Country Profile Series

United Kingdom
In-depth PESTLE insights

PESTLE Country Analysis Report: United Kingdom
REFERENCE CODE: ML00002-031 PUBLICATION DATE: May 2013 WWW.MARKETLINE.COM
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OVERVIEW
Catalyst
This profile analyzes the political, economic, social, technological, legal and environmental (PESTLE) structure in the UK. Each of the PESTLE factors is explored on four parameters: current strengths, current challenges, future prospects, and future risks.

Summary
Key findings The UK has a strong democratic system, but differences between coalition partners in the incumbent government pose a challenge The UK adheres to a democratic, parliamentary system of governance known as the Westminster system. This system ensures adequate distribution of power between the executive branch led by the prime minister, the bicameral legislature and the judiciary. Growing ideological differences between the Conservatives and Liberal Democrats in the current government is making the coalition vulnerable. Tensions between pro-Europe Liberal Democrats and euroskeptic Conservatives continue to plague British politics. Further, conflicting views on issues such as welfare reforms, immigration and the economy are straining relations. The UK economy is developed, but rising government debt remains a concern The UK is one of the largest economies in the EU and is one of the strongest in terms of social welfare and standard of living. Among the EU countries, the UK has one of the highest levels of per capita GDP in terms of purchasing power parity. According to the World Bank's Doing Business indicators for 2013, the UK is the seventh best country in the world to do business. The country ranks first in ―getting credit‖, implying that any company wishing to enter the UK faces fewer hurdles to procure the both working capital and long-term capital requirements. The UK’s government debt has been increasing constantly, and at £1.38 trillion ($2.11 trillion), reached an alarming figure of around 90.0% of GDP in 2012 according to Eurostat. It would be difficult for the government to service its ballooning debt against the backdrop of a contracting economy. The country has a strong education and health sector, but income inequality is still apparent The educational infrastructure in the UK is considered to be of very high quality and has historically attracted students from all parts of the globe. The nation’s tradition of education dates back hundreds of years and is constantly evolving. Academic credentials acquired from UK institutions are recognized and respected throughout the world. The UK has around 170 universities and higher education institutes, including three universities in the world's top 10, according to The Times Higher Education World University Rankings 2012–2013. The ranking was based on teaching, research, knowledge transfer and international outlook. The UK’s healthcare system is one of the most successful social ventures in the world. This success can be attributed to the presence of advanced healthcare infrastructure and the involvement of the private sector. Public expenditure on health in the UK has traditionally been very high in order to maintain the quality of services provided. However, rising inequality is a concern. According to the OECD Database on Household Income Distribution and

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Poverty, from the mid-1980s to the late 2000s, real household income for the bottom decile grew by 0.9% annually while it grew by 2.5% for the top decile. The growth in inequality is more than the OECD27 average. The UK has strong scientific and research and development capabilities, but declining patent applications by residents is a cause for concern. The UK is renowned for the quality of its R&D and its strengths in science and innovation. The country has also traditionally been keen to encourage R&D in both the public and private sectors. According to the Office for National Statistics (ONS), gross expenditure on R&D increased to £27.4 billion ($42.03 billion) in 2011, up 5% over 2010 expenditure in terms of current prices. Business R&D increased to £17.4 billion ($26.69 billion), up 8% over 2010. Total R&D expenditure stood at 1.79% of GDP in 2011, a marginal increase from 1.77% of GDP in 2010. However, as per World Bank data, the number of patent filings by UK residents fell from 20,426 in 2003 to 15,343 in 2011. Patent filings are worldwide patent applications filed through the Patent Cooperation Treaty procedure or with a national patent office for exclusive rights for an invention (a product or process that provides a new way of doing something or offers a new technical solution to a problem). A patent provides protection for the invention to the owner of the patent for a limited period, generally 20 years. This declining trend may hamper the UK's future technological competitiveness in the international market. Business legislation encourages commercial activity; however, traditional liberties are coming under threat The legislation that affects the business environment in the UK prioritizes the interests of investors. This is evident from the fact that domestic and foreign players have shown a continuous commitment to investing in the country. The majority of non-European multinational corporations seeking a presence in Europe tend to establish their Europe operations in the UK. The government faces the challenge of maintaining the country’s traditionally liberal values while changing legislation to help it to deal with the threat of terrorism, as these two priorities are hard to balance. Legislation such as the Terrorism Act 2006 and the Prevention of Terrorism Act 2005 has been controversial. The UK has a strong global influence in environmental issues, but high air pollution is a cause for concern With its position as an industrialized global power and a member of the G8, the UK has a leadership role to play in the global effort towards sustainable development and the protection of the environment. The UK, with its close ties to a number of countries and its influence in the Commonwealth, has the ability to obtain commitments from a number of developing countries that are unwilling to sacrifice economic growth for environmental gain. The level of air pollution in London is among the highest in the UK, and the country as a whole is among the most polluted. Regions such as Manchester, Glasgow and Birmingham also have dangerous levels of NO2. Exhaust fumes and emissions from factories and power stations around London are the main causes of pollution, and the UK faces a fine of around £300m ($460.20m) from the European Commission as it has failed to contain these. PESTLE highlights Political landscape  The UK is one of the most prosperous and influential nations in the world and has a large role to play on the international stage. It is one of the five permanent members of the UN Security Council, one of the founding members of the North Atlantic Treaty Organization, and a member of the G8. Though a member of the EU, it has a conservative approach to the issue of European integration.

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

The Scottish National Party (SNP) won a majority in the Scottish parliamentary elections held in May 2011, and is planning a referendum on independence in 2014. However, independence in unlikely and there are high possibilities of an increased devolution of powers.

Economic landscape  According to the International Monetary Fund, the current account deficit stood at 3.31% of GDP in 2012 and a drop to 2.70% is forecast for 2013.  Due to its ballooning fiscal deficit, the UK's prestigious AAA rating is at risk. Both Fitch and Moody's have downgraded the economy one notch from its AAA status. Standard & Poor's rates it AAA as of April 2013, but keeps a negative outlook. Social landscape  The government faces a number of challenges when it comes to maintaining the level of public services on offer. Given the fact that the budget deficit is a clear point of concern for the authorities, maintaining expenditure levels on social welfare projects will prove a challenge.  The government’s policy of "managed migration" could prove crucial in helping to offset the effects of the aging population on the economy. The speed at which the ratio of children and those aged above 65 is rising relative to the working age population is of concern to policymakers. Technological landscape  According to MarketLine, mobile penetration stood at 130.57 per 100 people in 2012 with total subscribers at 82.21 million. Mobile subscribers grew by an average of 10.88% during 2000–12. Internet users as of 2011 stood at 54.47 million, with a penetration rate of 87% in the same year. Internet subscribers grew at an average rate of 4.76% during 2005–11.  According to MarketLine, the UK aerospace & defense market had total revenue of $33.2 billion in 2011, representing a compound annual growth rate (CAGR) of 2% between 2007 and 2011. In comparison, the French and German markets grew with CAGRs of 0.8% and 3.7% respectively, to reach respective values of $44 billion and $37.4 billion in 2011. Legal landscape  The UK was named the 14th freest economy worldwide by the Index of Economic Freedom 2013 compiled by the Heritage Foundation and the Wall Street Journal, and was ranked seventh in the World Bank's Doing Business indicators for 2013.  British territories of Anguilla, Bermuda, Montserrat, the Turks and Caicos Islands, and the British Virgin Islands have signed treaties with the UK and other G5 nations to share tax information. The government has hailed this as a significant step to curb tax evasion. Environmental landscape  According to MarketLine, the UK renewable energy market had total revenues of $6.7 billion in 2011, representing a compound annual growth rate (CAGR) of 12.4% between 2007 and 2011. In comparison, the French and German markets grew with CAGRs of 3.4% and 3.3% over the same period, to reach respective values of $11.7 billion and $23.5 billion in 2011.

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

According to MarketLine, CO2 emissions in the UK came down from 572.58 million metric tonnes in 2003 to around 532.44 million metric tonnes in 2010.

Key fundamentals

Table 1:

The UK – key fundamentals
2010 2011 2.37 0.90 37533.32 4.50 30.25 32.74 63.18 8.08 130.58 2012 2.37 -0.03 37315.43 2.80 30.64 33.17 63.53 8.03 130.57 2013f 2.39 0.77 37394.37 1.92 31.08 33.74 63.88 8.19 132.25 2014f 2.43 1.73 2015f 2.48 2.05 2016f 2.54 2.45

GDP, constant 2005 prices ($ trillion) GDP growth rate (%) GDP, constant 2005 prices, per capita ($) Inflation (%) Exports, total as a percentage of GDP Imports, total as a percentage of GDP Mid-year population (millions) Unemployment rate (%) Mobile penetration per 100 people

2.35 1.80 37748.19 3.32 28.82 31.90 62.26 7.87 130.58

37833.04 38398.76 39131.73 1.81 31.19 33.94 64.23 7.99 133.69 1.83 31.14 33.94 64.58 7.65 134.91 1.93 30.87 33.69 64.93 7.32 135.95

Source: Country Statistics, MarketLine

MARKETLINE

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TABLE OF CONTENTS
Overview Catalyst Summary Key Facts and Geographic Location Key facts Geographical location PESTLE Analysis Summary Political analysis Economic analysis Social analysis Technology analysis Legal analysis Environmental analysis Political Landscape Summary Evolution Structure and policies Outlook Economic Landscape Summary Evolution Structure and policies Performance Monetary situation 2 2 2 11 11 12 13 13 14 16 22 27 30 32 34 34 34 37 41 43 43 43 44 45 51

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Outlook Social Landscape Summary Evolution Structure and policies Performance Outlook Technological Landscape Summary Evolution Structure and policies Performance Outlook Legal Landscape Summary Evolution Structure and policies Performance Outlook Environmental Landscape Summary Evolution Structure and policies Performance Outlook Appendix

53 54 54 54 54 56 58 59 59 59 59 59 61 62 62 62 62 63 63 64 64 64 64 64 66 67

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Ask the analyst Disclaimer

67 67

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TABLE OF FIGURES
Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Map of the UK Major UK banks’ revenues, costs and profits 12 18

