The United Kingdom has a highly developed and diverse economy that is considered to be one of the largest in the world. In recent years, the UK economy has undergone significant changes, including the vote to leave the European Union and the COVID-19 pandemic, which have had a significant impact on the state of the UK economy. In this blog, we will examine the current state of the UK economy and discuss some of the key factors affecting its performance.
- Economic Growth: In recent years, the UK economy has experienced modest economic growth, with real gross domestic product (GDP) growing at an average rate of 1.3% per year between 2016 and 2019. However, the COVID-19 pandemic has had a significant impact on the UK economy, leading to a sharp contraction in 2020. According to the Office for National Statistics (ONS), real GDP contracted by 9.9% in 2020, marking the largest annual decline on record. Despite this, the UK economy has begun to recover, with real GDP growing by 0.4% in the fourth quarter of 2020.
- Employment: The UK labour market has also been affected by the COVID-19 pandemic, with the unemployment rate rising from 3.8% in February 2020 to 4.9% in January 2021. However, the unemployment rate has since fallen, standing at 4.0% in December 2021. Despite this improvement, the UK labour market remains highly competitive, with many workers facing difficulties finding employment.
- Inflation: Inflation, as measured by the Consumer Price Index (CPI), has remained low in recent years, averaging 2.0% per year between 2016 and 2019. However, the COVID-19 pandemic has led to an increase in inflation, with the CPI rising to 0.7% in 2020 and 1.3% in 2021. Despite this increase, inflation remains below the Bank of England’s target rate of 2.0%.
- Trade: The UK is a highly trade-dependent economy, with exports accounting for approximately 30% of GDP. In recent years, the UK’s trade position has been affected by the vote to leave the European Union, which has led to uncertainty in trade relations with the EU. Despite this, the UK has signed several trade deals with countries outside of the EU, including Japan, Canada, and South Korea, which have helped to offset some of the impact of Brexit.
- Public Finances: The UK’s public finances have also been affected by the COVID-19 pandemic, with the government spending significantly more on measures to support the economy. As a result, the UK’s budget deficit, which measures the difference between government spending and revenue, has risen significantly, standing at £34.6 billion in January 2021. Despite this increase, the UK’s public debt, which measures the total amount of government borrowing, remains relatively low compared to other developed economies.
- Interest Rates: The Bank of England has set interest rates at a record low of 0.1% since March 2020 in order to support the UK economy during the COVID-19 pandemic. This has helped to keep borrowing costs low for businesses and consumers, which has supported economic growth and helped to stimulate spending. However, low interest rates can also lead to inflation, which may affect the value of savings held by households and businesses.Interest rate rises have now come into effect with the current Bank of England base rate sitting at 4%.
- Housing Market: The UK housing market has also been affected by the COVID-19 pandemic, with house prices declining in 2020 as a result of the economic uncertainty caused by the pandemic. However, house prices have since rebounded, with the average UK house price rising by 5.2% in 2021. Despite this increase, the UK housing market remains highly competitive