United Kingdom Pestle Analysis Part 1

Country Profile

United KingdomIn-depth PESTLE analysis

Prepared Date: Feb 2013

Prepared For: ISMAR Financial

Prepared By: Waris Hussain

OVERVIEW

Catalyst

This profile analyzes the political, economic, social, technological, legal and environmental (PESTLE) structure in United Kingdom. Each of the PESTLE factors is explored in terms of current strengths, current challenges, current opportunities and current threats.

Summary

Key findings

The United Kingdom of Great Britain and Northern Ireland is situated on the British Isles, a large group of islands lying off the north-western coast of Europe. The total area of the United Kingdom is 244 square kilometers.

Great Britain is situated in the temperate zone of Europe. The nature of Great Britain is greatly affected by the sea. The territory of UK can be divided in four areas England, Wales, Scotland and Ireland. The coastline of Great Britain is greatly indented, especially in the west and north-west where the mountains come close to the coast. Great Britain enjoys the humid and mild marine West-Coast climate with cold winters and warm summers and a lot of rainfall throughout the year. The prevailing winds blow from the south-west. The south of England is often called the "Garden of England", because there are many gardens and orchards there.

United Kingdom currently has political stability; it has good bilateral ties with many countries but currently has tensed relationship with European Union.

In United Kingdom constitutional monarchy framework is followed in which Monarch is the head of state and the Prime Minister is the head of government. Currently Queen Elizabeth is serving as a monarch and David Cameron is acting as Prime Minister. Following the May 2010 general election, the political situation in the country is stable. In 2010 election Conservative party headed by David Cameron won the election against the major contender Labor party and Liberal Democrat party In the earlier election Labor party headed by Tony Blair won the election by full majority.

The UK is one of 27 member states of the European Union (EU) and is subject to EU legislation but UK is not part of the euro zone. The chances of its joining EU has further decreased after UK blocked proposed changes to the EU Lisbon treaty aimed at addressing the crisis in the euro zone, which by the autumn of 2011 had reached an acute phase. As per the survey of 2008, UK is the 8th most politically stable place to live in because there is less risk of military invasion. Australia has the strongest relationship politically and on economic matters with UK.

The UK, a leading trading power and financial center, is the third largest economy in Europe after Germany and France. Over the past two decades, the government has greatly reduced public ownership and contained the growth of social welfare programs.

Agriculture is intensive, highly mechanized, and efficient by European standards, producing about 60% of food needs with less than 2% of the labor force. The UK has large coal, natural gas, and oil resources, but its oil and natural gas reserves are declining and the UK became a net importer of energy in 2005. Services, particularly banking, insurance, and business services, account by far for the largest proportion of GDP while industry continues to decline in importance.

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In 2008, however, the global financial crisis hit the economy particularly hard, due to the importance of its financial sector. Sharply declining home prices, high consumer debt, and the global economic slowdown compounded Britain's economic problems, pushing the economy into recession in the latter half of 2008 and prompting the government to implement a number of measures to stimulate the economy and stabilize the financial markets. In 2010 government initiated a five-year austerity program, which aimed to lower London's budget deficit from over 10% of GDP in 2010 to nearly 1% by 2015. GDP fell 0.1%, budget deficit remained high at 7.7% of GDP and debt continued to increase.

The aging population, Ethnic and religious differences these days is concern for the UK government but the literacy rate in UK is their power.

The impact of terrorism and political violence has been a major issue in British life over many years. The complexity of cultural and social interaction in Britain leads to discussions of race, ethnicity and deprivation amongst minority groups. The status and problems of minorities are a continuing challenge for British governments despite efforts to produce a more ‘inclusive society’, which is an ambition, shared by all the major political parties. An added dimension is the apparent growth of race-related crime and the role of various minority groups.

Literacy rate in UK is near to 100% and government wants to increase their investment on Education services as it is one of their most important exports. Furthermore there is no difference on the basis of sex in employment area.

The European Innovation Scoreboard 2008 ranks the UK one of the innovation leaders, with innovation performance well above that of the EU average and all other countries.

The UK has a strong track record in science and innovation. It possesses four of the world’s top six universities, and a research base that is now second only to the US in the G8 group of countries for excellence, producing 12% of all cited papers and 14% of the most highly cited papers. The UK is also recognized as one of Europe’s ‘Innovation Leaders’.

For over a decade, Government policy has consistently supported the development of the UK’s scientific and technological capabilities. This has been underpinned by record levels of investment in science of over GBP 40 billion.

Since the early 1990s, the UK has made noteworthy progress in dealing with number environmental pressures from economic growth.

It achieved strong decoupling for major air pollutants and CO2, for water withdrawals and for agrochemical consumption. This progress reflects both the reshaping of the economy and the strengthening of UK environmental policies in the EU context. The UK is committed at the highest level of government to environmental protection and sustainable development. Yet, it could still improve its ranking among OECD and EU countries with respect to a number of indicators of environmental pressure intensity.

