Comprehensive Financial Report: UK Economic and Financial Analysis

This report provides a comprehensive financial analysis of the United Kingdom's economic and financial outlook, examining key factors such as inflation, trade agreements, and major industries. The analysis considers the impact of Brexit on businesses, trade patterns, and the digital economy. It evaluates the UK's comparative advantages, including its strong financial services sector and language proficiency, while also addressing challenges like current account deficits and the decline in oil and natural resources. The report synthesizes data and information to assess the current and future financial growth of the UK, providing recommendations for portfolio managers and financial advisors to make informed investment decisions. The report also considers the impact of various factors on the UK's economy and offers insights into the opportunities and pitfalls of investing in the UK. The report uses data from various sources, including the Observatory of Economic Complexity (OEC) and the Office for National Statistics, to support its analysis and conclusions.

United Kingdom Economic and Financial outlook
INTRODUCTION
The United Kingdom is considered as the trading power and financial powerhouse standing 3rd
after Germany and France in Europe. 78.9, the economic freedom score of United Kingdom 78.9
makes it the 7th freest economic country in the index of 2019. It stands at the 3rd position among
44 countries of the European region, and the overall score exceeds the world and regional
averages. It’s GDP accounts for $2.8 trillion in 2018 and had a population of 66 million
approximately and comprises of Scotland, England, North Ireland and Wales. The quality of life
is quite high in UK with a diversified economy. The main contributors to the economy are
manufacturing, construction, services and tourism sectors. The departure of UK from European
Union in the year 2019, triggered its policy makers to record recovery of the economy from the
financial crisis by an effective rule of law, an open trade regime, and a highly developed
financial sector. As per pwc reports, in spite of the growth in the income in 2018, actual
expenditure growth of the household might slow down in 2019.This slowness is attributed to the
non-conformity around the result of the Brexit process which owes to the upgrade in financial
and business services, following the financial deregulation of the mid-1980s, and also the
relatively low manufacturing share and its willingness to attract skilled international migrants,
London has been able to outperform the UK regions in economic growth for almost the past 30
years. As per readings from the labour and housing markets, The performance of London in
terms of financial perspectives were less strong in the year 2018, sending out signals of slow and
less sustainable growth in future. ("United Kingdom - Economy", 2019)
BODY OF THE REPORT

Industries contributing mostly to Exports/Imports
With Brexit on set, the question taking rounds is that how will it impact businesses and that what
might be the present state of the nation's trading actually with the world in general? According
to the Observatory of Economic Complexity (OEC), in 2016 the item which was mostly export
from UK was cars accounting for 12% of the overall $374 billion export value for the given
year. Brexit has left many companies in dilemma as to decide on importing and exporting.
Pertaining to the ‘special relationship’ with the US, the UK generally caters or exports more to
it, in comparison to the other countries. Let us take a look at these major export items and
countries of the UK below:
TABLES AND DATA
Countries %of total exports
United States 14%
Germany 9.5%
France 6%
Netherlands 6%
Switzerland 5.1%
("UK Trade - Office for National Statistics", 2019)
For 2016, the top imports originated from the below:

Countries %of total exports
United States 7.5%
Germany 14%
France 5.8%
Netherlands 7.3%
China 9.8%
Top 7 imports and exports data of UK are as below:-
Exports % Imports %
Machinery 15 Machinery 12.9
Vehicles 11.4 Vehicles 11.2
Gems 9.8 Mineral fuels 9.9
Mineral Fuels 9.3 Pharmaceutica
ls
6.2
Pharmaceutica
ls
6.2 Electrical
Machinery
6.1

Electrical
Machinery
6.1 Aircraft 4.1
Aircraft 4.1 Optical,
technical,
medical
apparatus
2.8
("UK Trade - Office for National Statistics", 2019)
Division of export services of UK was undertaken and divided among other countries of EU in
the year 2017.Thereby other countries have started gaining through the export services at a
faster rate leading to a decrease in the share prices of the companies in the UK. (Gehringer &
Mayer, 2019)
With the significant moment marked it the history, the UK leaving the EU in the month of
March, 2019,there were high probable uncertainties leading to changes in the future trade
relationship between UK and EU. With the facts above , our analysis exhibits that the uncertainty
of the trade policy to undertake strong exporting decisions in the organization.
The United Kingdom owns a free economically international trade, is highly market –oriented
and developed. It shares its major trade with the United States. In Spite of the changing trends,
companies that enter the trade relations with UK might also meet complicated and stringent tax
laws.
Inflation