Major UK banks’ and Global systemically important banks (G-SIBs’) price to book ratios 19 The UK banks’ provisions and estimated provisions under expected loss accounting The UK-owned banks’ claims to emerging Europe, June 2012 Sectoral debt as a percentage of GDP, June 2012 Economic Support Ratio, 1971–2012 Average annual real net investment return of pension funds in % Real household income growth(%) by income group, mid-1980s to late 2000s 19 20 21 23 24 25

Inequality (Gini coefficient) of market income and disposable (net) income in the OECD area, working-age persons, late 2000s 26 29 36 37 39 44 46 47 48 49 50 51 52 53 55 57 58 60 65

Figure 11: Figure 12: Figure 13: Figure 14: Figure 15: Figure 16: Figure 17: Figure 18: Figure 19: Figure 20: Figure 21: Figure 22: Figure 23: Figure 24: Figure 25: Figure 26: Figure 27: Figure 28:

Patent applications, residents The UK – political events timeline Key political figures Composition of legislature Historical GDP growth, 1992–2012 GDP and GDP growth rate, 2006–16 Sector-specific contribution to GDP, 2012 Agricultural output (£ billion), 2007–12 Industrial output (£ billion), 2007–12 Services sector output (£ billion), 2007–12 The UK's external trade position, 2008–12 Consumer price index and consumer price index-based inflation, 2006–16 Unemployment in the UK, 2006–16 Major religions in the UK, 2001 Healthcare expenditure, 2005–11 Education expenditure, 2005–11 Internet users, 2007–11 Carbon dioxide emissions (million metric tons) and growth (%), 2003–10

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TABLE OF TABLES
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: The UK – key fundamentals The UK – key facts Analysis of the UK’s political landscape Analysis of the UK’s economy Analysis of the UK’s social system Analysis of the UK’s technology landscape Analysis of the UK’s legal landscape Analysis of the UK’s environmental landscape Comparative performance on receipt of patents, 2009–12 5 11 14 16 22 27 30 32 59

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Key Facts and Geographic Location

KEY FACTS AND GEOGRAPHIC LOCATION
Key facts
Table 2: The UK – key facts

Country and capital Full name Capital city The United Kingdom of Great Britain and Northern Ireland London

Government Government type Head of state Head of government Constitutional monarchy and Commonwealth realm Queen Elizabeth II Prime Minister David Cameron

Population (2013 est.)

63.39 million

Currency

British pound (GBP)

GDP per capita, adjusted by purchasing power parity (2012 est.)

$36,700

Internet domain

.uk

Demographic details Life expectancy (2013 est.) Total population: 80.29 years Men: 78.16 years Women: 82.54 years

Ethnic composition (2001 census)

White (92.1%), black (2.0%), Indian (1.8%), Pakistani (1.3%), mixed (1.2%), and other (1.6%)

Major religions (2001 census)

Christian (71.6%), Muslim (2.7%), Hindu (1.0%), other (1.6%), and unspecified or none (23.1%)

Country area

243,610 sq. km

Language

English

Exports

Manufactured goods, fuels, chemicals; food, beverages and tobacco

Imports

Manufactured goods, machinery, fuels and foodstuffs

Source: CIA – The World Factbook

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Key Facts and Geographic Location Geographical location
The country is located in Western Europe, between the North Atlantic Ocean and the North Sea, northwest of France.

Figure 1:

Map of the UK

Source: CIA – The World Factbook

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PESTLE Analysis

PESTLE ANALYSIS
Summary
The UK, being an influential member of the European Union (EU) and one of the largest economies in the world, remains a significant economic and political force. The relative economic decline experienced by the country through most of the 20th century reversed in recent years, with the UK riding out the global downturn relatively well. Its membership of the United Nations Security Council, the EU, the North Atlantic Treaty Organization (NATO), and the G8, along with strong links with its former colonies through the Commonwealth and robust cultural and security ties with the US, place it in a unique position within the global community. The UK’s efforts to keep a foot in both the European and American camps have proved challenging in the aftermath of the Iraq war and has put unprecedented strain on the Euro-American alliance. Economic conditions in the country worsened in 2011 and 2012, with a mounting fiscal deficit and high unemployment rate posing challenges to the government. The educational infrastructure in the UK is of a very high standard and is attractive to foreign students. The UK’s healthcare system is one of the most successful social ventures in the world, predominantly due to the presence of advanced healthcare infrastructure and the participation of the private sector. Public expenditure on health has traditionally been very high and has helped to preserve the quality of services. Despite the quality of educational and research institutions in the UK, there is a shortage of R&D personnel. The legal system in the UK is transparent and efficient and is conducive to business. In terms of environmental impact, the UK still needs to improve its air quality by curbing pollution.

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PESTLE Analysis

Political analysis
Overview The UK’s political landscape is deeply entrenched in the ethos of democracy and the stable system of governance ensures that there is a level of consistency in its policies. Following the world wars, the UK developed into a major global force, largely on the back of its rapid economic development. However, it continues to face terror threats from groups such as Al-Qaeda. With the Scottish National Party's (SNP’s) landslide victory in elections in Scotland, there is a high possibility of increased devolution of powers.

Table 3:

Analysis of the UK’s political landscape

Current strengths ▪ Strong democratic setup and effective governance ▪ Strong position in global politics Future prospects ▪ Stronger ties with India

Current challenges ▪ Tensions in the ruling coalition and falling popularity of the government

Future risks ▪ Terrorism ▪ The SNP’s push for independence

Source: MarketLine

MARKETLINE

Current strengths Strong democratic setup and effective governance The UK adheres to a democratic, parliamentary form of governance known as the Westminster system that calls for the distribution of power between the executive branch led by the prime minister, the bicameral legislature and the judiciary, with a system of checks and balances. As the World Bank's governance indicators illustrate, the UK is one of the most successful nations in terms of the application of the rule of law, control of corruption, government effectiveness, and regulatory quality. Furthermore, according to the governance indicators for 2011, the country had a high percentile rank of 92.4 for government effectiveness. Strong position in global politics After the two world wars, the UK rebuilt itself into a prosperous and modern nation. The UK is a major power in global politics by virtue of its permanent membership of the UN Security Council, its membership in G8 and NATO, and the legacy of the British Empire. The UK also has considerable influence in multinational organizations such as the International Monetary Fund (IMF) and the World Bank. Successive decades of solid economic growth, initially built on the industrial sector and now largely driven by the services industry, have ensured that its firm establishment as a global business hub and economic power backs its political might. Current challenges Tensions in the ruling coalition and falling popularity of the government Growing differences between the Conservatives and the Liberal Democrats is making the ruling coalition vulnerable.

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PESTLE Analysis
Tensions between pro-Europe Liberal Democrats and euroskeptic Conservatives on the extent of integration with EU might continue to plague British politics. Further, a conflict of opinion between the two parties on issues such as welfare reform, immigration and the economy are straining relations. The rising antipathy of Britons towards more integration with Europe has lowered the ratings of Liberal Democrats making it unlikely that they will withdraw from the coalition government. According to opinion polls in 2013, the Conservatives have declined in popularity while support for the opposition Labour Party has inched up. Future prospects Stronger ties with India The rapid economic growth of certain developing countries has made it important for the UK to cooperate with them for mutual benefit or risk heavy economic losses with the emergence of new, low cost centers of production. At a meeting between Indian Prime Minister Manmohan Singh and his UK counterpart David Cameron on the margins of the November 2010 G20 summit, the UK extended its support to India in its campaign for a permanent seat on the UN Security Council. The UK and India have shared a strategic partnership since 2004. This grew stronger in February 2013, when British Prime Minister David Cameron accompanied the UK’s largest ever trade delegation to India. Several politicians and executives from nearly a hundred companies accompanied Cameron in an effort to strengthen diplomatic and economic ties. The UK seeks to double its trade with India 2015. Future risks Terrorism The involvement of the UK in the war on terror in Afghanistan and Iraq seems to have had some negative consequences with the threat of terrorism now facing the country. The July 7, 2005 bombings in London brought the capital to a standstill, and the public threats issued by extremist groups such as Al-Qaeda are a clear indication of the constant dangers that they pose. Foiled terrorist attacks have also put the government and the public on edge. In March 2010, the UK's intelligence and security service said that terror threats linked to Pakistan remained the primary area of concern. Additionally, according to a security committee, about 15% of the security services' work is now focused on East Africa and Somalia in particular, as there are an increasing number of extremists visiting the area for terrorist training. The committee said the UK faced a range of covert threats to its security, and identified Al-Qaeda as presenting the most significant risk. In a report titled ―CONTEST The United Kingdom’s Strategy for Countering Terrorism‖ published by the Secretary of State for the Home Department in March 2013, the government highlighted threats to the UK’s interests from areas in Pakistan and the tribal areas along the Afghan border, Al-Qaeda in the Arabian Peninsula (AQAP), Northern Africa, Somalia and Syria. The SNP’s push for independence The SNP won a majority in the Scottish parliament in elections held in May 2011, and is planning a referendum on independence in 2014. There are major impediments to Scotland breaking away from the UK, including the division of debt and oil reserves. The SNP has already been pushing for greater financial independence, but its push for full independence from the UK is likely to be opposed by all other political parties including Labor, the Liberal Democrats and the Conservatives.

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PESTLE Analysis

Economic analysis
Overview The country boasts of high per capita GDP and a favorable investment climate, but the government is challenged by a high deficit and debt, which has forced it to curtail spending. The government cut corporate tax in a bid to spur growth, but the economy continues to struggle due to stagnant growth and a banking sector that remains vulnerable due to its exposure to Europe.