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TABLE OF CONTENTS

Overview 2

Catalyst 2Summary 2

Key Facts and Geographic Location 6

Key facts 6Geographic location 7

PESTLE Analysis 8

Summary 8

Political Analysis 9

Overview of UK Political System 9Election, Political Parties and their Current Representation 10General Election of 2010 11Current Strength and Opportunity 12Current Weakness and Threats 14

Economic Analysis 16

Overview of UK Economic 16Type of Economic System 17Government Intervention in Market 17Comparative Advantage in UK 18Exchange Rate and Stability of UK currency 20Financial Markets 21Infrastructure Quality 21Business Cycle Stage and Economic Growth 22Skill Level of Workforce 23Labor Costs 24Unemployment Rate, Inflation Rate and Interest Rate 24

Social Analysis 26

Overview of UK social system 26Demographic Characteristics 27

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Class Structure and Education 29Culture 30Entrepreneurial spirit 30Health and Environment 31Challenges for United Kingdom 32

Technological Analysis 33

Overview of UK Technological and Scientific Environment 33Innovation in Macro Economy 33Important Scientific Researches by UK scientist 35UK society and Technology 35Nobel Laureates 35UK Vision for Future Technologies 36

Environmental Analysis 37

Overview of Environment in UK 37Carbon Dioxide Emissions 37Ecological Footprint 38Environmental Issues in UK 38Key Environmental Regulation 38Current Threat 38

Location Analysis 39

About Geographical Location 39United Kingdom Surrounding Countries 39

Conclusion 40

Appendix 41-45

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KEY FACTS AND GEOGRAPHIC LOCATION

Key Facts

UNITED KINGDOM - Key facts Country and capital

Full name United Kingdom of Great Britain and Northern IrelandCapital city London

Government Government type Parliamentary constitutional MonarchHead of state Queen Elizabeth 2

Population Approx. 63 million

Currency Pound sterling (GBP)

GDP per capita PPP $ 36,510.80

Internet domain .uk

Demographic details Life expectancy 80.17 years (total population) 78.05 years (men) 82.40 years (women)

Ethnic composition (2001 census)

White (of which English 83.6%, Scottish 8.6%, Welsh 4.9%, Northern Irish 2.9%) 92.1%, black 2%, Indian 1.8%, Pakistani 1.3%, mixed 1.2%, other 1.6% (2001 census)

Major religion (2001 census) Christian (Anglican, Roman Catholic, Presbyterian, Methodist) 71.6%, Muslim 2.7%, Hindu 1%, other 1.6%, unspecified or none 23.1%

Country area 243,610 km2

Language English, Scots, Scottish Gaelic, Welsh, Irish and Cornish

Exports Nuclear reactors, boilers, machinery and mechanical appliances (including parts thereof), Mineral fuels, mineral oils and products of their distillation, bituminous substances and mineral

Imports Machinery, chemicals, vehicles, metals, agricultural products, textiles

Geographical Location

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PESTLE ANALYSIS

Summary

When companies are looking to invest in different countries or locate offices in those countries, their management will often seek to run a PESTLE analysis of that country. PESTLE stands for political, economic, social, technological, legal and ecological elements within what is called an "external macro-environment," which can range in size from a major city to an entire country.

The UK comprises Great Britain (England, Wales and Scotland) and Northern Ireland. Politically UK follows a constitutional monarchy and parliamentary system where monarch Queen Elizabeth is Head of State and Prime Minister David Cameron is the head of Government. The Great Britain countries are associated with UK but not constitutionally part of it. Currently UK is politically stable and there is less military involvement in government decisions.

UK is one of the largest economies in the world. As in most other developed countries the manufacturing sector has been declining while services sector is inclining in growth. The UK was hard hit by the global economic crisis in 2008-09 and again by the Euro zone crisis. UK is also a member of United Nations Security Council and European Union.

Socially UK has a wide selection of people from different social backgrounds. In the UK, generally there is a high education level, meaning that people will be more demanding. Religion and culture are also considerations within the social section. In the UK there are a variety of religions and cultures including Christians, Muslims, Hindus, Jews and many more.

Technologically UK is a place of innovation and research. UK government allows tax credit for those companies who are investing in Research and development. Universities of UK are top listed universities and are known for their research program. The Internet is becoming more widespread within the UK, with millions of people using it every day within the UK alone.

United Kingdom has three laws in it. First is English law for England and Wales, second is Northern Ireland law and third is Scottish law. The Supreme Court of the United Kingdom is the highest court in the land for all criminal and civil cases in England and Wales and Northern Ireland, and for all civil cases in Scots law. According to the crime statistics report criminal and civil crimes in England and Wales has decreased by 48% because of the strict legal system.

Environmentally, the UK is clean and green and worried about CO2 emission. They have made some of the most ambitious pledges about going even greener. UK bodies have achieved their target of 15% reduction of green house gases and now their target is to reduce it by 20%. UK bodies are also working on lowering the industrial waste disposal and want to recycle the household wastes.

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Political Analysis

Overview of UK Political System

Great Britain is a constitutional monarchy. This means that the official head of the State is the monarch (a king or a queen) but his or her powers are limited by the constitution. For years it has been Her Majesty Queen Elizabeth II.

Parliament: The UK Parliament is the supreme legislative body in the UK and British overseas territories. The parliament is a bicameral assembly, with an upper house, the House of Lords, and a lower house, the House of Commons. At its head is the Sovereign, Queen Elizabeth II. The House of Commons and the House of Lords are both involved in passing legislation, scrutinizing the work of the government and debating current issues. Members of the House of Lords are mostly appointed by the Queen. The House of Lords acts as a chamber of review for legislation passed by the lower house. The Supreme Court of the United Kingdom is now the highest court for all matters under English law, Northern Irish law and Scottish civil law. Members of the House of Commons are publicly elected. Members of the Commons alone are responsible for making decisions on financial Bills, such as proposed new taxes. The Lords can consider these Bills but cannot block or amend them.