Inflations can be measured while determine the average prices of goods and services and
comparing the same with that of its rival companies which is then concluded upon by the
professional statisticians. The Index or the Indices hired involved to keep a record of the price
changes can be :
● Consumer Price Index (CPI)
● Retail Price Index (RPI)
At present, there has been a relaxation in the United Kingdom’s inflation conditions. There are
several factors that contributed to the inflation and deflations policies. Enumerating few sectors:
The travel industry, that is the cost of land and air modes of travel reduced than it was in the
earlier years, leading to the decline in inflation. ("Top Challenges of Doing Business in the UK",
2019)
The drop in the prices of crude oil, that is petrol, diesel etc,
On the contrary, hotel prices rose a bit although with the advent of online merchants, it became
affordable too, hence getting least botheration in terms of inflation.
Trade data are generally noted in segments as per the understanding of the MOU, monthly and
quarterly. Month on a month basis analysis is generally adopted for the goods division as it is
easy to be quantified based on the demand and supply of the products. Whereas It is harder to
measure the same on a monthly basis for the services sector, hence it is calculated quarterly from
where we can derive the monthly outcome also. (Estevadeordal & Suominen, 2012)
The following sectors categorise as goods, Beverages, Tobacco, oil essentials, manufactured
goods etc and the service sector includes travel, construction work, financial, property,
maintenance services, etc.

The rate of inflation, when checked annually shows an increase of 2.1% in the April of the
current year,2019 from the previous month showing 1.9%. Though the inflation rate was still
below from what was expected, that is 2.2%. The core reason which led to a rise in the inflation
rate was the sudden increase in the electricity production and consumption rate.
Below given are the annual inflation rates for the past few years :
TABLES AND DATA
YEAR INFLATION
2019 2.2%
2018 2.44%
2017 3.6%
2016 1.8%
2015 1.0%
2014 2.4%
2013 3.0%
2012 3.2%

2011 5.2%
2010 4.6%
2009 -0.5%
("TRADING ECONOMICS | 300.00 INDICATORS | 196 COUNTRIES", 2019)
To assess and not conclude, the UK assets market are fairly calm depending upon the political
surroundings. The UK inflation rate fell significantly in the year 2017 but has risen in 2018 and
2019. These inflation swaps have marked in the major economies with the crash in the prices of
the oil.
Inflation in the UK is as a result of the depreciation through which the importing costs of both
the intermediate input services and final goods increases. It has been researched that for every
10% rise in the export share of any group of product, inflation increases by 0.17% for any
particular year. Inflation has a great impact on the real wages off the average workers. The
higher the inflation, lesser will be the growth of the real wages thereby affecting the economic
budget and cost of living of the average worker. Higher inflation has also affected the households
of all income levels.
UK has voted a, leave vote in the EU in the year 2016.The decision of the UK to leave the EU
has lead to the dire consequences over the countries which began to undertake the decrease in the
share prices of the organizations. Still the concrete synopsis on inflation is a very difficult
challenge with many uncertainties.

Trade Agreements
Trade agreements continuously maintains a balance between commitments and flexibility.
Suppose if the agreement is extremely flexible then the component of the commitment
undermines and vice versa.
These agreements are regulated through World Trade Organization and its antecedent, the
General Agreement on Tariffs and Trade (GATT).
Such agreements have proven to be fruitful and disciplined for the countries, as if the trade
agreements were not introduced, then they might have indulged in to manipulate its trade factors,
that is the prices and quality of the exports to its imports thereby resulting in an increase in its
income at the expense of its trading partners. Secondly Government might also have faced
economic and political difficulties in setting up the trade policies.
Existing Trade Agreements forms almost around 11% of the United Kingdom’s trade .UK
currently takes part in the free trade agreements of the European Union. These agreements
exhibit a wide range of traits such as:
● Partnership agreements on the Economic basis
● Free Trade Agreements (FTA)
● Agreements associating Economic and Political Cooperation from the neighboring
countries.
● Preferential reduction in the duties for the goods, that is import tariff rates, payable duties
and its rates,
● Intellectual property and its common standards

The UK is in the process of re-transforming its existing trade agreements which it participates in
as a member of the EU. However, if United Kingdom exits from the EU then it may end up with
no deals. Leaving the EU with a deal is the Government’s foremost priority. These EU
agreements no longer pertain to the UK at the end of the transition period in the event of a deal
or on Brexit day when there is no deal. In order to provide continuity , the Government
continually strive at providing new deals. Though the government has confirmed that a number
of agreements shall not be continued with the Brexit exit date(29 March, 2019) which includes
Japan and Turkey, the largest trade partners covered by EU agreements.
UK’s current trade agreements exist only through its EU membership but foregoing new trade
relations with any other country beyond the EU’s jurisdiction might prove a challenge for the
common economic wealth. The reason being that the complex trade relating agreements are
never easily negotiated and agreed upon. Digital economy has achieved significance and
overcome major regulatory barriers thus creating hindrance free trade for UK economy.
("Inflation - measuring inflation | Economics Online` 2019)
APPENDIX
Analysis and synthesis of data and information of United Kingdom and analysis of its
comparative advantage
Now through this section, we shall try to analyse how much the 3 factors explained in the prior
section impact the current and future financial growth of the UK and on its economic factors. As
already iterated and cited that a hard Brexit would have serious implications on Britain’s highly
emerging service exports rather than its manufacturing exports. The export/import data also