Table 4:

Analysis of the UK’s economy

Current strengths ▪ Highly developed economy and favorable investment climate ▪ Excellent environment for doing business

Current challenges ▪ High debt ▪ Budget deficit

Future prospects ▪ Corporate tax reduction ▪ Strengthening the financial system

Future risks ▪ Stagnant growth may continue ▪ Banking sector vulnerability ▪ High indebtedness

Source: MarketLine

MARKETLINE

Current strengths Highly developed economy and favorable investment climate The UK is one of the largest economies in the EU and is one of the strongest in terms of social welfare, and standard of living. Among the EU nations, the UK has one of the highest levels of GDP per capita in terms of purchasing power parity. According to the World Bank's Doing Business indicators for 2013, the UK is the seventh best country in the world in which to do business. Further, the country ranks first in ―Getting credit‖—this indicates that any company wishing to enter the UK faces fewer hurdles in terms of meeting working capital and long-term capital requirements. Excellent environment for doing business The UK is an open and competitive economy, and international businesses view the political and economic institutions favorably. The country has a robust science base and boasts of strong high tech manufacturing capabilities in aerospace, defense and automobiles. The UK’s strength lies in knowledge economy sectors such as banking, software and pharmaceuticals. According to the World Economic Forum’s Global Competitiveness Report 2012–13, the country ranks eighth among 144 countries. The UK has a favorable business environment in terms of the availability of skilled professionals, a central time zone perfectly positioned between the east and the west, a flexible regulatory environment to start a business, a doorway to the rest of the EU, and a leading global financial center in London. Current challenges High debt The UK government’s debt has constantly been on the rise, and has reached an alarming figure of around 90.0% of GDP

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PESTLE Analysis in 2012, according to Eurostat. The UK government debt reached £1.38 trillion ($2.11 trillion) in the same year. It would be difficult for the government to service a ballooning debt and go ahead with the deficit reduction plans, as the economy is passing through a recessionary phase. Rising government debt will be a challenge to the UK economy in the medium term. Budget deficit The financial crisis of 2007–08 pushed the overall fiscal deficit to 11.5% of GDP in 2009, according to Eurostat; this is the highest since the Second World War and among the highest in the world. With public finances clearly on an unsustainable path, the June 2010 budget laid out a five-year adjustment plan that would cut the deficit to 1.5% of GDP by 2015–16. The austerity program was extended to 2017–18 as the economy is struggling to recover. The target deficit was revised to 2.2% of GDP by 2017–18 in the 2013 budget. Progress was made in 2010, with the deficit dipping to 10.2% of GDP; the figure was 7.8% in 2011 and 6.3% in 2012. The 2013 budget though, has forecast a deficit of above 7% of GDP in 2013. Cutting the budget deficit amid stagnant growth is a big challenge for the government. Future prospects Corporate tax reduction The UK corporate tax rate was cut to 23% from April 1, 2013, and is likely to decrease gradually to 20% by April 1, 2015—this will be among the lowest for G20 nations. This rate reduction is a welcome change for businesses, as they can spend a greater share of their profits on expansion. This policy will also make the UK a favorable investment destination for large businesses. Strengthening the financial system In the wake of the financial crisis and several cases of fraud, the government has taken steps to strengthen the financial system. A new financial regulation and supervision framework gives the Bank of England authority to monitor the day-today supervision of financial services firms (through the Prudential Regulation Authority). Subsequently, it also gets the responsibility for macro-prudential supervision of the financial system (through the Financial Policy Committee). The Financial Policy Committee (FPC) will be in charge for identifying, monitoring and implementing measures to remove or reduce systemic risks from the financial system. In addition, the Independent Commission on Banking (ICB) is responsible for the stability of the banking system. The ICB has come up with some recommendations, which are likely to get legislative approval in 2013. The recommendations include ring-fencing retail banking from global wholesale and investment banking, and increasing equity capital for large retail banks to 10% of total risk weighted assets. The new supervisory standards are likely to improve the governance standards of banks. Future risks Stagnant growth may continue The government maintained that it would continue with austerity measures to bring down the fiscal deficit in spite of the economic contraction experienced in 2012. The huge cut in public spending led to a sharp contraction in the construction sector that had contributed significantly to the economic revival experienced since 2009. Against this backdrop, the path to recovery looks difficult, as stimulus measures from the government seem unlikely. With the majority of the austerity measures yet to be implemented, recovery from the recession looks unlikely in the short term.

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PESTLE Analysis
Banking sector vulnerability The banking sector remains vulnerable in spite of improved capital ratios, because of a rise in capital and a fall in riskweighted assets. The banking system’s profitability remained low and impairments were high in 2012, as shown in the figure below. Profits were impacted by low net interest margins, the revaluation of own debt and costs for noncompliance. The banking sector also suffered from high wholesale and retail funding costs.

Figure 2:

Major UK banks’ revenues, costs and profits
150.00 100.00

£ billion

50.00

Total revenues (£ billion)
0.00 -50.00 -100.00

Pre-tax profits (£ billion)
Impairments (£ billion) Other costs (£ billion)

Year
Source: Financial Stability Report November 2012, Bank of England MARKETLINE

Further, the market to book values of major British banks were below that of US counterparts (global systemically important banks or G-SIBs) in 2012, but were above that of European banks, as can be seen in the figure below. The low valuation clearly reflects the market’s perception of the underlying risks in bank assets and their ability to generate future profits. The Financial Stability Report November 2012 highlighted that the current impairment allowance is not enough for the estimated stock of impairments; hence, in the near term, larger than expected impairments can affect the profitability of banks.

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PESTLE Analysis
Major UK banks’ and Global systemically important banks (G-SIBs’) price to book ratios

Figure 3:

2.50
2.00

Price to book ratios

1.50 Major UK banks 1.00 0.50 US G-SIBs Other European G-SIBs

0.00

Source: Financial Stability Report November 2012, Bank of England

MARKETLINE

Figure 4:

The UK banks’ provisions and estimated provisions under expected loss accounting
120

100
80

£ billion

60

Current impairment allowance
Estimated stock of impairments (expected loss)

40
20 0 2006 2007 2008 2009 2010 2011 2012 Year
Source: Financial Stability Report November 2012, Bank of England

MARKETLINE

Further, the UK banking system has high exposure to Europe, which is a not a good sign considering the crisis in the peripheral countries. The banks’ exposure to the vulnerable European countries (including Greece, Ireland, Italy, Spain

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PESTLE Analysis and Portugal) amounts to ₤170 billion, which is more than 35% of total exposure in other European countries as of June 2012. In case the crisis worsens, more assets are likely to go bad.

Figure 5:

The UK-owned banks’ claims to emerging Europe, June 2012
70.00 60.00 50.00

£ billion

40.00
30.00 20.00 10.00 0.00 UK-owned banks’ claims on euro-area banking systems

Cyprus

Germany

Greece

Italy

Country
Source: Financial Stability Report November 2012, Bank of England MARKETLINE

High indebtedness The high indebtedness of households, financial institutions and private non-financial corporations (PNFCs) is a cause for concern. The high debt to GDP ratio is a major reason for restrained private investment and consumption, which curbs demand growth. The total debt in these three sectors was 359.40% of GDP as of June 2012, according to the Financial Stability Report November 2012. Household debt stood at 100.21% of GDP, while the debt of financial institutions and private non-financial corporations (PNFCs) stood at 175.99% and 83.20%, respectively. Further, the report also pointed out concerns about the debt liability of households. Such high levels of private sector debt can create macroeconomic imbalances in the economy.

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Netherlands

Portugal

Belgium

Sweden

Austria

Spain

France

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PESTLE Analysis

Figure 6:

Sectoral debt as a percentage of GDP, June 2012
200.00 180.00

Debt as a percentage of GDP

160.00 140.00 120.00

Households
Other financial institutions Private Non-Financial Corporations

100.00
80.00

60.00
40.00

20.00
0.00

Jan-96

Jan-98

Jan-92

Jan-94

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Source: Financial Stability Report November 2012, Bank of England

Jan-12

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PESTLE Analysis Social analysis
Overview Residents of the UK enjoy a standard of living comparable with those in other developed countries. Decades of solid economic growth have helped in the development of robust social infrastructure. The UK’s education and healthcare delivery systems rank among the best in the world. The government is focused on alleviating income inequality and plans to eradicate child poverty by 2020. The establishment of the single European market could be positive as a number of young people could migrate to the UK, and thus offset the problem of an aging population.

Table 5:

Analysis of the UK’s social system

Current strengths ▪ Strong education system ▪ Healthcare services

Current challenges ▪ Child poverty ▪ Relatively high dependency ratio

Future prospects ▪ System of "managed migration" ▪ Supporting low and middle incomes

Future risks ▪ Challenges of an aging population ▪ Rising inequality

Source: MarketLine

MARKETLINE

Current strengths Strong education system The UK has high-quality educational infrastructure and has historically attracted students from all parts of the globe. The nation’s tradition of education dates back hundreds of years and is constantly evolving. Qualifications obtained from UK institutions are recognized and respected worldwide. The UK has around 170 universities and higher education institutes, including three universities in the world's top 10, according to The Times Higher Education World University Rankings 2012-2013. The ranking was based on teaching, research, knowledge transfer and international outlook. Healthcare services The UK’s healthcare system is one of the most successful social ventures in the world. This is due to the presence of advanced healthcare infrastructure and private sector involvement. The UK’s public expenditure on health has traditionally been very high, and has helped to maintain quality and efficiency. All residents of the UK, the European Economic Area, and countries that have bilateral healthcare agreements with the UK are eligible for NHS care. The system has established itself as one of the best in the world. Current challenges Child poverty The government has set a target of eliminating child poverty by 2020. As per the government definition, ―Children are

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PESTLE Analysis said to be living in relative income poverty if their household's income is less than 60% of the median national income‖. According to The Institute for Fiscal Studies (IFS) forecasts, child poverty will increase to 3.4 million by 2020 from 2.4 million in the past decade. This is in contrast to the improvement seen in reducing child poverty in the previous decade. According to a UNICEF report titled ―Child Well-being in Rich Countries: A comparative overview‖, the UK was ranked 16th among the OECD countries and was clubbed in the group that includes Hungary and Portugal. The government has to do a lot more to tackle poverty, especially poverty among children, to achieve its goal by 2020. Relatively high dependency ratio According to the European Commission, the elderly population (65 and over) as percentage of the total population will increase from 16.5% in 2010 to 24.6% by 2060. The total dependency ratio, defined as the population under 15 and over 64 as a percentage of the population aged 15-64, will increase by 20%. The dependency ratio has some deficiencies as it does not does not take into consideration the fact that working-age people who are not employed and children under working age also receive government support funded by workers’ taxes. According to the Office for National Statistics (ONS), the economic support ratio—the number of people aged 16 and over in employment for every other person of any age, including children—is a better indicator that addresses the shortcomings of the dependency ratio. The economic support ratio fell after the global financial crisis, as more people were unemployed; this resulted in lesser revenue from worker taxes. Stagnant growth will make it more difficult for the government to fund dependents.