Government:As far as formation of government is related the political party or coalition that wins the most seats in a general election forms the new government, led by its party leader, who then becomes the Prime Minister. At the general election held on 6 May 2010, the Conservative Party, led by David Cameron, won 306 of the 650 seats in the House of Commons. The Liberal Democrats, led by Nick Clegg, won 57 seats. Following the election, the Conservatives and the Liberal Democrats announced a coalition Government with David Cameron as Prime Minister and Nick Clegg as Deputy Prime Minister.

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Crown:Along with the House of Commons and the House of Lords, the Crown is an integral part of the British Parliament although the Queen's modern role has become largely ceremonial. The Queen is only a formal and symbolic head of State. Generally, the day after a general election the Queen invites the leader of the party that won the most seats in the House of Commons to become Prime Minister and to form the government. The Queen opens Parliament through the State Opening. She also dismisses Parliament before a general election at the request of the Prime Minister. In reality, the Queen acts only on the advice of her ministers.

Devolution:Parliamentary reforms in the UK referred to as "devolution", have created a number of national assemblies, including a national Parliament in Scotland, a national Assembly in Wales and a national Assembly in Northern Ireland. Scotland, Wales and Northern Ireland all held successful referendums on devolution in the late 1990s. This led to the establishment of the separate national assemblies and the democratic election of officials. The Scottish Parliament and the National Assembly for Wales took responsibility for their devolved powers on 1 July 1999, the Northern Ireland Assembly on 2 December 1999. The Northern Ireland Assembly was suspended at midnight on 14 October 2002. Power was restored to the Assembly on 8 May 2007.

Europe:The UK is one of 27 member states of the European Union (EU) and is subject to EU legislation. One of the roles of the UK Parliament is to scrutinize EU draft legislation and other EU documents and to change UK law to reflect agreed EU legislation and treaties. In the UK the Scrutiny Reserve Resolutions provide that no UK minister should agree in the European Council of Ministers or the European Council to a proposal that is still 'subject to scrutiny' in the UK Parliament , and if they do, requires them to explain their reasons. The UK Parliament receives copies of EU documents, together with an Explanatory Memorandum prepared by the relevant government department. Documents are considered by the Scrutiny Committees in both the Commons and the Lords.

Election, Political Parties in UK and their current representation

The UK political system is a multi-party system. Since the 1920s, the two largest political parties have been the Conservative Party and the Labor Party. Before the Labor Party rose in British politics the Liberal Party was the other major political party along with the Conservatives. There are six types of elections in the United Kingdom: United Kingdom general elections, elections to devolved parliaments and assemblies, elections to the European Parliament, local elections, mayoral elections and Police and Crime Commissioner elections. General elections have fixed dates, and must be called within five years of the opening of parliament following the last election. United Kingdom general elections are held following, dissolution of Parliament. All the Members of Parliament forming the House of Commons of the Parliament of the United Kingdom are elected. Following the Parliament Act 1911, parliamentary sessions last a maximum of five years, and are ended by the dissolution of Parliament. Traditionally the dates of general elections are not fixed in advance, and the time is chosen by the governing party to maximize political advantage. The 2010 election was held on 6 May 2010.

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Candidates aim to win particular geographic constituencies in the United Kingdom. Each constituency elects one MP by the first past the post system of election. At the 2005 general election, there were 646 constituencies, thus 646 MPs were elected to Parliament. The party with the most seats usually forms the government, and the second largest party forms Her Majesty's Loyal Opposition. In 2010The election took place in 650 constituencies across the United Kingdom under the first-past-the-post system.

The table below is showing the political parties in UK and their current representations.

Party UK House of Common

Scottish Parliament

National Assembly for Wales

Northern Ireland Assembly

London Assembly

European Parliament

Conservative Party 306 15 14 - 9 25Liberal Democrats 57 5 5 - 2 11Labor Party 257 37 30 - 12 13Democratic Unionist Party 8 - - 38 - 1Scottish National Party 6 69 - - - 2Sinn Fein 5 - - 29 - 1Plaid Cymru Party of Wales 3 - 11 - - 1Social Democratic 3 - - 14 - 0Alliance Party of Northern Ireland 1 - - 8 - 0Green Party of England 1 - 0 - 2 2Respect Party 1 0 0 - - 0Ulster Unionist Party 0 - - 15 - 1Scottish Green Party 0 2 - - - 0UK Independence party 0 0 0 1 0 13

General Election of 2010

The last general election was held in May 2010 to elect House of Common members. In 650 constituencies election took place under first past the post system. Conservative party led by David Cameron won the election but could not able to get majority that is 326 seats in order to create overall majority that is why it resulted in hung party. The coalition partner of Conservatives was Liberal Democrats. Before this general election Labor party ruled in House of Common for 13 years. Mr. David Cameron then becomes the Prime Minister of United Kingdom and representative of House of Common.

