever we talk about countries like UK we cant restrict ourselves to balance of payments as they
are heavily dependent on their service sector. So we talk about the concept of invisible trade.
UK has a high positive service sector invisible trade balance due to its heavy reliance on insurance,
financial services and business services.

Fig 3: Comparison of Trade deficit in goods and trade surplus in services

So this shows that the UK has a more than high exchange rate value and needs to be devaluated.
Countries in the Eurozone mainly PIGS have become uncompetitive and are experiencing large
current account deficits. This is because an overvalued exchange rates means exports are more
expensive, but imports are cheaper. This encourages domestic consumers to buy imports.
Further UK has a relatively low saving rate compared to competitors which leads to higher spending
on consumer goods which are imported causing a deterioration in the current account.

Fig 4: UK current account as a percentage of GDP

TRADING PARTNERS
The top export partners of the United Kingdom are: USA, Germany, Netherlands, France and BelgiumLuxembourg, particularly dominated by the European Union countries. China, UAE, Hong Kong are the
top countries in Asia where UK exports. The imports to the UK are dominated by the following countries:
Germany, China, the Netherlands, France and the United States. The imports are dependent even more
heavily on the European countries than the exports; China and the US being the only exceptions. The
pattern of trade of the UK is Europe dominant.

EUROPEAN UNION
EU in 2014 accounted for 44.6% of UK exports of goods and services, and 53.2% of UK imports of
goods and services. However, strong economic growth in many non-EU economies has led to growth in
the importance to UK trade. Exports from the UK to EU and non-EU countries have grown on average by
3.6% and 6.5% respectively in 2014. However, the stronger export growth to non-EU countries has
resulted in the proportion of UK exports destined for the EU falling from 54.8% to 44.6% in 2014.
Growth in the value of UK imports of goods and services from EU and non-EU countries is more
comparable, growing on average by 4.7% and 5.5% respectively in each year.
UK trade with the EU is dominated by goods rather than services in 2014, trade in goods represented
close to two-thirds of all UK exports to the EU, and over three-quarters of total UK imports from the EU.

Fig 5: EU and Non EU Balance of Payments

ANALYSIS OF THE CAPITAL MARKET

FOREIGN INVESTMENT POLICY OF UK
The UNCTAD Report states the United Kingdom is the eleventh largest recipient of direct foreign
investment (FDI) in the world. FDI flux, which had markedly decreased because of the outbreak of
international financial crisis of 2009, rose again in 2012 and is expected to strengthen further. In 2014,
FDI reached USD 61 billion. London being the financial capital of Europe and the strong performance of
the currency of Great Britain and it being one of the most important European markets are some of the
major factors driving its economy.

Table 1: FDIs in past 3 years in UK

Table 2: Industry wise FDI in UK

FACTORS FAVORING UK AS A FDI DESTINATION

Execution rate of formalities: The set up time for a company is just 13 days in the United
Kingdom, compared to the European average of 32 days putting it in the first place in Europe and
sixth place in the world.
Favorable taxation: The UK provides relief for double taxation globally. Even UK-based
companies benefit from an exemption from corporation tax on any foreign dividends which they
receive from subsidiaries. This facilitates a simplified tax environment for foreign subsidiaries
based in the UK. It makes the environment investor-friendly. Moreover, London is one of the
world's leading finance capitals.

But some of the reasons which may deter an investor from investing in UK are:

Financial sector has an excessive influence on the GDP,

Infrastructure is of poor quality
Foreign companies posing a tough competition in the industrial sector.

UKS EXTERNAL DEBT ANALYSIS

When we talk about Public debt in the UK we are referring to the debt of the central government.
Currently UK National debt is estimated to be 1.53 trillion. Which is more than thrice of what it was in
2005. In terms of Gross Domestic Product, the UK National Debt in 2005 was about 38 percent of GDP.
But in the last ten years, in the wake of the Crash of 2008 and subsequent recession, the National Debt
has doubled to over 80 percent GDP, but shows signs of leveling out as a percent of GDP .

Fig 6: Rise in external debt over the years

The National Debt began at about 30 percent of GDP around 1900. It then plummeted to over 150 percent
in World War I and crossed the 200 percent mark during World War II. It then declined to 50 percent of
GDP by the 1970s and dipped to 25 percent by 1990. It was the economic crisis of 2008 which then led
to a further steep rise in the debt.
Now the focus should be on debt restructuring which will lead to recovery as it will provide a breathing
space to the debtors and will lift the uncertainties about payment obligations. But the main issue that
remains hidden is the lack of transparency within the system which needs to be addressed to reduce the
debt and increase accountability.
UKS FOREIGN RESERVE
Foreign Exchange Reserves in the United Kingdom increased to $130.4 billion in December from $127.7
billion in November, 2015. They averaged $66.5 billion from 1999 until 2015, reaching an all-time high
of $131.3 billion in October, 2015 and a record low of $35.2 billion in February, 2000.
Foreign Exchange Reserves in the United Kingdom is reported by the HM Treasury. In the United
Kingdom, Foreign Exchange Reserves are defined as the foreign assets held or controlled by the country
central bank. The reserves are made of gold or a specific currency. They can also be special drawing
rights (SDRs) and marketable securities denominated in foreign currencies like treasury bills,
government bonds, corporate bonds and equities and foreign currency loans. UK is ranked 24th in a list of
the worlds largest holders of foreign currency reserves. The Bank of England and the Treasury hold $70
bn in foreign exchange reserves.
The low ranking shows UKs vulnerability to another financial crisis and a run on the pound with
limited cash available to meet shortfalls or intervene in the markets.

FUTURE PROSPECTS
UK has the potential to benefit from an increasing demand for high quality goods and services as the
middle classes in countries are demanding better quality products and services due to rise in their
disposable income. Developed countries have lost world market share in goods exports to emerging
economies, especially China. However, developed countries, especially in the EU, retain a clear
advantage in high-end goods. Exploiting these overseas opportunities will be especially important for the
innovative, high productivity, and technology intensive firms who will underpin sustainable future growth
in the economy.
However, trade barriers particularly informal barriers to entry such as bureaucratic regulations, cultural
and linguistic differences and lack of access to information and contacts, remain high in many of these
high growth markets, particularly in BRICs (Brazil, Russia, India and China) and in the less advanced
emerging markets. The Government has a role to play in helping UK firms overcome such barriers, thus
reducing the fixed cost of entering new markets and encouraging firms to enter a wider range of often
more challenging markets, but where the opportunities to benefit from expanding demand may ultimately
be higher.

REFERENCES:
http://atlas.media.mit.edu/en/profile/country/gbr/
http://www.pwc.co.uk/assets/pdf/uk-economic-outlook-full-report-november-2015.pdf
http://www.telegraph.co.uk/finance/economics/10623863/British-exports-hit-record-high-in-2013.html
http://www.economicshelp.org/blog/5776/trade/uk-balance-of-payments/
http://www.tradingeconomics.com/united-kingdom/imports

SUBMITTED BY:
GROUP 9