Figure 7:
1 0.9 0.8 0.7 0.6 0.5

Economic Support Ratio, 1971–2012

0.4
0.3

0.2
0.1

0
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: Office for National Statistics(ONS) MARKETLINE

Future prospects System of "managed migration" The government’s policy of "managed migration" could prove crucial in helping to offset the effects of the aging population on the economy. The speed at which the ratio of children and those aged over 65 to the working age

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PESTLE Analysis population is rising is of concern to policymakers. However, to counter the increase in this ratio, the prudent management of immigration could be a tool to ensure that the UK’s dependent population will have an adequate base of workers to support it. In addition, the free movement of people and labor in the single European market is also likely to help offset the issue of a rapidly aging population. Supporting low and middle incomes The government has taken measures to support families in the low and middle-income categories by cutting income taxes for them. From 2014–15, the first £10,000 ($15,340) of income will not attract tax and will help to put more disposable income in the hands of the households. According to government estimates, this will benefit around 24.7 million individuals. Additionally, £7 billion ($10.73 billion) has been allocated to support lower income households. Future risks Challenges of an aging population One of the biggest challenges that an aging population brings is finding a way to modify pension schemes so that they remain sustainable. Due to an aging population, the UK's 6,316 pension schemes accumulated deficits of £236.6 billion ($362.95 billion) as of March 2013, up from £204 billion ($312.94 billion) in March 2012. The IMF pointed out in 2012, that the UK could face an additional pension cost of £800 billion ($1.22 trillion) by 2050 due to higher life expectancy and an ever-increasing aging population. Further, according to the OECD, during December 2007-June 2011, the annual real net investment return of pension funds for the UK went into negative territory and returns fell to -4%. With interest rates in the developed nations being at a record low, the income outlook for pension funds is bleak in the medium term. With negative returns, UK pension funds risk deeper deficits. The aging population and unsustainable pension schemes remain a huge challenge for the nation.

Figure 8:

Average annual real net investment return of pension funds in %
Chile Norway Canada Finland Australia Portugal Dec 2007 - Jun 2011 Dec 2001 - Dec 2010

Korea
New Zealand

Austria
Hungary United Kingdom United States -10.0
Source: OECD, Global Pension Statistics

-5.0

0.0

5.0

10.0
MARKETLINE

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PESTLE Analysis
Rising inequality Rising inequality is a concern. According to the OECD Database on Household Income Distribution and Poverty, from the mid-1980s to late 2000s real household income for the bottom decile grew by 0.9% annually, while for the top decile it grew by 2.5%, as shown in the chart below. The growth in inequality is more than the OECD27 average. The UK ranks among the top countries in terms of rising inequality. Further, as clearly depicted in Figure 10, market incomes (gross wages, income from self-employment, capital income, and returns from savings taken together) remain skewed in the UK than the disposable (net) income. Among the OECD29 countries, the UK has one of the highest levels of unequal distribution of market incomes. The government should take steps to tackle such high levels of inequality, as it could distort overall social development.

Figure 9:

Real household income growth(%) by income group, mid-1980s to late 2000s

OECD-27 Turkey Sweden Spain Portugal Norway Netherlands Italy Germany United States United Kingdom France Finland Denmark Czech Republic Top decile Bottom decile Total population

Belgium
0.0
Source: OECD

1.0

2.0

3.0

4.0

5.0
MARKETLINE

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PESTLE Analysis

Figure 10: Inequality (Gini coefficient) of market income and disposable (net) income in the OECD area, working-age persons, late 2000s
Gini Coefficient in late 2000s
0.60 0.50 0.40

0.30 0.20
0.10 0.00 Gini coefficient of disposable income Gini coefficient of market income

Luxembourg

Switzerland

Finland

Belgium

Greece

Korea

Australia

Sweden

Iceland

Austria

Hungary

Poland

Canada

Portugal

Italy

Estonia

Turkey

Israel

Czech Republic

Slovak Republic

Mexico

France

New Zealand

Denmark

United Kingdom

Country

Source: OECD

United States

Netherlands

Germany

OECD-29

Spain

Slovenia

Ireland

Norway

Japan

Chile

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PESTLE Analysis

Technology analysis
Overview The government has been successful in steering the R&D in the right direction, and is taking steps to boost competitiveness. R&D and IT are vital to a growing economy, and the dearth of personnel could pose a serious challenge to the country's attempts to maintain its competitiveness. The declining trend in the number of patent applications may hamper the UK's future technological competitiveness in the international market.

Table 6:

Analysis of the UK’s technology landscape

Current strengths ▪ Renowned scientific expertise ▪ Effective intellectual property rights

Current challenges ▪ Lack of skilled personnel ▪ Regulatory control over indigenous innovations

Future prospects ▪ Scope for new industries ▪ Outsourced R&D can improve focus on core areas

Future risks ▪ Declining patent applications by residents

Source: MarketLine

MARKETLINE

Current strengths Renowned scientific expertise The UK is renowned for the quality of its R&D and its strengths in science and innovation. The country has also traditionally been keen to encourage R&D in both the public and private sectors. According to the ONS, gross expenditure on R&D increased to £27.4 billion ($42.03 billion) in 2011, up by 5% over 2010 expenditure in current prices terms. Business R&D increased to £17.4 billion ($26.69 billion), up by 8% over 2010. Total R&D expenditure increased to 1.79% of GDP in 2011 from 1.77% of GDP in 2010. There are various R&D initiatives underway in the UK, including the Research Council’s UK Energy Programme, several Department of Trade and Industry capital grant demonstration programs, and the Carbon Trust, which supports technology development across a wide range of technologies. Effective intellectual property rights As the UK is at the forefront of innovation and R&D globally, it has concurrently developed its legislation concerning the protection of intellectual property rights (IPR). The UK Intellectual Property Office (UK-IPO) is responsible for granting IPR. Although the UK does not have a general statutory register of copyright, the UK-IPO is responsible for maintaining registers of trademarks, designs and patents. IPR protection legislation is frequently enacted and amended in line with industry developments. Current challenges Lack of skilled personnel Despite the quality of educational and research institutions within the UK, there is a shortage of work force in the R&D

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PESTLE Analysis sector. Another factor behind this is the attractive opportunities available outside of research within the UK. Moreover, technicians in R&D (per million people) have constantly been on a declining trend, dropping from 907.6 in 2008 to 837.0 in 2010, according to the World Bank. Technicians in R&D and equivalent staff are people whose main tasks require technical knowledge and experience in engineering, physical and life sciences (technicians), or social sciences and humanities (equivalent staff). They participate in R&D by performing scientific and technical tasks involving the application of concepts and operational methods, normally under the supervision of researchers. The decline in the working age population has had an impact on the progress of R&D within the country. The UK has also witnessed a serious shortfall in IT and telecom talent, as the number of graduates with IT-related degrees has declined substantially in recent years. Both R&D and IT are vital to a growing economy, and the dearth of personnel could pose a serious challenge to the country's attempts to maintain its competitiveness in these areas. Regulatory control over indigenous innovations The authorities face the unenviable challenge of striking a balance between keeping the distribution of indigenous technology profitable and maintaining a competitive advantage. For instance, the UK is a key player in the defense industry. However, even if companies within this field are able produce innovative products, they might not be able to profit as much as they could out of doing so, as the dispersion of this technology is sensitive. The government must therefore closely monitor developments in such industries and decide on a relevant export policy. Future prospects Scope for new industries As the UK is at the forefront of new technology, there are good opportunities for the development of relatively nascent fields such as nanotechnology, space exploration and tourism, and alternative energy. The government has implemented incentives such as tax concessions to make investment in such industries an attractive proposition. While such ventures are generally capital-intensive and returns are uncertain, prospects are extremely bright for companies that do manage to make a breakthrough, as is the case with the more traditional technology-intensive industries such as pharmaceuticals and telecommunications. Outsourced R&D can improve focus on core areas The trend of outsourcing R&D activity to low cost emerging markets has been quite common for some time. This is of particular importance in the pharmaceuticals industry, where most of the major companies have established R&D centers in foreign countries, particularly in Eastern Europe and Asian territories such as India, China, Malaysia, and Indonesia. These countries provide cheap labor, while the quality of output is about the same. Although it might appear to be a problem in the short term, this may be advantages in the long run, considering that it might allow companies to focus on core areas and provide greater scope for new innovative ventures. Future risks Declining patent applications by residents As per World Bank data, the number of patent filings by UK residents fell from 20,426 in 2003 to 15,343 in 2011. Patent filings are worldwide patent applications filed through the Patent Cooperation Treaty procedure or with a national patent office for exclusive rights to an invention—a product or process that provides a new way of doing something or offers a new technical solution to a problem. A patent provides protection for the invention to the owner of the patent for a limited period, generally 20 years. This declining trend may hamper the UK's future technological competitiveness in the international market. According to the Innovation Union Scoreboard for 2013, the UK is categorized as an innovation

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PESTLE Analysis follower, while Germany is an innovation leader.

Figure 11:

Patent applications, residents

60000
50000 France

Patent applications

40000 Germany 30000 20000 10000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 United Kingdom

Source: World Bank

MARKETLINE

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PESTLE Analysis

Legal analysis
Overview The legal system in the UK is organized, transparent, and efficient. This makes for an environment that is conducive to business, as legislation is passed in a practical manner, keeping all stakeholders in mind. At the same time, this legislation is enforced in a fair manner by a number of agencies set up for monitoring specific areas. The government has brought in general tax-avoidance rules to make evasion more difficult in the country. The British overseas territories have signed a treaty to improve tax transparency, which is likely to make it difficult to avoid taxes. The UK government will have to bring about changes in its policies to attract FDI and to compete with BRIC and other advanced economies.

Table 7:

Analysis of the UK’s legal landscape

Current strengths ▪ High in business Freedom ▪ Effective enforcement of legislation

Current challenges ▪ Tax evasion ▪ Finding balance between traditional liberties and increased terror threat

Future prospects ▪ Measures to cut down tax evasion

Future risks ▪ Lack of incentives to attract FDI

Source: MarketLine

MARKETLINE

Current strengths High in business Freedom Laws that affect the UK’s business environment have been created and amended with the interests of investors in mind. This is evident from the fact that domestic and foreign players have shown a continuous commitment to investing in the country. The majority of multinational corporations based outside Europe prefer to control their European operations from the UK. According to the 2013 Index of Economic Freedom, the UK ranked 14th in the world and fifth in Europe. The country scores high in regulatory efficiency and open markets. The government has made continuous efforts to ensure that the overall environment is conducive to business. Effective enforcement of legislation It is important for government to produce effective legislation, but it is also equally important for them to enforce it. According to the World Bank's Doing Business indicators for 2013, the UK ranked 21st out of 185 countries in terms of the enforcement of contracts. The number of days in the enforcement of contracts is 399, compared to the Organisation of Economic Co-operation and Development (OECD) average of 510 days. Moreover, the number of procedures in enforcing a contract is 28 days, which is lower than the OECD average of 31 days.