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This Election happened because the Prime Minister at that time Gordon Brown of Labor party asks the Queen Elizabeth to dissolve the parliament and call for re-election. Brown asked the Queen to dissolve Parliament because in the UK it is the Prime Minister who chooses when to hold an election. The only limitation is that he must call an election within 5 years of the last one. Brown stepped down because, regrettably, his party lost the election. No party won a majority in the election, so at first there was no winner and so Brown remained as the Prime Minister until a stable government could be formed.

The result of 2010 election can be seen from the chart given below:

Current Strength and Opportunity

Political stabilityThe United Kingdom (UK) is a CRT-1 country with very low levels of risk across all three categories one is political risk, second is economic risk and third is financial system risk. Parliamentary sovereignty is a key convention, so it is part of the constitution; it states that parliament is the supreme law making body, therefore in ensures a clear centre of authority. Parliament can make, amend and repeal laws, they are the supreme law. Furthermore there is less of military influence in the UK political and constitutional system.

Flexibility of constitutionThe UK constitution is uncodified which is in itself is a strength. Unlike a codified constitution (the USA), the UK has flexibility and is able to adapt to new circumstances. For example in 1998 the Human Rights Act was introduced to UK law. In the USA this would be a lengthy procedure as they would have to amend the rigid constitution, as a result there have only been 27 amendments since the constitution was written. Whereas a simple act of parliament can change the UK constitution.

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Conservative

Labor

Liberal Democrats

Democratic Unionist

Scottsh National

Sinn Fein

Others

0 50 100 150 200 250 300 350

Parliamentary Seats Seats Won

Detail chart of Parliament seats is given in Appendix (A)

Flexibility is strength within the constitution because power is not rigidly set. It can be distributed across the three branches of government: the legislature, the executive and the judiciary.European Union Member Being apart of the European Union, makes you a part of the single market, which is a common market and customs union between the member countries. The single market involves the free movement of the following 3 important aspects:1. Free movement of goods: goods can be moved freely throughout member countries. The only restriction that may be placed on a good is when there is a risk, such a public health risk, environment, or consumer protection.2. Free movement of capital: allows investments to move between countries without any additional cost. These investments include things such as property purchases and buying shares between countries. In 2005 the Commission of the EU completed the legislative phase of an action plan aimed at developing a true European-wide market in financial services and is now trying to put a new strategy in place to deepen financial integration and deliver further benefits to industry and consumers alike among England and the other countries.3. Free movement of services: allows citizens to move, work, live, and retire in any member country that they wish. This was introduced in 1993 with the concept of Community Citizenship amongst the countries of the EU.Along with the free movement of these things, the countries of the EU all instill the same external tariff on all the goods entering their market. Once the goods are in the target market, they can not be taxed any further than they already have."

Bilateral relationshipUK has a strong bilateral relationship with many developed economies of the world. These bilateral relation ship is based on both Political and economic relationship. UK’s most important strategic partners are United States of America, France, Australia, New Zealand and some Asian countries.

New Banking RegulationsNew banking regulation has increased the power of the Bank of England to oversee financial stability, phasing out the FSA. Targeted changes include a banking tax, limiting bonus, and curbing high risk behavior. This will allow many new industries to set up.

UK Code of GovernanceUnited Kingdom code of cooperate governance code is currently too robust and flexible. It has a principal based approach which allows the companies to follow code and if they found any difficulty in following any code they companies are allowed to do that but they have to give reason in their financial statement which is to be certified by the auditor. This robust code of governance was implemented after the liquidation of many financial industry sectors which cause the economic crisis. This will increase the shareholder confidence.

Price Control policiesThe government either directly or through regulatory bodies has permanent price control powers over most public utilities which discourage the monopoly and allow the free and fair competition. This will allow many small and new private and public entities to setup.

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Tax IncentivesExpenditure on certain energy efficient assets qualifies for 100% tax deduction in the year of acquisition. The annual investment allowance also provides for a full tax deduction for the first GBP 100,000 each year. Tax incentives on research and development are available for all large and small entities. In 2011-2012 government announces to setup or invite 21 new entities to create new business activity in economically declining areas of UK. Also UK has tax treaties with many countries.

Current Weakness and Threats

Relationship with EUCurrently UK relationship with European Union is in danger and David Cameron has currently called for a referendum to be done between 2015 and 2017 in which public will decide whether they want UK to exit European Union or not. Currently European countries are in crisis which directly or indirectly is depreciating the value of United Kingdom, its economy and its currency.

Exchange ControlsThere are no exchange controls in UK. No currency considerations affect the remittance of profits, dividends, interest and royalties or of licensing, management and patent fees. Nevertheless the UK tax authorities may challenge the level of transfer if they suspect corporate tax avoidance or evasion. In short UK tax authorities have to work on their Exchange control program so that tax avoidance and evasion can be stop.

High Tax RatesThe UK has the ninth highest tax burden for people earning over £125,000 in a list of 26 countries, according to a poll by accountants UHY. For the very top earners - classed as people earning £950,000 a year or more – Britain has the sixth highest tax rate. As well as being hit by high levels of income tax, Britons have been affected other tax rises relating to National Insurance and changes in allowances and reliefs. UHY found that people earning over £125,000 keep 60.8 per cent of their income after personal taxes and social security contributions. This means that they take home less money than people earning the equivalent amount in countries including Uruguay, China, India, Romania and Brazil. People earning over £950,000 keep half their salary, UHY said. The only countries with worse tax rates are France, Italy, the Netherlands, Ireland and Spain. This will discourage the FDI in UK in future.