throws light on the incidental risks to the industries which possess higher value in the economy
and also the ones whose exports are crucial for the UK in order to finance its import bills.
UK’s growing inflation in the recent years had slowed the economic growth at the end of 2018
however it was expected to recover the start of the year 2019, though it remains sluggish. The
historic downgraded unemployment rate of United Kingdom has been one of the major reasons
for the economy's success of the past year. Following the financial crisis, the real wages have
started to recover and apart form part time workers and self -employed there has been a surge in
the full-time employees as well, strengthening the economy and putting it comparatively better
positioned.
Trade is all about playing to your strengths and it is known as comparative advantage for the
reason. Fortunately, language is the main strength of the country as it forms the world language
and consequently publishing forms the comparatively most competitive strength Britain inherits
one of the world’s most robust intellectual property regimes, and the Creative Industries Sector
Deal included £2 million to educate consumers on the value of copyright. Over the past 4 years,
the Department for International Trade and its predecessors have exhibited significant role in the
annual London Book Fair which also involves its meetings with renowned buyers from the
countries China, India, South Korea, Indonesia, Thailand, USA and the UAE. Government has
thus been giving enough push and helping with open hands to bank on this advantage. (Wiggins,
2015)
The UK retains its position as the world's leading exporter of financial related professional
services. To summarize, we can look at the below statistics of financial sector generating
revenues for the 4 largest countries in the same sector:

Country Trade surplus (in billions)
United Kingdom $88
US $47
Switzerland $23
Luxembourg $17
("Inflation - measuring inflation | Economics Online", 2019)
Combining legal, accounting and other related financial services, UK's financial services trade
surplus was around $107 billion (£83 billion).
Mostly due to the reduction in the oil prices, supermarket price struggles against strong sterling
prices which kept the cost of imports, there had been exceptionally low inflation in 2014 and
2015.However, the vote to leave the EU changed the face of inflation in the UK and led to a
sharp decline in the value of sterling thereby making imports more expensive. Consumer
spending came as a rescue in such a scenario and had led to UK economic recovery. Though,
that leads to another major concern if the source of such spends is savings or taking out loans
(which could lead to future issues with greater magnitude). (Monaghan, 2019)
RECOMMENDATIONS FOR PORTFOLIO MANAGERS
The portfolio managers and finance managers worldwide still can have a real optimistic view on
their decisions on the services sector of the economy which has surpassed the pre-recession
peaks and accounts for almost 80% of the GDP, service output in March being 2% annual
change. On the other hand, manufacturing sector which was once in past a great contributor of

GDP, has faced steep decline in its importance. The sector’s contribution to the employment is
not very significant but latest technology has turned the sector to be very productive and
focussed towards higher value goods. When it comes to trades, the imports are still more than the
exports for a long time. Agriculture is intensive and is highly mechanical, the country is one of
the richest in coal, gas and natural resources however oil and natural resources are on the decline
of late, making it a net importer since 2005.The country is basically class performer when it
comes to financial services sector particularly banking, insurance and business services. Home
prices decline, global economic slowdown and high consumer debts-all of these aggravated the
problems in UK economy and resulted in the recession for UK economy in the latter 2008 which
had negative impact on the sterling prices. The then BROWN(labour) government has to then
take certain measures to stabilize finance and economy of the state. The Sterling’s depreciation
also led to corporate margins cut down of domestic producers ,which reduced the capacity of
non-exporting firms to finance their own investment. Uncertainty of economy has resultantly
weakened business investment growth. ("United Kingdom - Trade Agreements | export.gov",
2019)
Current account deficit has been concerning the economists of late that it could make UK
vulnerable to external shocks. In a period of 2 years between the Brexit decision and the actual
exit of the UK from the EU, the UK must negotiate free trade agreements with the EU and other
countries globally.Additionally the EU decides to change its policies then UK even though
being a founding member if European Free trade Association (EFTA),founded in 1960,shall lose
accesses to single market. It is expected, that according to official analysis FDI inflows shall
decline by 22% due to Brexit decision and the EU exit, hence portfolio managers and analysts
don’t have too much a positive outlook for the sovereignty. ("Consumer price inflation, UK -