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PESTLE Analysis
Current challenges Tax evasion Tax evasion and avoidance costs the UK an estimated £14 billion ($21.47 billion) annually. Others estimate the number to be substantially higher. The efficient collection of this revenue would reduce the demand to slash social and welfare expenditure, which hurts the poorest. Treasury data shows that those avoiding taxes are primarily wealthy individuals and corporations, so recouping this money would not harm the vulnerable. The government has brought in general antiavoidance rules to make tax evasion more difficult. Finding a balance between traditional liberties and tackling the increased threat of terrorism The government faces the challenge of maintaining a traditionally liberal society while taking steps to combat terrorism. For instance, a 2006 law bans the "glorification" of terrorism and gives law enforcement agencies special powers to act against websites deemed inflammatory. While the House of Commons approved the law by a comfortable margin, members of the House of Lords criticized it as restricting freedom of speech. In much the same way, legislation such as the Terrorism Act 2006 and the Prevention of Terrorism Act 2005 were controversial. Future prospects Measures to cut down tax evasion The British overseas territories have signed a treaty to improve tax transparency. British territories of Anguilla, Bermuda, Montserrat, the Turks and Caicos Islands and the British Virgin Islands have signed a treaty with the UK and other G5 nations to share tax information. The government has hailed this as a significant step to check tax evasion. Further, The Swiss/UK Tax Cooperation Agreement, which came into force from January 2013, is expected to enhance information exchange and disclosures related to British assets in Swiss banks. Moreover, in May 2013, the G7 countries agreed to take steps to target tax evasion and avoidance. Future risks Lack of incentives to attract FDI A number of emerging economies have introduced various pioneering schemes in an attempt to attract foreign investment. India, Russia, and China, for instance, have introduced various versions of special economic zones, which attract marquee global investors looking for tax exemptions or tax concessions. One trend that may define this decade is the increasing attractiveness of Germany to international investors. Germany’s emergence from recession and its economic leadership in Europe is likely to field a challenge to the UK as a destination for foreign investment. The UK government will have to change policies to compete with BRIC and other developed economies in attracting FDI.

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PESTLE Analysis

Environmental analysis
Overview The UK, considered one of the strongest players in global politics, has a large role to play in determining future global policies. Increasingly, world leaders are viewing climate change and sustainable development as global issues that require concerted global efforts and the UK has a major role to play in convincing other countries to commit to this cause. The government must also ensure that it meets its own commitments to send a positive signal to other countries. The UK must effect a greater reduction in the emission of pollutants if long-term environmental protection is its aim. Although targets have been set through a number of international and internal agreements, the process should be developed further. The great challenge lies in balancing economic development with progress in the environmental situation. This will be especially difficult in the face of increasing competition from emerging markets.

Table 8:

Analysis of the UK’s environmental landscape

Current strengths ▪ Strong global influence ▪ Good track record in implementing policies

Current challenges ▪ High air pollution

Future prospects ▪ Proactive policy toward Kyoto Protocol successor ▪ Carbon budget

Future risks ▪ Balancing environmental protection with economic development

Source: MarketLine

MARKETLINE

Current strengths Strong global influence With its position as an industrialized global power and as a member of the G8, the UK has a leadership role to play in the global effort towards sustainable development and environmental protection. The UK, with its close ties to a number of countries and its influence through the Commonwealth, has the ability to extract commitments from developing nations that are unwilling to sacrifice economic growth to protect the environment. Good track record in implementing policies The UK has a good record of accomplishment in achieving a number of its environmental objectives and in expanding its environmental infrastructure. The country has broadened its environmental objectives because of various international commitments, and partly as a response to its goal of sustainable development. The step towards integrated pollution control is a major component of environmental management, although it is only half-complete and its scope is still limited to large point sources of pollution. The Energy Act 2011 brought about a significant change in the provision of energy efficiency measures for both homes and businesses. The act seeks to enable and secure low carbon energy supplies and ensure fair competition in energy markets. Seven environment-related directives have been combined into one piece of legislation to improve the framework of the act. The government has stated that it is committed to the use of market

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PESTLE Analysis forces, although it is yet to make extensive use of economic instruments as part of its environmental policy. Current challenges High air pollution In June 2010, the European Commission issued a second and final warning to the UK over air quality, and asked it to come up with a pragmatic solution to pollution. London suffers from high air pollution, while Manchester, Glasgow and Birmingham have dangerous levels of NO2. Exhaust fumes and emissions from factories and power stations around London are the main causes of pollution. In May 2013, the Supreme Court ruled that the government had failed to bring down air pollution levels as per EU directives and the European commission can take legal action against the government for non-compliance. This exposes the government to a fine of around £300m ($460.20m). Around 29,000 deaths in the UK every year are due to air pollution. The government has to take immediate and decisive steps to control air pollution in the country. Future prospects Proactive policy toward Kyoto Protocol successor The UK played a central role in galvanizing support for extending the Kyoto Protocol beyond 2012. The UK supported ratification of the Kyoto Protocol’s second commitment period, and worked to secure a mandate for a comprehensive legally binding instrument in protocol form by 2015. Indeed, by committing to a second commitment period, the UK through the EU has championed the next round of negotiations, helping to maintain essential elements that include its potential long-term viability as a framework. This is a significant step forward in curbing emissions to tackle global climate change. Carbon budget Under the Climate Change Act, the UK government has to report annually to lawmakers on its progress in meeting its carbon budgets. The government has set an overall target of an 80% reduction in emissions from 1990 levels by 2050. The UK's reduction also compares well to cuts achieved in other countries. The government has targeted to limit emissions to 2,782 MtCO2e during 2013–17, 2,544 MtCO2e over 2018–22 and 1,950 MtCO2e over 2023–27. Furthermore, the government has started a new mandatory scheme for large public and private sector organizations to boost energy efficiency and reduce carbon emissions. Future risks Balancing environmental protection with economic development The dilemma of striking a balance between economic development and protecting the environment is one that will remain an issue for the near future. While economic development and concurrent technological development have some positive influences on the environment, they also have overwhelming detrimental effects. In the UK, the relative decline of the industrial sector has meant that there is less pressure on the environment, although even the transition to a servicesdriven economy has not erased the harmful impact that overall economic development is having on the planet. In May 2012, former cabinet minister Chris Huhne warned that the UK’s economic growth would not be sustainable unless the government focuses on ―green growth‖. Huhne added that the continuing debate to choose between environmental protection and economic development is not necessary, and that the government has to take into account environmental issues in growth strategies.

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Political Landscape

POLITICAL LANDSCAPE
Summary
The UK has strong democratic traditions. There is great respect for human rights and civil liberties, and the public sector is transparent and accountable. The system of governance in the UK has developed from a monarchy into a democratic parliamentary system of governance known as the Westminster system. The legislative, executive, and judicial functions are entrusted to separate bodies. Executive authority is vested in the cabinet, led by the prime minister, while legislative authority is vested in a bicameral parliament and judicial authority is vested in a system of courts. Neither of these institutions has absolute authority over the other, and there is an adequate system of checks and balances in place. The monarch, Queen Elizabeth II, is the head of state, but this position is largely ceremonial. The UK emerged from the world wars as a dominant, industrialized nation, largely on the back of continuous economic development. As a result, the UK became a major force in global politics as a permanent member of the United Nations Security Council and the North Atlantic Treaty Organization (NATO), and an important member of the European Union (EU). The UK has distanced itself from complete European integration, but at the same time, the government has tried to keep itself involved in the EU's international commitments. The country was criticized for its support of the US-led war on terror in Afghanistan and Iraq. In May 2010, elections to the House of Commons brought about an historic change in the political composition of the UK. The Conservative Party headed by David Cameron won the election with 36.1% of the vote, claiming 305 seats out of the 650 available, and went on to form the UK's first coalition government since World War II.

Evolution
Pre-1950s Early medieval Britain consisted of a number of small kingdoms, which by 1000 had formed into the kingdoms of England and Scotland. The King of Scotland inherited the English throne in 1603 and acted as sole ruler over the two territories. These kingdoms were combined to form the Kingdom of Great Britain in 1707. In 1801, the Kingdom of Great Britain merged with the Kingdom of Ireland to form the United Kingdom of Great Britain and Ireland, which became a dominant power in the 19th century. The nation later became the United Kingdom of Great Britain and Northern Ireland after most of the latter country seceded in 1927. At the height of its power, the ―British Empire‖ covered around a quarter of the earth’s surface. However, the nation suffered great losses during the two world wars in the first half of the 20th century. After World War II ended, the Labour Party came into power and established a welfare system. The UK became a permanent member of the UN Security Council and a founder member of NATO. The end of World War II also heralded the start of decolonization, whereby a number of the UK’s colonies gained independence. 1950–90 In 1961, the UK’s application to join the European Economic Community (EEC) was opposed by French president Charles de Gaulle, although the country eventually joined in 1973 despite widespread strikes. The late 1960s saw the start of intense violent conflict in Northern Ireland between elements of the unionist community and the nationalist community. Apart from the dispute between the two parties over the status of Northern Ireland within the UK, the minority nationalist community (primarily Roman Catholic) resented the treatment they received from the majority unionist community (primarily Protestant), while the unionists opposed the dominance of the nationalists.