Protection for Individual RightsFinally, the UK constitution provides weak protection for individual rights and civil liberties. This is, in part, a consequence of elective dictatorship but the fact is that there is nothing that forces the government to respect individual freedom and basic rights. For instance, the Human Rights Act passed in 1998 was largely ineffective as it stops well short of being an entrenched bill of rights. Its provisions have been set-aside in the past by Parliament, for instance, over terrorism legislation in 2001.

Over-centralized System of Government

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Criticism has been that the UK has an over centralized system of government with weak or ineffective checks and balances. One of the key features of liberal democracy is that government power is limited through internal tensions between and amongst government bodies. However, UK government is characterized more by the concentration of power than its fragmentation. This can be seen through the way in which the PM tends to dominate cabinet, how the executive usually controls Parliament and how central government usually controls local government. However, this has been controlled relatively well since 1997 with Blair introducing a number of constitutional reforms. For example, the devolution of power in Scotland and Wales transferred a degree of central power from Westminster and distributed it on a local level.

Massive Defense cutsBritish Prime Minister David Cameron announced defense cuts today that will completely fundamentally change British military capabilities. As part of the cuts the flagship of the Royal Navy, the aircraft carrier HMS Ark Royal and its fleet of Harriers will be immediately scrapped. That will leave the UK without an aircraft carrier capable of years. Cameron said massive budget deficits made completely reshaping the British military a necessity. Also to be cut, 7,000 Army personnel, 5,000 Navy personnel, another 5,000 from the RAF, and 40% of the country's tank force.

Fiscal Austerity ProgramsMany governments around the world will have to cut spending and increase taxes to avoid fiscal deficits that increased during the financial crisis. These programs will decrease government spending in the economy, which will slow growth rates. Additionally, citizens will have less money and benefits to use in case of emergencies. The fear is that cuts might be so drastic that they hurt the economy. "Fiscal Austerity programs" has a significant impact, so an analyst should put more weight into it.

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Economic Analysis

Overview of UK Economy

The economy of the United Kingdom is the sixth largest national economy in the world measured by nominal GDP and eighth largest as per Purchasing power parity and the third largest in Europe measured by nominal GDP. The British economy encompasses the economies of England, Scotland, Wales and Northern Ireland. In 18th century UK was the first country in the world to industrialize and during the 19th century possessed a dominant role in the global economy. From the late 19th century the Second Industrial Revolution in the United States and Germany presented an increasing economic challenge to Britain. Despite victory, the costs of fighting both the First World War and Second World War further weakened the accountability of UK's public finance and resulted in the collapse of the British Empire, and by 1945 it had been superseded by the United States as the world's dominant economic power. However, it still maintains a significant role, such as the area of financial industry in the world economy. The UK has one of the world's most globalised economies. London is the world's largest financial centre and has the largest city GDP in Europe. As of December 2010 the UK had the third-largest stock of both inward and outward foreign direct investment,

The Bank of England is the UK's central bank and its Monetary Policy Committee is responsible for setting interest rates. The currency of the UK is the pound sterling, which is also the world's third-largest reserve currency after the U.S. dollar and the euro. The UK economy has been weak in recent years following the late 2000s recession with growth largely flat since 2010. The UK experienced a double dip recession which was the longest and deepest in 50 years between Q4 2011 and Q2 2012; however recent figures have shown the UK economy improving, unemployment fell to 7.6%. UK economy started to grow again in Q3 2012, growing by 1.0% - the fastest rate of GDP growth since Q3 2007. Latest unemployment statistics from the ONS show unemployment falling at its fastest rate since 2001.

Economic Indicator Current statisticsGDP (%) QOQGDP

-0.3%$ 2.4 trillion

Interest Rate 0.5%Unemployment Rate 7.7%CPI 2.7%(124.4 index)PPI -0.3%Balance of trade (total)Goods Services

$(5.6) billion$(14.83) billion

$9.19 billion

Budget deficit $189.4 billionRetail sales 0.3%Industrial production (2.4) %Debt $ 2115.21billion.Foreign exchange reserves $104.8 billion

Type of Economic System

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The United Kingdom operates a diversified economy that is one of the largest in the world. The British economic system exhibits the characteristics of a mixed system, combining market based features with some socialist characteristics. UK has a distinct private sector, where resources are allocated primarily by market forces, such as the grocery sector of the UK economy. Mixed economies may also have a distinct public sector, where resources are allocated mainly by government, such as defense, police, and fire services. In many sectors, resources are allocated by a combination of markets and panning, such as healthcare and, which have both public and private provision.

The CIA World Fact book reported that the United Kingdom's economy had a total gross domestic product (GDP) of nearly $2.34 trillion in 2012; making it the world's seventh largest. Service industries account for 75 percent of the U.K.'s economic output, according to the CIA. Industry accounts for 23.8 percent of output while agriculture represents 1.2 percent. Overall, the United Kingdom's mixed economy has mostly free market features but retains some socialist characteristics, such as the government owning a stake in some industries.

The British capital, London, is an important center of world financial activity. It is home to the London Stock Exchange, founded in 1801 and one of the world's largest stock exchanges. In addition, more than 100 of Europe's largest companies have their headquarters in London. Since the 1980s, under Prime Minister Margaret Thatcher, the British government privatized many industries, including British Rail, British Petroleum and British Airways. The world economic crisis of 2008 pushed the British economy into a recession, leading to a series of stimulus and reform measures by the government, including nationalization of part of the country's banking industry.

