Economic Overview of the UK - Case Study Example

Economic overview of the UK (Name) (Institution) (Course) (Instructor) (Date of submission) A. Economic opportunity Strong economic base with growth potential The UK is one of the strongest economies in the European market and around the world that is fundamentally supported by the service industry. The Australian department of foreign affairs and trade- DFAT (2010) says that the UK is the 7th largest economy in the world. With a fairly large population that provides labour and a market for goods and services produced within and without, the country is well positioned economically for foreign enterprises suited to set up base there. However, this does not capture the whole economic suitability of the country more so given that the recent global economic recession has shaken up the traditional belief that traditionally strong economies such as the US and the UK perform well economically by default (Office of National Statistics 2010). Since the 1992, the UK has had a long period of economic prosperity with the 1990’s decade recording an average of 4% in unemployment. Such a constant level in the unemployment rate is attributed to constant GDP growth i.e. demand side. Nonetheless, high GDP growth rate is also associated with high inflation rates especially when aggregate demand increases at a higher rate than aggregate supply which is often termed as unsustainable growth. Sustainable growth, as witnessed in 2000 to around 2005, requires that AD and AS grow at an equal pace to avoid inflation. In this period, the UK GDP growth rate averaged 2.75% while inflation averaged 2%. However, there are other factors on the supply side of labour that have contributed to the constant level in unemployment. These are frictional unemployment, structural unemployment and real wage unemployment (Office of National Statistics 2010). The supply side has also played its role through other elements such as improved technology and lower raw material prices. Technology has played its role in the production filed where robots and efficient methods of production have reduced the cost in production, time used, processes required and amount of labour. Although technology may be viewed to reduce the amount of labour demanded and somehow force labour wages down (Paliwoda & Ryans 2008), this has not been reported in the UK. Despite the 2008/2009 global recession, weekly wages for full time employees grew by 2.0% in April 2009 to stand at £489. Median weekly male wages were relatively higher at £531 while for females was £426 over the same period. Only 10% of full time employees earned more than £971 and a similar percentage earned less than £271 weekly. The 40 to 49-year-olds reported the highest earnings averaging £551 weekly. Median weekly earnings for fulltime employees in London averaged £627 which was higher than in other areas which ranged from £436 in the North East to £514 in the South East. Fulltime employees in the healthcare sector reported better weekly pay with a median of £1,031, followed by managers in corporations at £745 with salespersons reporting the lowest at 278 a week (Direcgov 2010). The UK boasts of a superior infrastructure network that allows efficient distribution channels. Most notable is the growth in popularity of e-commerce as facilitated by increased computer usage, increased internet availability and high internet speeds. This implies that firms considering operations in the UK have the opportunity to explore opportunities presented by such high technology growth. According to the Office of National Statistics, 18.3 million (70%) households in the UK had access to the internet as of 2009 which was an 11% increase over the previous year figures with increased access to broadband (see Appendix A). Sixty four per cent of all adults who had accessed the internet over the past three months prior to the survey reported that they had made online purchases within the year while 83% of them had made purchases within the previous three months. On the general terms, internet accessibility and usage for commercial purposes by households is growing (Office of National Statistics 2010). A 2003 survey on e-commerce also indicates that firms are conducting B2B businesses too over the internet. A survey carried out in 2003 showed that 29% of businesses bought goods and services over the internet which was a 13% increase from the previous year. The report also shows that the large firms were traditionally equipped with internet though it is the small businesses (with less than 50 employees) that accounted for majority of the growth. The report also shows that internet usage and accessibility was highest in urban centre and more so in London where early half the country’s population lives (Office of National Statistics 2010). Market size and growth The UK has often being accused of being cantered on London city and neglecting other regions. In realization of this, Hilderth (2006) explores the role of small and medium cities in spurring growth in the UK. The author noted that large cities in given states that play multiple roles such as London carry with them diverse markets and hence are most suited by multinationals targeting an extensive market. He notes that such large cities act as cultural, government, fashion, entertainment and knowledge headquarters. Such cities are also favoured by many firms because they simplify distribution and logistics issues. The UK, which comprises of four states, England, Wales, Scotland and Northern Ireland which in total have a population of around 61.4 million people by mid 2008 estimates. England has majority has majority of the population with 51.4 million (84%), followed by Scotland with 5 169, Wales with nearly 3000 