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Political Landscape
The Conservative Party came to power in 1979, led by Prime Minister Margaret Thatcher. In 1982, the UK sent special forces teams to the Falkland Islands (an archipelago located off the coast of South America) after they were invaded by Argentina, and successfully regained control over the territory. Under Thatcher, economic reforms took place with the introduction of free market policies and the privatization of various state enterprises. Thatcher was re-elected twice, in 1983 and in 1987, but resigned in 1990 after facing a challenge for the leadership of the Conservative Party. John Major was then named prime minister. 1991–2013 In 1991, the UK, as one of the US’s allies, helped liberate Kuwait from Iraqi occupation. The Northern Ireland peace process received a boost in 1993 when the UK government issued a joint peace proposal with the Irish government. Eventually, the Belfast Agreement in 1998 ended the conflict in Northern Ireland. In recent times, there has been a significant devolution of powers from the central government to various sub-national entities. The devolved system of government is different from a federal system of government in that, under the doctrine of parliamentary sovereignty, devolution is in theory reversible and sub-national entities are subordinate to the UK parliament. In 1997, the Labour Party, led by Tony Blair, emerged with a landslide victory over the Conservatives. Blair’s party was subsequently re-elected twice, in 2001 and again in 2005, despite the party’s policy of staunch support for the war on terror in Iraq and Afghanistan. In 2007, Gordon Brown succeeded Tony Blair as both the head of the Labour Party and the prime minister. In June 2009, the governing Labour Party lost the European elections, ending in third position with only 15.7% of the vote, while the Conservative Party received 27.7%. In the May 2010 elections to the House of Commons, the Conservative Party won with a 36.1% share of the vote, winning 305 seats. The Conservative leader David Cameron subsequently went on to form the UK’s first coalition government since World War II in partnership with the Liberal Democrats. In December 2011, Prime Minister Cameron disagreed with proposals to make changes in the EU’s Lisbon treaty. He said that these proposals would jeopardize the status of London as a financial center. In December 2012, both the British and the Scottish government agreed on a referendum for Scottish Independence in 2014. In January 2013, Prime Minister David Cameron proposed a referendum by 2017 on whether to leave the EU after the next parliamentary elections.

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Political Landscape
Figure 12: The UK – political events timeline

1914−50

1951 − 80

1981−90

1991−2000

2001 Onwards

• World War I began in 1914. • War ended in 1918 with several hundred thousand UK soldiers dead. • First Labour government was elected in 1924. • Major worldwide economic crisis was witnessed in 1931. • World War II started in 1939.
• War ended in 1945 and a welf are state was introduced by the newly elected Labour government.

• Queen Elizabeth II was crowned as queen in 1953.
• The UK intervened in Suez Canal crisis, but withdrew due to US pressure in 1956.

• In 1981, the Thatcher government began the process of privatization of state-run industries. • In 1982, Argentina invaded the Falkland Islands in the South Atlantic, which was recaptured by the UK. • Thatcher was re-elected in 1983 in the midst of high unemployment and unrest in the inner cities.
• Thatcher resigned af ter she lost the leadership of her party and she was succeeded by John Major in 1990.

• The UK’s bid to join the EEC was vetoed by French President Charles de Gaulle in 1961. • The UK joined the EEC in 1973. • EEC membership was endorsed in a ref erendum in 1975.

• The UK became a permanent member of the UN Security Council in 1945.
• The UK became a f ounder member of NATO in 1949.
Source: MarketLine

• In 1991, the UK took part in US-led military campaign to liberate Kuwait f rom Iraqi occupation. • Major was re-elected as prime minister in 1992. • The UK’s government along with the Irish government issued the Downing Street declaration on Northern Ireland in 1993. • The Labour Party led by Tony Blair won a landslide victory in 1997. • The voters of the Republic of Ireland and Northern Ireland approved the Good Friday Agreement f or a political settlement in 1998. • In 1999, the Scottish parliament and Welsh assembly were inaugurated.

• The Labour Party led by Tony Blair won its second successive election in 2001.
• The UK joined US-led military campaign against Iraq in 2003.

• The Labour Party won a third successive term in of f ice in 2005. • Gordon Brown succeeded Tony Blair as the prime minister in 2007.
• In May 2010, the Conservative Party won the House of Commons elections with 36.1% of the vote and f ormed a coalition government along with the Liberal Democrats. David Cameron became the prime minister.

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Political Landscape

Structure and policies
Key political figures Key political figures in the UK are:   Prime minister David Cameron Head of state Queen Elizabeth II

Figure 13: Key political figures
Queen Elizabeth II is the monarch of the UK and she is the only monarch of more than one state in the world. Queen Elizabeth II is a constitutional monarch of the country and she takes on certain representational duties, which are ceremonial in nature. The monarch of the UK has the right to dissolve the parliament and appoint a prime minister. Moreover, the monarch is the head of the commonwealth and so the official head of state for fifteen countries, which is largely a ceremonial position.

David Cameron became the prime minister and took office on May 14, 2010. He was elected as the leader of the Conservative Party in December 2005. Cameron believes that some of the issues that his party focus on include promoting social justice and increasing the access to good schools, good healthcare and good housing. Cameron has been serving as the MP of Witney since 2001.

Source: MarketLine

MARKETLINE

Structure of government The UK subscribes to a democratic, parliamentary system of governance known as the Westminster system. This system, developed over several centuries, is named after the location of the UK parliament. The Westminster system is characterized by the presence of a titular head of state, who in practice is more of a ceremonial figurehead, and a bicameral legislature in which at least one of the houses is elected. Other key features are a de facto executive branch led by the head of the executive—who is usually the head of the party with the largest representation in parliament, and a judicial branch that is independent of the legislature and the executive. Center/federal Legislative power is vested in both the government and the two chambers of parliament: the House of Commons and the House of Lords. On a broad level, the duties of the houses are similar and involve monitoring the work of the government, passing legislation, and discussing issues of significance. There is a system of checks and balances, as the decisions made by one house usually have to be approved by the other. State/provincial In the late 1990s, a significant devolution of authority was carried out in the UK through the transfer of powers from the central government to various sub-national bodies. Despite the creation of a national parliament in Scotland and a national assembly in both Wales and Northern Ireland, the UK parliament had retained overall authority over these

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Political Landscape devolved institutions. Referendums held in Scotland, Wales, and Northern Ireland in 1997 and 1998 confirmed that the public was in favor of devolution, and by 1999, the devolved powers were formally transferred. Following the passage of the Scotland Act 1998, the Scottish parliament and executive formally came into existence, and the parliament has the power to make laws, with certain areas being reserved for the parliament of the UK. All areas that are not reserved for the parliament of the UK come under the purview of the parliament of Scotland. The parliament and the executive have powers in specific areas such as economic development, education, health, law and home affairs, local government, transport, social services, housing, and the environment. Key political parties Labour Party The Labour Party initially came into existence in 1900 as a political pressure group that formed out of the trade union movement, and was influenced by the socialist political parties of the time. A leading left party in England, Scotland, and Wales since the 1920s, it has been a party of self-proclaimed democratic socialism. In recent times, the party has adopted a "third way" approach to policymaking, combining both socialism and laissez-faire principles. Under the leadership of Tony Blair and Gordon Brown, it was at the helm of affairs in the UK from 1997 until 2010, although its majority in the House of Commons fell rapidly during this time. Brown took over from Blair as prime minister and head of the party in June 2007. However, in the May 2010 elections for the House of Commons, the party got 258 seats out of 650 and lost overall power. Ed Miliband is the present leader of the party. Conservative Party The Conservative Party is arguably the oldest political party in the world, with roots in the Tory party of the 18th and 19th centuries. Indeed, even today, the Conservatives are often referred to as the Tories. The party is the largest in the UK in terms of public membership, and is the most successful party in the UK in terms of number of election victories. The Conservative Party won the May 2010 House of Commons elections with 305 seats out of 650. The party, along with the Liberal Democrats, then formed a coalition government in the UK. In its policy document, the party has stressed the need for a ―responsibility revolution,‖ in which large-scale changes are to be brought about in the current system in order to create ―an opportunity society, a society in which everybody is a somebody, a doer not a done-for.‖ Liberal Democrats The Liberal Democrats trace their roots back to the formation of the Liberal Party in 1859. In terms of public membership, the Liberal Democrats are the UK’s third largest party. In general, the party promotes social liberalism, which focuses on individual liberty, minimal state intervention in an individual’s personal affairs, and the decentralization of power away from "unaccountable" public bodies. Nick Clegg was elected leader of the Liberal Democrats in December 2007 after the resignation of his predecessor, Sir Menzies Campbell. The Liberal Democrats' policy initiatives are based on the objective of maintaining ―a fair, free, and open society." For example, the party supports the decentralization of power away from national government and free education for all citizens including university students. The party opposes the authoritarian anti-terror laws that were brought in by the previous Labour government. In the general elections of May 2010, the Liberal Democrats gained 57 seats in parliament. The party is part of the coalition government led by the Conservatives.

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Political Landscape
Composition of legislature In the last parliamentary elections held in May 2010, the Conservative Party won 305 seats in parliament. Apart from Prime Minister David Cameron, the party has other important members of the cabinet such as the ministers responsible for finance, foreign affairs, home affairs, defense, health, justice, and the environment. While the Labour Party managed to secure 258 seats in parliament, the Liberal Democrats won 57 seats.

Figure 14: Composition of legislature

Other, 30
Liberal Democrats, 57

Conservative, 305

Labour, 258

Source: CIA – The World Factbook

MARKETLINE

Key policies Economic The economy continues to be weak since the financial crisis of 2008. The government since then has been bolstering the economy with unprecedented financial support. The banking sector has not yet recovered from the crisis and concerns over bank balance sheets remain. Interest rates are still at rock bottom, and have failed to provide much-needed impetus to the economy. The economy is facing considerable headwinds both from foreign and domestic woes. The big bailouts after the financial crisis have weighed heavily on public finances, with the government registering a high deficit and ballooning debt. In addition, elevated private sector and household debt continues to restrain investment and consumption, which acts as a drag on domestic growth. On the external front, a lingering debt crisis in the Eurozone, a major market for British exports, has affected exports and manufacturing. The government’s front loaded fiscal consolidation has narrowed the deficit figure, although it remained elevated over the past few years. Fiscal consolidation has badly affected GDP growth. The government faces challenges in balancing economic growth and deficit reduction. Due to stagnant growth, the budget for 2013 has been made fiscally neutral, with tax raises and cuts in expenditure balanced out by tax cuts and increases in expenditure. It has focused on rebalancing the economy through private sector led investment and exports, and away from debt fueled consumption and public spending. In the 2013 budget, the government proposed the lowering of corporate tax to 20% from April 2015, apart from the 1%