Government Intervention in Market

UK government intervene in free market in some areas and this is a justified rational for government intervention.

Identify the set of policy goals to be achieved. This involves an assessment of the Government's strategic goals and objectives, and the way in which they are translated to individual policy areas.

The Government intervenes when there is lacking of perfect competition in the market, in case of Externalities effects, when there is a information failure by the market and in the case of rare public goods.

Where there is an issue of equality amongst the citizens. It is the case of health services, distribution of income etc issues.

Equity, which is to do with the delivery of social or distributional objectives. Even where markets are working efficiently, they may result in a distribution of income that is unacceptable to society. This will often arise through a lack of incentives to improve equity, or because the necessary information is available only to government.

Whether the costs of government intervention are justified. This is concerned with the cost analysis of the intervention both positive and negative and the cost of not intervening.

Comparative Advantage in UK

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Foreign Investment:Foreign Investment is the biggest driving force of International economy. Direct investment by multinationals has increased by 25% in United Kingdom according to the United Nations Conference on Trade and Development. The UK doesn't discriminate between foreign individuals and nationals in formation and operation of private companies. The British Government defends the rights of any British registered company in the EU without giving any importance to nationality of ownership. Also, it doesn't discriminate between UK firms or foreign nationality owned firms.US firms prefer investing in the UK due to factors such as common language, similar business cultures and legal heritage. Japanese firms prefer the UK as an investment destination because it acts as an export platform to export manufacturing goods to other European countries. Long term economic and political stability, regulator stability coupled with relatively low taxation rates and inflation make the UK an attractive destination for foreign investors. The government is committed to economic reform which includes deregulation, privatization and support for healthy competition.

Simple Tax System:The tax system of the UK is simple. Corporations are taxed 28 percent on profits over 1.5 million GBP while small companies pay tax at a rate of 21 percent on profits up to 300,000 GBP. Small companies are given marginal tax benefits on profits ranging from 300,001-1,500,000 GBP. This tax system also allows tax deductions on expenditures and depreciation of assets used for trade. The assets over which tax deductions are accepted are industrial buildings, machinery, plant equipment and assets used for research and development purposes. Unit trusts and open ended investment companies are required to pay 20 percent tax on profits earned.

Services IndustryThe service sector is the dominant sector of the UK economy, and contributes around 73% of GDP. The creative industries accounted for 7% GVA in 2005 and grew at an average of 6% per annum between 1997 and 2005. In 2008 the education, health and social work sector had a total gross value added of around £170 billion, of which around £145 billion was compensation to employees. In 2008 health and social work had a gross value added of around £93.7 billion. This industry added gross value of £86,145 million to the UK economy in 2004.The UK's exports of financial and business services make a significant positive contribution towards the country's balance of payments. London is a major centre for international business and commerce and is one of the three "command centers" of the global economy. There are over 500 banks with offices in London. London's financial services industry is primarily based in the City of London and Canary Wharf. The City houses the London Stock Exchange, the London International Financial Futures and Options Exchange, the London Metal Exchange, Lloyds of London, and the Bank of England. Several other major UK cities have large financial sectors and related services. Edinburgh has one of the large financial centers in Europe

London Stock ExchangeThe London Stock Exchange or LSE is a stock exchange located in London, United Kingdom. Founded in 1801, it is one of the largest stock exchanges in the world, with many overseas listings as well as British companies. The London Stock Exchange is at the heart of global financial markets and is home to some of the best companies in the world. The Exchange provides a highly active and efficient market for trading in a wide range of securities, including UK and international equities, debt, covered warrants, exchange traded funds (ETFs), fixed interest, contracts for difference (CFDs) and depositary receipts.

18 | P a g e W a r i s H u s s a i n U K P E S T L E A n a l y s i s

Economic and Financial RiskThe United Kingdom (UK) is a CRT-1 country with very low levels of risk across all three categories (economic, financial and political). Despite its excellent risk profile, the UK was hit particularly hard by the global financial turmoil, partially due to its sizeable financial sector. The UK’s service industries, including financial services and real estate activities, represent three quarters of economic production. With inflation contained and growth stubbornly sluggish, the Bank of England is expected to maintain low interest rates until mid-to-late 2014 as well as pursuing further quantitative easing.While positive economic growth has resumed in the 3Q of 2012, driven largely by the Olympic Games, it is only very slight. The financial sector has generally stabilized, following government intervention and increased supervision in the wake of the financial crisis. Banks have agreed to increase lending to businesses in 2012. UK has very low risk rating as compare to other EU countries.