and Northern Ireland with just over 1 700 (Office of national statistics). The annual growth rate was reported to be less than 1% at 0.68%. This implies that the though the rate might appear small the market size is increasing positively. As shown by appendix B, the population pyramid in the country quite unbalanced. The majority of the population is around the ages of 23, 45 and 60 for both males and females. The youth, 16 years and below, account for 20% of the population and is boosted by high standards of healthcare and low child mortality rates. This number equals that of adults in retirement. The population distribution along gender lines is fairly even below 70 years but above this age there is a relatively higher number of females (Office of National Statistics 2010). The ruggedness of the pyramid indicates volatile population growth rates and fertility rates. The lower number of males above 70 years is attributed to the Second World War in which many men perished while fighting in the British armed forces. The baby boomers are represented by the bulge at the age of around 45 years. The constriction around the ages of 31-37 indicates a fall in fertility levels in the 1970’s while a similar fall in fertility level is shown o persons aged between 7 and 20. The broad base of the pyramid is indicative of increased fertility levels as more births have been reported since 2003. Such a trend in growth of fertility level implies that there are prospects of a larger population. The pyramid also indicates that there is large labour force in that 62% of the population lies between 16 and 64 years (Office of National Statistics 2010). Immigration has been heavily linked with increase in population as the immigration figures grow. Statisticians project that 70% of the population increment in the UK in the next 20 years will be from immigration. There were an estimated 230 000 immigrants in 2008 alone. This has forced some government sections to call for stricter regulation to protect local workers and the local culture (Johnston 2007). B. Economic risk Budget Taxation and the relatively huge difference in earnings present a huge discrepancy in budget constraints and amount of disposable income. Retired households pay less in taxes than they receive in benefits hence a net gain while non retired households single adult with children also gain. However, non-retired households pay more in taxes than they receive in benefits though those with children perform better than those without children (Office of National Statistics 2010). A number of cash benefits such as Incapacity Benefit, Pension Credit, Income Support and the State Retirement Pension are very effective in reducing income inequality which mostly benefits the low income earning households. In fact these cash benefits account for 58% of gross income for the poorest fifth of households. The national budget except for Northern Ireland is arranged in progressive order such that the higher a household earns, the more is paid in taxes. The allocation of this income to expenditure varies mostly by family size, geographic location and lifestyle (Office of National Statistics 2010). An empirical study of UK households on how disposable income is distributed among various wants carried in 1998 shows that majority of the expenditure is allocated to food and non alcoholic drinks categorized as goods at 22.2%. When foods and drinks (both alcoholic and non-alcoholic) are consumed away from home such as in restaurants, they are considered as services and account for 7.0%. Home energy needs take up the next largest portion of a household budget at 10.3%. Alcoholic beverages and tobacco take also a considerable portion accounting for 8.8 % closely followed by clothing and footwear at 8.2%. Private transports goods and entertainment goods almost tie at 5.5% and 5.7% respectively. Personal goods and household furnishings account for the rest of the households goods at 2.1% and 2.5% respectively. Apart from goods and drinks from outside which account for household services, others include; holidays- 2.8%, general household services- 1.5%, personal services- 1.1%, public transport- 2.4%, private transport 6.0%, communication- 4.1%, entertainment services- 6.1% and miscellaneous goods and services 3.6%. However, the total amount of this expenditure is exclusive of savings and any investments made (Office of National Statistics 2010). More current data on expenditure allocation indicates that households have increased disposable incomes by leveraging their access to credit most notably through housing equity withdrawal and in the process pushing savings rates down. Uncertainty and falling consumer confidence has resulted in increased savings as consumption drops. The PriceWatersHouse Coopers UK economic outlook report for 2010 indicates that there has been a 5% drop in average household nominal earnings as result of increased unemployment brought about by the global recession between 2008 and 2009 which contrasts the report by the Office of National Statistics which says that in the same period there was an increase in wages by 4%. In the same period, household spending fell by 4.7% and investments fell by an undisclosed margin (Office of National Statistics 2010; Appendix C). Unemployment Unemployment is considered to be the number of persons in the labour force who are not participants of active employment due to number of reasons. The labour in this context pertains to persons who have above the legally recognized adult age and are not hospitalized and have not yet reached the retirement age. Following the global economic recession, the UK registered high unemployment levels with the first three months of 2010 recording 8.0% percent. The number of full