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Political Landscape reduction to 23% from April 2013 and a further 2% cut from April 2014. A 20% corporate tax rate will be among the lowest in the G20. Further, the budget also extended tax relief on R&D to 10% of qualifying expenditure, before deduction for taxes. To boost small and medium enterprises (SMEs), from April 2014, the government will provide an employment allowance of ₤2000 to all businesses, which will help offset their National Insurance liability and encourage them to employ more people in the near term. Moreover, the budget also extended the 50% tax investment relief to entities buying shares in new business ventures. The budget cut the cost of raising capital by eliminating the stamp duty for share sales in Alternative Investment Market (AIM) listed companies. The 2013 budget has also focused on sustainable energy and called for consultation on new tax incentives to encourage investments in unconventional forms of energy, including shale gas. In addition, other forms of incentives to bolster investments in North Sea oil have been announced. The budget also mentioned measures to tackle tax evasion and avoidance. Social The Conservative-led administration has announced its intention to reduce the intake of foreign labor and boost employment opportunities for the domestic population. The coalition government headed by David Cameron has announced a host of measures to simplify benefits, impose time limits on those who are able to work, and to encourage people on unemployment benefits to find work. People who need support for a short time have a wide choice in terms of housing subsidies, tax credits, or direct welfare payments. In March 2012, the reforms bill on health and social care was finally passed. The focus of the bill is to curtail increasing costs against the backdrop of the UK’s aging population. The government argues that the reforms will reduce costs by 45% while giving more choices to the patient. The bill has been passed but it is yet to be seen if it can bring any significant changes to the strained NHS. The government plans to introduce a flat rate pension of £144 ($220.90) a week from 2016. Foreign The UK is one of the most prosperous and influential nations in the world and has a large role to play on the international stage. The country is one of the five permanent members of the UN Security Council, is one of the founding members of NATO, and a member of the G8. Though a member of the EU, it has followed a conservative approach to European integration. UK-EU tensions could escalate in the near term as the government renegotiates the terms of membership with the latter. A modified relationship may lead to a diminishing role for the UK as far as future EU policy matters are concerned. The incumbent prime minister has also called for a referendum on exiting the EU by 2017 as the nation has become increasingly skeptical of its prospects. The issue of Scottish independence remains a serious risk, as there is a referendum in 2014. With the Scottish National Party pressing for independence, the future of the union remains uncertain. Although full independence is unlikely, there may be more devolution. The UK will continue to remain a close ally of the US. Defense As a permanent member of the UN Security Council, the UK has a responsibility towards global peacekeeping and crisis management efforts. The UK has committed troops to a number of peacekeeping missions in countries such as Sudan, Liberia, Sierra Leone, the Democratic Republic of Congo, Cyprus, Kosovo, Bosnia, Georgia, Iraq and Afghanistan. As one of its main defense policy objectives, the UK aims to combat terrorism and the proliferation of weapons of mass destruction. The UK has established a close relationship with the US, and has participated in the latter’s war on terror in Iraq and Afghanistan. As part of its defense policy relating to the war on terror and tyranny, the UK committed its forces

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Political Landscape against the Gaddafi regime in Libya and contributed to his overthrow. The current conflict in Syria has not attracted an overt UK response. Performance Governance indicators The World Bank report on governance uses voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption as indicators for 215 countries and territories over 1996–2011. Daniel Kaufmann of the Brookings Institution, Massimo Mastruzzi of the World Bank Institute and Aart Kraay of the World Bank Development Economics Research Group conducted the study. For any country, a percentile rank of zero corresponds to the lowest rank and 100 correspond to the highest. The UK ranked in the 92.0 percentile for voice and accountability in 2011. This parameter measures the extent to which a country's citizens are able to participate in selecting their government, along with freedom of expression, freedom of association, and the availability of free media. The UK ranks high due to its openness and liberal attitude toward the press. The UK is ahead of its neighbor France, which was ranked in the 88.7 percentile. The UK was ranked in the 60.4 percentile for political stability and absence of violence in 2011. This parameter measures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism. The UK is below its neighbor France, which ranked in the 67.5 percentile. The UK ranked in the 92.4 percentile for government effectiveness in 2011. This parameter measures the quality of public services, the quality of civil services and the degree of their independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. The UK’s rank on this indicator has been impressive throughout recent times, as successive governments have broadly pursued similar economic policies, leading to stability in policy formulation and implementation. France was slightly behind the UK with a percentile rank of 88.2. The UK ranked in the 94.3 percentile for regulatory quality in 2011. This parameter measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. A high ranking indicates fair implementation of policies and regulations in the private sector. Under this category, France trailed the UK, ranking in the 82.5 percentile. The UK ranked in the 92.5 percentile for rule of law in 2011. This parameter measures the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence. In this category, France placed lower than the UK, ranking in the 90.1 percentile. The UK was ranked in the 91.5 percentile for control of corruption in 2011. This parameter measures the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, and the appropriation of the state by the elite and private interests. France was lower at 90.5.

Outlook
Prime Minister David Cameron indicated that there would be a "seismic shift" in how the country was governed after unveiling a historic coalition with the Liberal Democrats in mid-May 2010. After taking office in Britain's first coalition government since World War II, the prime minister announced that the Conservative Party and its Liberal Democrat partner considered a record fiscal deficit to be the most important issue requiring immediate attention. The detailed joint

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Political Landscape policy program published by Cameron included a pledge not to join the euro. The government has a strong majority in parliament; however, the diverse opinions of the coalition parties regarding strong austerity measures and the worsening Eurozone crisis can strain relations between them. There is a very low possibility of an early election; however, the situation could change if economic conditions deteriorate. This could strain relations between coalition partners and make early elections more likely.

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Economic Landscape

ECONOMIC LANDSCAPE
Summary
The UK’s economic development has historically been based on its strong industrial centers. However, in recent times the services sector has overshadowed the industrial sector to become the key driver of economic growth. This shift has led to unbalanced economic growth, as London and the South East have consistently grown, while the Northern cities such as Manchester, Liverpool, Newcastle, Sheffield, Leeds and Birmingham, which have traditionally been dependent on industrial activity, have not benefitted much. The economy slipped into recession in 2012 after growth contracted by 0.03%; public debt remains elevated and thus remains a significant cause for concern. The government maintained that it would go ahead with austerity measures to reduce the fiscal deficit. Inflation dropped to 2.80% in 2012 from 4.5% in 2011, which is a positive sign for the economy. Strong fiscal consolidation is in progress, and remains vital to achieve a more sustainable budgetary position, that will reduce fiscal risk.

Evolution
The UK has traditionally been at the forefront of economic progress. After the two world wars, a government led by Clement Attlee, the then leader of the Labour Party, was established. This government went about the nationalization of various industries and institutions such as the inland transport system, electricity, gas, telephones, coal mining, and even the Bank of England (BoE). The Labour Party still considers the establishment of the National Health Service in 1948 to be one of its most important achievements. Led by Harold Wilson, the Labour government of the 1960s had a different focus than the government of the 1940s, choosing to concentrate on economic planning and the modernization of British industry. The government created large public sector companies that were technology-intensive, funded the creation of infrastructure to support industry, and encouraged innovation and the adoption of new technologies. The victory of Margaret Thatcher and the Conservative Party in the 1979 elections brought about a change in direction for the UK economy. Under Thatcher, economic reforms took place with the introduction of free market policies and the privatization of various state enterprises, and the government sold a number of large public sector enterprises created by previous governments. Thatcher was re-elected twice, in 1983 and in 1987, but resigned in 1990 after being challenged for the leadership of the Conservative Party. John Major succeeded her as prime minister. Since the 1990s, the UK economy has made a pronounced shift from its traditional dependence on its industrial sector. The services sphere has come to the forefront, and successive governments have promoted this trend. During 2000–07, economic growth averaged 3.16%. However, due to the global financial crisis, the country’s GDP contracted by 0.97% and 3.97% in 2008 and 2009, respectively. The economy recovered in 2010 to register growth of 1.80%, but slowed again in 2011 growing 0.90%. A recession ensued in 2012 due to uncertainty in the Eurozone.

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Economic Landscape

Figure 15: Historical GDP growth, 1992–2012

5.00 4.00 3.00 2.00

Growth rate (%)

1.00 0.00 1992 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-1.00 -2.00
-3.00 -4.00 -5.00 Year

Source: Country Statistics, MarketLine

MARKETLINE

Structure and policies
Financial authorities and regulators From April 2013, the Financial Services Authority ceased to exist and became two separate regulatory authorities. The Financial Conduct Authority was established to supervise the financial services authority and the Prudential Regulation Authority was formed to supervise banks, building societies, credit unions, insurers and major investment firms Stock markets and derivatives The London Stock Exchange (LSE) is responsible for providing a platform to trade in a wide array of securities, including domestic and international equities, covered warrants, exchange-traded funds, depository receipts, debts, and fixed interest products. The LSE allows companies of every size to raise capital through four primary markets. The exchange’s market capitalization as of March 2013 stood at $3.71 trillion. It comprises the following components:     The Main Market: Arguably the most prestigious listing and trading environment in the world. The Alternative Investment Market (AIM): The equities market for smaller companies. The Professional Securities Market: For depository receipt securities and listed debt. The Specialist Fund Market: Dedicated to specialized investment entities.

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Economic Landscape
Insurance According to MarketLine, the UK insurance market had total gross written premiums of $319.7 billion in 2011, representing a compound annual rate of change (CARC) of -7.3% between 2007 and 2011. In comparison, the French market narrowed with a CARC of -0.2%, and the German market expanded with a compound annual growth rate (CAGR) of 1.9%, over the same period, to reach respective values of $273 billion and $244.9 billion respectively. The life insurance segment was the most lucrative in 2011, with total gross written premiums of $210.2 billion, equivalent to 65.7% of the market's overall value. The non-life insurance segment contributed gross written premiums of $109.5 billion in 2011, equating to 34.3% of the market's aggregate value. The decline in the insurance sector is forecast to continue, with an anticipated CARC of -0.5% for the five-year period 2011–16; this is expected to drive the market to a value of $312.2 billion by the end of 2016. Comparatively, the French and German markets will grow with CAGRs of 1.8% and 0.3% respectively, over the same period, to reach values of $298.7 billion and $248.9 billion respectively. Asset management According to the Investment Management Association (IMA), assets under management totaled £718 billion ($1.10 trillion) as of March 2013. Key policies The key macroeconomic policies of the government are focused on maintaining fiscal discipline, restoring full employment, returning inflation to target, and stimulating growth, investment, and demand. The BoE has kept its official base rate on hold at a historic low of 0.5% since March 2009, and is not expected to alter it in the near term. The quantitative easing program stands at a cumulative £375 billion ($575.26 billion), signifying a major expansion of money supply to boost the contracting economy. The stimulus helped to calm the markets but the overall economic impact remained modest. The rising fiscal deficit along with increasing debt levels forced the Cameron government to initiate a program with some tough austerity measures.