UK Trading PartnersUK currently have budget deficit of GBP 3.5 billion. The main reason behind this is the UK Industrial sector which has decline after 19th century but UK services industry has a trade surplus of about GBP 5.7 billion. The chart given below show the UK major trade partners

19 | P a g e W a r i s H u s s a i n U K P E S T L E A n a l y s i s

UNITED ST

ATES

NETHER

LANDS

IRISH REP

UBLICCHINA

ITALY

RUSSIA UAE

INDIA

CANADA

SINGAPORE

TURKEY

NORWAY

DENMARK

0

2,000

4,000

6,000

8,000

10,000

12,000Trade Year to date 2012 Trade Year to date 2012

Detail Chart of UK trading partner and trade for 2012 us given in Appendix (B)

Exchange rates & stability of UK currency

Pound sterling is the official currency of United Kingdom. British pound is one of the most important currencies in the world and it is the oldest currency currently being used and also a highly valued currency among the major currencies of the world. Bank of England is the only bank in the United Kingdom allowed for issuing banknotes as a legal currency. Pound sterling is the 4th most traded currency in the foreign exchange market, its volume of trading is about 12.9%. One of the reasons for the heavy trade in the currency is the location of the largest foreign exchange trading hub. The currency uses a floating rate regime and can be easily traded in the foreign exchange markets. The contraction of the British economy has led to a highly volatile monetary system and that is why the value of the currency fluctuates frequently in comparison with the United States dollar and Deutsche Mark. This attracts the attention of the investors resulting in more of investment and more of hedging in the currency. Sterling is also the third most held reserve currency in global reserves (about 4%).

Movement in exchange rate in terms of British Pound (GBP) per US Dollars is given below. The data is taken on year date exchange rate basis.

20 | P a g e W a r i s H u s s a i n U K P E S T L E A n a l y s i s

UNITED ST

ATES

GERMANY

NETHER

LANDS

FRANCE

IRISH REP

UBLIC

BELGIUM

CHINASP

AINITA

LY

SWED

EN

RUSSIA

SWITZ

ERLA

NDUAE

HONG KONGINDIA

JAPAN

CANADA

SOUTH

KOREA

SINGAPORE

AUSTRALIA

TURKEY

SOUTH

AFRICA

NORWAY

POLAND

DENMARK

-60

-40

-20

0

20

40

60

80

100

% Change 2012/ 2011 % Change 2012/ 2011

2007 2008 2009 2010 2011 20120

0.10.20.30.40.50.60.70.8

Exchange Rate Exchange Rate

Detail Chart of exchange rate is given in Appendix (C)

United Kingdom Financial Market

London is arguably the world’s largest and most significant financial centre. The following summary provides a brief overview of its share of global markets:

London is the world’s number one centre for foreign exchange. The market capitalization of London Stock Exchange (LSE) was $ 3.266 trillion at December 2011. London is an important centre for both capital raising and secondary market trading, with active

domestic commercial paper and euro commercial paper markets as well as an estimated multi-trillion Eurobond market.

London maintains a leadership position with 45.8% of total global interest rate OTC (non-exchange traded) derivatives turnover (BIS 2010).

The London Metals Exchange (LME) is the largest metals exchange in the world. Figures from International Financial Services London (IFSL) indicate that the UK fund

management industry was responsible for £4.8 trillion of funds at the end of 2010.

Infrastructure Quality

The United Kingdom has one of the most developed and extensive infrastructure systems in the world but many of those infrastructure aspects require maintenance. Because of constraints on the government's budget, London has endeavored to transfer responsibility for the maintenance and construction of new roads to local and regional governments. There are also increasing efforts to transfer control of infrastructure projects to private industry.

The United Kingdom has 371,603 kilometers of roadways. This includes 3,303 kilometers of expressways. The kingdom also has 16,878 kilometers of railways. The majority of this track is standard gauge and one-quarter of it is electrified. There is also an extensive network of canals and waterways which total 3,200 kilometers. Since the United Kingdom is an island, it is dependent on the maritime and air transport of goods. The nation has some of the world's busiest ports such as London, Glasgow, Manchester, and Portsmouth.

One of the most significant infrastructure projects in the history of the kingdom was the completion in 1994 of the Channel Tunnel, popularly known as the "Chunnel." This 35-kilometer tunnel under the English Channel connects England and France. For the first time in its history, the United Kingdom had a direct, if limited, land route for the transport of goods and people to and from the continent. Since its opening, the amount of goods that are transported through the Chunnel has grown by almost 20 percent per year.

Business Cycle Stage and Economic Growth

21 | P a g e W a r i s H u s s a i n U K P E S T L E A n a l y s i s

UK enters in economic recession in second quarter of 2008 when its GDP falls 0.9%. This recession was result from crisis in financial services industry. Manufacturing output reduced by 7% by end 2008.It was the deepest recession since the war. It has affected many sectors including banks and investment firms, and seen many well known and established businesses fold.

2007 Q1

2007 Q2

2007 Q3

2007 Q4

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q3

2011 Q4

2012 Q1

2012 Q2

2012 Q3

2012 Q4

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

GDP Growth rate GDP Growth rate

Britain has notably struggled to come out of the latest recession, with much speculation of a 'double dip' recession during the 2010s. In quarter four of 2010 GDP fall 0.4%, unemployment rate rose to 8.1% in August. Economic growth in Q3 2012 was 1.0% helped by an Olympic ticket sales boost. But, in Q4 2012, the economy went back into negative growth. Manufacturing fell 1.5%, service sector growth was flat, and construction rose 0.3% in the final quarter. If growth is negative in first quarter 2013, the UK will be officially in a ‘triple dip recession’.