time employees has reduced where many of them have resulted in unemployment of part time jobs. The number of permanent/full time employees fell by 103,000 between December 2008 and March 2010. Consequently, part time employees increased by 27,000. Those in part-time employment due to lack of a permanent job placement increased by 25 000 to reach 1.07 million people the highest since 1992 (Office of National Statistics 2010). Fall in consumer confidence In the beginning of 2008, the UK consumer confidence level hit its lowest in 13 years triggered by the Northern Rock crisis and the crush of the housing market that preceded the recession. Apart from these two factors, higher inflation rates also contributed to the pessimism towards the economy (Conway 2008). Towards the end of 2009, consumer confidence was restored as households believed that the stimulus package enacted by the government would salvage the economy from the recession which had seen GDP growth fall by 4.8%. Fast forward into 2010, consumer confidence has faltered. Monoghan (2010) says that this fall is a result of the halting of some of the economic stimulus programs enacted by the government following optimism in the performance of the economy. Consumers are uncertain that about the ability of the economy to surge forward without financial stimulus. Other measures such as a looming VAT hike and tax reviews which had been lowered during the recession to spur growth are seen as other likely causes in the fall in consumer confidence. Thirty four per cent of consumers interviewed in May believe that the economic situation would improve in the next six months as opposed to 41% of consumers interviewed November last year who believed that the economy would improve in the next six months. Expectations of employment have also disappointed a number of employees who have not yet found job positions. The house market has also not yet fully recovered leading to indecisiveness among consumers as the confidence levels in this sector remained unchanged. D. Political opportunity Strong regulatory framework and transparency Market regulation is an important element in capitalistic market though a purely capitalist economy prohibits them. A fully capitalistic economy calls for market forces to regulate the economy without government interference. However, experience has taught otherwise as more and more regulations are enacted to ensure fair practice in many markets. All the same, excessive regulation is prohibited. The UK has a myriad of regulatory bodies that cater for different sectors of the economy and industries. Each regulatory body only enforces its laws and regulations to only those organizations that fall within their jurisdiction determined by the type of business activities. One of the many industries that almost capture all firms is advertising. Advertising in the UK is regulated by the Committee of Advertising Practice which creates, reviews and enforces various broadcast and non broadcast advertising together with the Office of Fair Trading which protects and promotes consumer interests ad also ensuring fair competition amongst players. New firms seeking to ply the UK market have to seek authorization and approval from the Companies House. For companies wishing or considering being listed to the London Stock Exchange, they are liable to follow the laws and regulations spelt out in the ‘Rules and Regulations’ section of the LSE. The labour market also poses a challenge to many economies in enacting regulations over the standard wage ceiling and floor if necessary. Most economies such as the UK concentrate on protecting low income earners from exploitation by employers by setting up minimum wages. The national minimum wage in the UK has been rising gradually over the years and is set to hit £5.93 an hour for workers aged above 21 years, £4.92 an hour for workers aged 18 to 20 and £3.64 an hour for workers aged 16 to 17 starting from October this year. Persons on apprenticeship have also been covered and have a minimum wage of £2.50 per hour for all ages though those above 19 years and have completed their first year of apprenticeship are set to receive more. EU membership Membership to the European Union implies a wider market for firms operating in the UK and Europe in general. For firms exploring the new markets within the EU, they are posed to enjoy greater benefits as they have fewer regulatory procedures to go through given that that member states have harmonized regulations to a certain degree. A larger market provided by the EU translates to stiffer competition. Pelkmans (2006) says when competition is healthy through adequate regulation, it inspires innovation and product differentiation which are necessary for organizational growth. Baldwin and Brunetti (2001) explore extensively the benefits gained by the UK as a result of its membership to the EU. They develop complex models to explain how the mobility of factors of production, stability gained from a ‘diversified’ economy and a larger market factor in to influence economic growth. They argue that the benefits of creating and maintaining a common market supersede the cost of developing the regulatory infrastructure to guide such a body. This ways they appreciate that the presence of the EU presents some challenges but are not comparable to the benefits. E. . Political risk Membership to the EU also presents a risk presented by integration (Baldwin and Brunetti (2001). Among the leading problems posed by the creation the EU is the integration of the financial markets and dismantling of national financial regulatory measures in favor of the integrated ones. The larger regional regulatory body has created a lot of inefficiencies as not all market operations of individual