The United Kingdom is made up of England, Scotland, Wales, and Northern Ireland. It has the fifth largest national economy—measured by nominal GDP—in the world, and the second largest in Europe. In 2013, the United Kingdom (UK) was the world's fourth largest exporter and importer. Many economists rank the UK as one of the most globalized economies. London has the largest city GDP in Europe.
Service sector business dominates the UK economy, making up about 78 percent of GDP. Financial services are particularly important, with London tying New York for largest financial center. Aerospace industry, pharmaceuticals, automotive industry, and North Sea oil and gas production make up the greatest portion of the remainder of the UK's GDP.
The UK's central bank is known as the Bank of England; its Monetary Policy Committee sets national interest rates. The national currency of the UK is the pound sterling (₤). The pound is the world's third largest reserve currency, following only the US dollar and the EU euro. It is also the fourth most valuable currency in the world, after the Kuwaiti dinar, Bahraini dinar, and Omani rial.
The United Kingdom is a member of the G7, the G8, the G20, the Commonwealth of Nations, the European Union, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), the World Bank, the World Trade Organization (WTO), the Asian Infrastructure Investment Bank, and the United Nations (UN).
England emerged from Roman rule as a culturally diverse island made up of multiple kingdoms. The economy was largely agrarian and based on a well-developed feudal system. Eventually conquered by the Norman French in 1066, England hosted a largely homogenized culture, and it turned its interests to subjugating the Welsh, Irish, and Scottish, and continuing conflicts over the throne of France. This area managed to remain largely self-sufficient through most of its history.
At the dawn of the industrial age, the UK was the first country to industrialize. Britain led the industrial revolution, dominating the European and world economy during most of the 19th century. UK industry led to innovations such as steam engines, textile equipment, and more modern tools. It also invented the railroad system, and built much of the railway equipment used by other nations. The UK also dominated banking, with London as the heart of global finance.
Colonization allowed the island nation to build one of the most impressive empires in history. Throughout much of the colonial period, the UK followed a mercantile system of economic control. However, after 1840 it abandoned mercantilism and in favor of free trade, with no tariffs, quotas, or restrictions. The empire period also saw the development of one of the most powerful navies and armies in the world. These forces protected global holdings and trade routes.
However, starting in the late 19th century, growth by other nations—the United States and Germany, in particular—began to outpace Britain and cut into her export and economic expansion rates. The costs of fighting two World Wars further weakened the UK's relative position in the global economy. Although it remains a significant player in the world economy, particularly in financial services and knowledge economy, it is no longer the empire it once was. Nevertheless, between 1870 and 2000, per capita economic output in the UK increased by 500 percent, leading to a remarkable improvement in living standards and one of the highest qualities of life in the world today.
Current Economic Situation
The UK entered a recession during the global financial crisis of 2008. The UK had not experienced a significant downturn in its economy for nearly two decades before, and its initial losses in the recession were deeper than any other G7 member nation save Japan. It exited the recession in the fourth quarter of 2009, according to the Office for National Statistics (ONS). However, the ONS also reported that total negative growth caused a 7.2 percent contraction in the UK's economy, making it the longest and deepest recorded recession in UK history.
The Labour government lost support during the financial crisis, and the general election of May 2010 ended in a hung parliament. The conservatives took control of the government. While the Labour party followed a deficit spending policy, the Tory government immediately began making deep spending cuts. This resulted in six figure public sector job losses but strong private sector growth. By October 2013, unemployment fell below two and a half million for the first time since the beginning of the crisis.
The Office for National Statistics reported that between 2005 and 2011 the UK dropped from fifth largest average household income in the world to 12th. This drop was partially attributed to the devaluation of sterling, which backs the pound. However, the ONS also reported that during this same period inflation was relatively flat, the labor market remained more resilient than in other recessions, and household spending and wealth in the UK remained relatively strong in comparison with other OECD member countries.
Nevertheless, since 2013, the UK has pursued a strong policy of recovery and expansion. An austerity program dating back to 2010 continues, with the aim of further deficit reductions. While deficit spending accounted for 11 percent of GDP in 2009 and 2010, but as of 2014 had fallen to five percent.
The ONS estimates that growth in first quarter of 2015 was 0.3 percent, and that the volume of the GDP is four percent above pre-recession peak figures.
According to the OECD, economic growth in the UK is the result of exemplary job creation: a trend that should continue throughout 2015 and 2016. Growth was further underpinned by robust private consumption and investment. However, the OECD also predicts inflation to gradually increase, beginning in 2015. If this occurs, it will likely lead to a shift in government economic programs in order to counteract the negative effects of inflation. Higher interest rates could support stronger growth in productivity.
Reforms to loan availability may also occur in the short to medium term, further bolstering consumer spending and corporate capital investment. This could free up additional funds to address the UK's aging infrastructure, in order to further support industry.