Skill Level of Workforce

22 | P a g e W a r i s H u s s a i n U K P E S T L E A n a l y s i s

2006 Q1

2006 Q2

2006 Q3

2006 Q4

2007 Q1

2007 Q2

2007 Q3

2007 Q4

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q3

2011 Q4

2012 Q1

2012 Q2

2012 Q3

2012 Q4

-8

-6

-4

-2

0

2

4

6

GDP annual gowth rate GDP annual gowth rate

As demand for skilled labor increases, there has been a rapid decline in skilled labor supply in the UK. In addition, employers also claim that there is an apparent skill gap amongst the existing work force for certain occupations. The expansion of knowledge-based industries has raised the general demand for skilled workers across a range of sectors and occupations.

Improving the skills of the workforce has, and will continue to be, a crucial aspect of government policy. Previous influential studies, based mostly on aggregate data, have shown that UK productivity lags behind some of its competitors and that part of this gap is due to a lower stock of skills within the workforce. The UK has a strong economy and world-leading employment levels, but its productivity trails than many key comparator nations, poor skills are a key contributor to this problem as well as having wider impacts on social welfare. Over the last decade, the skills profile of working age people in UK has improved. For example, the proportion with a degree has increased from one fifth to over one quarter of the population.

Despite these improvements, the UK still does not have a world-class skills base because over one third of adults in the UK do not have a basic school-leaving qualification, five million people have no qualifications at all and one in six do not have the literacy skills expected of an 11 year old and half do not have these levels of functional numeracy. Looking ahead to 2020, global, demographic and technological change will place an even greater premium on the UK’s skills profile.

New analysis conducted by the Review shows that, if the Government meets its current ambitious targets for improving the UK’s skills, by 2020 the proportion of working age people without any qualifications will fall to 4 per cent; and the proportion holding a degree will increase from 27 per cent to 38 per cent, and this will have significant benefits for the economy increasing annual productivity growth by 0.2 per cent with a net benefit to the economy of £3 billion a year, equivalent to 0.3 per cent of GDP. However, even if the UK can meet these targets, the nation’s human capital will still fail to be world-class. Considerable problems will remain; at least 4 million adults will still not have the literacy skills expected of an 11 year old and 12 million would not have numeracy skills at this level.

In order to have strong skill level of workforce UK government has to tackle the stock of low skilled adults without qualifications, basic literacy, investing more in intermediate skills and further increasing the proportion of adults holding a degree.

Labor Costs

23 | P a g e W a r i s H u s s a i n U K P E S T L E A n a l y s i s

1%

18%

80%

Labor Force - by occupation(%)

Agriculture Industry Services

Minimum wage set by the government that an employer is legally allowed to pay an employee. The minimum wage for an employee aged 21 or older is GBP 6 an hour. Workers aged 16 to 17 must be paid GBP 3.8 per hour. The development rate for those who aged 18 to 20 is GBP 5 per hour. A new minimum wage of £2.50 per hour is set to be introduced for apprentices who are either under 19 or in the first year of their apprenticeship.

Labor costs index decrease to 105.4 indexes in 3rd quarter of 2012 from 105.50 Index Points in the second quarter of 2012. Historically, from 1959 until 2012, the United Kingdom Labor Costs averaged 49.13 Index Points reaching an all time high of 105.50 Index Points in May of 2012

Unemployment rate, Inflation rate and Interest rate

Unemployment Rate in the United Kingdom decreased to 7.70 percent in November of 2012 from 7.80 percent in October of 2012. Historically, from 1971 until 2012, the United Kingdom Unemployment Rate averaged 7.26 Percent reaching an all time high of 12 Percent in February of 1984 and a record low of 3.40 Percent in November of 1973. The current fall in the UK unemployment rate is due to the employment created by London Olympics which helps the UK economy to recover a bit. As per the CBI and PwC forecast UK Financial services companies are likely to cut a further 18,000 jobs across the UK over the next three months despite optimism that business volumes will rebound.

The inflation rate (measured by CPI) in the United Kingdom was recorded at 2.70% in December of 2012. Inflation Rate in the United Kingdom is reported by the UK Office for National Statistics. In the United Kingdom, the most important categories in the consumer price index are Transport, Housing, Water, Electricity, Gas and Other fuels, Recreation and Culture, Restaurants and Hotels and Food and Non-alcoholic Beverages. This inflation rate in consistent from past 3 month. Decrease in inflation is due to decrease in the price of fuel and housing. The targeted inflation by BOE for future is 2.2%.

24 | P a g e W a r i s H u s s a i n U K P E S T L E A n a l y s i s

2005 2006 2007 2008 2009 2010 2011 20120.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%

Inflation rate %

Inflation rate % at year end

2005 2006 2007 2008 2009 2010 2011 20120.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%

Unemployment Rate %

Unemployment Rate % at year end

The benchmark interest rate in the United Kingdom was last recorded at 0.50 percent. Interest Rate in the United Kingdom is reported by the Bank of England. In the United Kingdom, the Bank of England has operational independence. Decisions on interest rates are taken by the Monetary Policy Committee (MPC). The current interest rate that is prevailing in market is unchanged since March 2009. Currently there are two opinions in the market regarding interest rate change. Some economist says that Interest rate will remain unchanged in UK till 2009 and some says that interest rate has to be increased in 2013 so that Banks can have solid recovery and BOE inflation target can be meet.

25 | P a g e W a r i s H u s s a i n U K P E S T L E A n a l y s i s

2005 2006 2007 2008 2009 2010 2011 20120.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Interest rate %

Interest rate % at year end

Detail chart of Unemployment, Inflation and Interest rate is given in Appendix (E)