The United Kingdom with a $2.85 trillion GDP, is the world’s fifth largest economy and the second largest in Europe after Germany.
The Services sector is the most important and accounts for 78 percent of total GDP. The biggest segments within Services are:
- Business Services and Finance (32 percent of GDP). The City of London is the world’s largest financial centre. It is the leading international centre for banking, insurance and foreign exchange trading. London is also a major centre for other business and professional services – four of the six largest law firms in the world are headquartered there. Edinburgh is also one of the largest financial centres in Europe and is home to the headquarters of the Royal Bank of Scotland Group and Standard Life. The UK’s exports of financial and business services make a significant positive contribution towards the country’s balance of payments.
The status of the UK FS sector as a major global and regional hub relies to some extent on having access to European markets. One of the key benefits of EU membership to the FS sector is the ability to access the Single Market via the passporting regime. Banks and investment companies are entitled to provide services to clients in other EEA states without further authorisation requirements. The passport regime covers banking services such as deposit-taking and lending, insurance (life, non-life), reinsurance, investment services, alternative investment funds, payment services and electronic money.
The decision to leave the EU has an impact on the ability of foreign banks authorised in the UK to offer products and services in a number of key areas for EU clients, including lending and deposit-taking, foreign exchange or other investment banking services. Also affected are UK-incorporated banks and other UK financial services firms with sizeable European operations. As a result, FS institutions may relocate activities that particularly relate to serving EU customers and these changes could also reduce the incentives for foreign banks to both retain and locate new international activities in the UK in the future. These factors combined could lead to a slowdown in FS sector activity and growth in the UK over the long-term, leading to a gradual erosion of the UK’s status as a regional financial centre.
The decision to Brexit may result in thousands of job cuts as banks consider moving their operations out of London to financial hubs such as Paris and Frankfurt. Most banks are waiting now the outcome of the UK/EU negotiations before making next moves.Some of the UK’s biggest law firms have been registering solicitors in Ireland so they can continue to practise in European law after Brexit. Freshfields, Hogan Lovells, Slaughter and May and Allen & Overy are among the firms that have put forward applicants to join the roll of solicitors in the Republic of Ireland. This means they can continue to give advice in Europe and have the right to argue before EU tribunals such as the EU’s powerful Court of Justice in Luxembourg.According to economic estimates, leaving the EU can result in a potential loss of 3-5% of UK GDP.
- Government, education and health (23 percent of GDP)
In the UK, 80% of the healthcare sector spending consists of the state funded and operated National Health Service (NHS). It has a workforce of around 1.7 million, making it the largest employer in Europe. Public administration, defence, transport and communications also make up a huge part of this sector. London is the hub for big airlines such as British Airways and Virgin Atlantic and its six commercial airports form the world’s largest city airport system measured by passenger traffic.
Civil service and local authority spending is expected to be cut back in the coming years but growth should remain positive for the NHS and schools.
- Retail, hotels and restaurants (14 percent of GDP).
Intercontinental Hotels Group (IHG), headquartered in Buckinghamshire, is currently the world’s largest hotelier whilst London had the highest non-food retail sales of any city in the world. The UK-based Tesco is the third-largest retailer in the world measured by revenues and has a 30% share of the UK market.
Consumer confidence has been hit by the vote to leave the EU although the BOE has tried to aid this via a rate cut, which has given a boost to consumer spending. Prices are seen to be declining on the high street and online due to fierce competition. Slower real earnings growth and job cuts in the UK could hit domestic spending in all these areas and a weaker pound puts pressure on retailers who import heavily from abroad. Although a weaker pound also attracts tourists from abroad to the UK.
- Real estate and Renting (10 percent of GDP)
Notable real estate companies in the United Kingdom include British Land, Land Securities and The Peel Group. The UK property market boomed for the seven years up to 2008 and in some areas property trebled in value over that period. The increase in property prices had a number of causes: low interest rates, credit growth, economic growth, rapid growth in buy to-let property investment, foreign property investment in London and planning restrictions on the supply of new housing.
The EU referendum result has been a shock to the UK economy and the housing market. Shares in homebuilders have been amongst the worst performers on the FTSE and some estate agents have issued profit warnings, predicting significantly lower revenue this year because of the referendum result. Evidence suggests that buyers are pulling out of transactions and sellers are cutting asking prices on UK property.The main reason for this is increased political and economic uncertainty, which could impact the housing market through four key channels:
- The deterrence of foreign investment in the UK (which particularly affects the central London market, but also has wider economic impacts).
- Uncertainty regarding the future of EU nationals in the UK (and those considering moving to the UK).
- A reduction in consumer confidence leading to buyers deferring or renegotiating transactions.
- Turbulence in the UK banking sector, which provides the vast majority of mortgage funding for housing transactions.
Industry accounts for 21 percent of total GDP and the largest segments within this sector are;
- Manufacturing (10 percent of GDP).Most prevalent is the UK automotive manufacturing sector and aerospace industry. The UK is a major centre for engine manufacturing and has the second-or third-largest aerospace industry in the world. British companies with a major presence in the industry include BAE Systems (the world’s second-largest defence contractor) and Rolls-Royce (the world’s second-largest aircraft engine maker).Also prevalent is the pharmaceutical industry. The UK is home to GlaxoSmithKline and AstraZeneca, respectively the world’s third- and seventh-largest pharmaceutical companies.Although the largest producer of oil and natural gas in the EU, the UK is a net importer. The UK is home to a number of large energy companies, including two of the six oil and gas “supermajors” – BP and Royal Dutch Shell.
Business investment levels are due to decline due to Brexit uncertainty and manufacturers of capital goods will be hard hit, although some exporters will gain from the weaker pound which should help limit the fall in total output. Falling oil prices have also recently driven down the input costs for certain manufacturers.
- Construction (6 percent of GDP).
As a result of Brexit, business investment levels are projected to decline – driven by economic and political uncertainty in the short term, as well as concerns about the UK’s future trading relationships with the EU in the longer term. Construction may be hardest hit due to its reliance on large scale capital investment projects that may be particularly prone to be delayed or even cancelled due to uncertainty following the vote to leave the EU.
The Agriculture sector accounts for only 1 percent of total GDP. The sector produces about 60% of the UK’s food needs whilst the remainder is imported from abroad. The UK retains a significant fishing industry.