national financial markets have been harmonized. There has also been creation of possibilities for legal regulatory arbitrage which erodes on investment attractive ness of the region. On the individual level, member countries are exposed to newer risks in their markets as a result of lacklustre performance in regulations. The UK owes much of her success to the integration of the four states that comprise the UK and more recently its membership to the UK. Therefore any political decision by any member state of the UK or member of the EU that rocks the stability of the UK could be disastrous (Pelkmans 2006). F. Cultural opportunity The UK boasts of diversity in so many ways. First, the UK alone comprises of four states with relatively varying cultural backgrounds. They have enriched the country and provide a rich and tolerating national culture from which organizations located in the country can develop their organizational culture. Secondly, the country has attracted nationalities from all over the world due to her economic prowess. Immigrants move into the country in search of work, tourism, education among other reasons that have all played a part in enriching UK’s national culture. Consequently, London is a global city with a cosmopolitan character. Cultural diversity allows manufacturers and service providers to develop new unique products and services targeting a specific cultural group (de Mooij 2005). The author notes the case in the US where many manufacturers have developed products for specific cultural groups such as processes foods for the Filipino market and television stations for the Latino culture. In the same case, cultural diversity in the UK presents an opportunity for local players to develop new products to target various cultural groups by incorporating some elements of their culture. Cultural risk Unlocking the barriers of cultural acceptance and cultural tolerance are some of the greatest challenges posed by cultural diversity. Incidences of segregation and discrimination along ethnic and racial lines have been reported in the UK. When the number of cases compared to other global cities such as New York, London performs poorly and hence looses out on its global attractiveness. Cultural diversity is often a source of conflict in the way that people relate and also organizations are oftentimes unable to exploit cultural diversity. Chryssochoou (2004) notes that accents and unconventional ways of doing things, as dictated by cultural backgrounds create divisions. The author says that individuals with a different culture are oftentimes penalized instead of being rewarded. Consequently, individuals tend to earn less than their human capital hence the firms and organizations lose out their potential that is best nurtured by inclusion and appreciation of their employees’ uniqueness. Immigration is often accused of diluting local cultures. As such, the excessive diversity in the UK will create a mixture of cultures that firms producing goods and industries will be unable to fully satisfy or incorporate cultural aspects in their product offering. Chryssochoou (2004) suggests a strong culture practiced by a large number of people is easy to serve for markers and is often favoured by multinationals. For instance, China enjoys a single cultural group representing over 80% of over the 1.3 billion persons. The UK therefore has many opportunities and risks involved. However, these risks and opportunities need to be weighted accordingly in order to carry out a correct assessment of the market and ensure correct and informed decision making. References Balsdwin, R. & Brunetti, A. (2001). Economic impact of EU membership on entrants: new methods and issues. London: Springer Chryssochoou, X. (2004). Cultural diversity: its social psychology. London: Wiley-Blackwell Conway, C. (2008). “UK consumer confidence hits 13-year low” Daily Telegraph de Mooij, M. (2005). Global marketing and advertising: understanding cultural paradoxes. London: Sage DFAT (2010). United Kingdom country brief. Direcgov (2010). New £5.93 minimum wage rate from October. Ford, R. (2010). “Record number of migrants become UK citizens, figures show” Times Online Feb 25th Hildreth, P. A. Roles and Economic Potential of English Medium-Sized Cities: A Discussion Paper Johnston, P. (2007). Record immigration sees UK population soar. Daily Telegraph. < http://www.telegraph.co.uk/news/uknews/1567068/Record-immigration-sees-UK-population-soar.html> Monoghan, A. (2010). UK consumer confidence falters in face of 2010 uncertainty. Daily Telegraph. Office of national statistics (2010). Paliwoda, S. & Ryans, J. (2008). International Marketing. London: Edward Elgar Publishing Pelkmans, J. (2006). European integration: methods and economic analysis. London: Prentice Hall Pricewaterhouse Cooppers (2010). The squeeze on household spending power. Appendices Appendix A. Appendix B. http://www.statistics.gov.uk/cci/nugget.asp?id=6 Appendix C. Table 1.2: Outlook for UK household income and spending growth Variable Average nominal growth rate (% pa) 2004-07 2008-09* Employment Average wages 0.9% 4.1% Earned income 5.0% Investments Social Security Pensions - - - Gross household income 5.2% Direct taxes - Taxes on income - Employee NICs - Council tax 7.2% 7.6% 7.2% 5.8% Household disposable income 4.7% Non-discretionary household spend - electricity and gas - water supply - food - rental payments - debt services 5.8% 13.1% 8.9% 4.7% 7.7% 10.2% Discretionary disposable income 3.1% Total household savings -2.6% Total household credit - secured credit - unsecured credit 11.5% 11.8% 9.8% Total household spending 4.7% Discretionary spending 4.5% Memo item: PRI inflation 3.1% * accelerating growth;  decelerating growth;  stable growth. Read More