Performance
GDP and growth rate Overview During 2000–07, economic growth averaged 3.16%. However, due to the global financial crisis, the country’s GDP contracted by 0.97% and 3.97% in 2008 and 2009 respectively. The country’s economy recovered in 2010 to register growth of 1.80%, but slipped again in 2011 to 0.90% before entering recession in 2012 because of fiscal austerity measures and uncertainty in the Eurozone.

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Economic Landscape

Figure 12: GDP and GDP growth rate, 2006–16

2.60 2.55 2.50 2.45 2.40

5.00 4.00 3.00 2.00

Growth rate (%)

1.00

$ trillion

0.00

2.35
-1.00

2.30
2.25 2.20 2.15

-2.00 -3.00 -4.00 -5.00

2006

2007

2008

2009

2010

2011
Year

2012

2013

2014

2015

2016

GDP
Source: Country Statistics, MarketLine

Real GDP growth rate
MARKETLINE

GDP composition by sector Traditionally, industrial activity has been concentrated in the northern parts of the country, while the southern region has been driven by the services sector. Because of the relative decline in the importance of the industrial sector and surging activity in the services sector over the past few decades, the South has flourished while the North has developed at a much slower pace. The industrial sector accounted for close to 21.29% of GDP in 2012, while the services sector’s contribution stood at 78.19% and agriculture made up for the remainder.

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Economic Landscape

Figure 13: Sector-specific contribution to GDP, 2012
Agriculture, 0.52%

Industry, 21.29%

Services, 78.19%
Source: Country Statistics, MarketLine MARKETLINE

Agriculture Agriculture in the UK is technology-intensive, with only 1.4% of the population engaged in the sector as of 2006, according to CIA – The World Factbook. Because of the UK’s high population density and relative scarcity of land, only around a third of total production is devoted to arable crops, while the rest is devoted to livestock. According to MarketLine, the sector contracted by an average rate of 0.64% during 2002–12, with agricultural output reaching £7.38 billion ($11.32 billion) in 2012.

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Economic Landscape

Figure 14: Agricultural output (£ billion), 2007–12

10.00 9.00 8.00 7.00 6.00

8.00 6.00 4.00 2.00

Growth rate (%)

0.00 -2.00

£ billion

5.00

-4.00
4.00 3.00 2.00 1.00 0.00 -6.00 -8.00 -10.00

-12.00
-14.00

2007

2008

2009
Year
Agriculture output

2010

2011

2012

Growth rate
MARKETLINE

Source: Country Statistics, MarketLine

Industry Much has been made of the steady decline in the relative contribution of the industrial sector toward GDP over the past couple of decades. The main commodities produced by the industrial sector are machine tools, electric power equipment, automation equipment, railroad equipment, ships, aircraft, motor vehicles and parts, electronics and communications equipment, metals, chemicals, coal, petroleum, paper and paper products, textiles, and clothing. The UK has a large number of globally recognized industrial brands, and its main exports include manufactured goods, fuels, chemicals, food, and beverages. According to MarketLine, the sector grew by 2.46% during 2003–12, with industrial output reaching £301.99 billion ($463.26 billion) in 2012.

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Economic Landscape

Figure 15: Industrial output (£ billion), 2007–12

305.00 300.00 295.00 290.00

8.00 6.00 4.00

Growth rate (%)

2.00

£ billion

285.00 0.00

280.00
-2.00

275.00
270.00 265.00 260.00 -4.00 -6.00 -8.00

2007

2008

2009
Year
Industry output

2010

2011

2012

Growth rate
MARKETLINE

Source: Country Statistics, MarketLine

Services The UK’s services sector has been consistently growing in importance over the past decade and, as is the case with most developed countries, it dominates in comparison to the other sectors. London is arguably the world’s largest financial center, and thus the UK services sector is dominated by financial services—especially insurance and banking. In recent years, tourism and education have emerged as important contributors to the economy, with the UK growing in popularity among foreigners with disposable income and the student community in particular. Public services and defense have also contributed significantly to the sector’s recent growth, as the global financial crisis hit financial services relatively hard. According to MarketLine, the sector grew by 4.59% during 2003–12, with services output reaching £1109.10 billion ($1,701.39 billion) in 2012.

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Economic Landscape

Figure 20: Services sector output (£ billion), 2007–12

1150.00

7.00 6.00

1100.00 5.00 1050.00 4.00 3.00

Growth rate (%)

£ billion

1000.00

2.00
950.00 1.00 0.00 900.00 -1.00 850.00 2007 2008 2009 Year
Services output Growth rate

-2.00 2010 2011 2012

Source: Country Statistics, MarketLine

MARKETLINE

Fiscal situation The UK’s government debt has been increasing since 2001, and reached an alarming figure of around 90.0% of GDP in 2012 according to Eurostat. The deficit stood at 6.3% of GDP in 2012 and is expected to be above 7% in 2013. Current account According to the International Monetary Fund (IMF), the current account deficit stood at 3.31% of GDP in 2012 and is expected to narrow to 2.70% in 2013. Exports and imports As would be expected, the UK’s major trade partners are almost exclusively European Union (EU) member nations. According to CIA – The World Factbook, the main destinations for goods and services produced in the country in 2011 were Germany (10.9%), the US (9.9%), the Netherlands (7.9%), France (7.4%), Switzerland (7.1%), Ireland (6%) and Belgium (5.3%). In 2011, the UK sourced its imports from Germany (12.5%), China (8.2%), the Netherlands (7.1%), US (7%), France (5.7%), Belgium (4.8%) and Norway (4.7%). Exports rose from $746.92 billion in 2011 to $777.44 billion in 2012, while imports increased from $808.19 billion to $841.54 billion over the same period.

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Economic Landscape

Figure 21: The UK's external trade position, 2008–12
1800.00

1600.00 1400.00

1569.76 1374.18 1235.40 828.62

1555.11

1618.98

1200.00 1000.00

808.19 741.14 721.85 641.17 594.22 652.33 746.92

841.54 777.44

$ bn

800.00 600.00 400.00 200.00 0.00 2008

2009

2010 Year
Exports Imports Total trade

2011

2012

Source: Country Statistics, MarketLine

MARKETLINE

International investment position According to the United Nations Conference on Trade and Development Investment Report 2012, foreign direct investment (FDI) inflow reached $53.94 billion in 2011 from $50.60 billion in 2010. Credit rating Due to its ballooning fiscal deficit, both Fitch and Moody's have downgraded the economy one notch from its AAA status. Standard & Poor's retained the AAA rating with a negative outlook in April 2013.

Monetary situation
Key monetary indicators Inflation Inflation was 4.50% for 2011, but eased to 2.80% in 2012 as the austerity measures introduced by the government began to take effect alongside rising unemployment and contracting household incomes.

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Economic Landscape

Figure 22: Consumer price index and consumer price index-based inflation, 2006–16

140.00 120.00

5.00 4.50 4.00

Consumer price index

100.00 80.00 60.00 40.00 20.00

3.50

Inflation (%)

3.00 2.50 2.00 1.50 1.00 0.50

0.00

0.00

2006

2007

2008

2009

2010

2011
Year

2012

2013

2014

2015

2016

Consumer price index
Source: Country Statistics, MarketLine

Inflation
MARKETLINE

Interest rates Since March 2009, the Bank of England (BoE) has kept its base interest rate at a historic low of 0.5%, and is expected to retain it for the time being. Employment According to MarketLine, the unemployment rate was 8.03% in 2012, which might go up to 8.19% in 2013. As of March 2013, the average wage has declined, reflecting the slow economic recovery.

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Economic Landscape

Figure 23: Unemployment in the UK, 2006–16
3.00 9.00 8.00

Number of unemployed (million)

2.50 7.00 2.00 6.00

Rate of unemployment (%)

5.00 1.50

4.00 1.00 3.00
2.00 0.50 1.00 0.00 0.00

2006

2007

2008

2009

2010

2011
Year

2012

2013

2014

2015

2016

Total unemployment
Source: Country Statistics, MarketLine

Rate of unemployment (%)
MARKETLINE

Outlook
Prime Minister David Cameron and Chancellor George Osborne have unveiled a host of measures to cut the fiscal deficit. Financial strain on households due to gloomy prospects for earnings and house price growth, combined with lofty household debt levels and an uncertain employment scenario mean that consumer spending will be constrained. Inflation is expected to come down, according to MarketLine estimates. Nevertheless, the outlook is expected to change for the better, particularly if the Eurozone crisis reaches a timely and satisfactory conclusion. The disappointing growth and weak productivity experienced in recent years is due to poor macroeconomic policies.

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Social Landscape

SOCIAL LANDSCAPE
Summary
The UK is one of the most densely populated developed countries. The standard of living enjoyed by residents is among the best in the world. Apart from the civil liberties and rights afforded to individuals by the authorities and government, residents have access to one of the best systems of social welfare in the world. The majority of the population relies on public healthcare services, and there are special projects to care for children, the unemployed, the disabled, and the aged. The education system is world-renowned and attracts a large number of international students. The UK is home to people from a number of countries. Ethnic English, Scottish, Welsh and Northern Irish comprise 92.1% of the total population, while those from the Indian subcontinent, China, the Caribbean and Africa are significant ethnic minority groups. The demographic characteristic that is a cause for concern is a rapidly aging population, which poses a number of social, economic and political challenges.

Evolution
Since World War II, the UK has developed into a multicultural, multi-ethnic and secular country with a large white majority and minority communities from all over the world. The standard of living is among the highest globally and the system of social welfare is one of the best in the world. In contrast with some other European countries, immigration is contributing to a rising population, accounting for about half of the population increase between 1991 and 2001. The Labour Party came into power in the UK shortly after World War II and focused on an approach that leaned left, in line with public opinion at the time. The years between the world wars saw the Conservative Party associated with widespread poverty and mass unemployment, so the Labour government focused on industrial development and the creation of a solid social infrastructure. The concept of the welfare state was introduced and several industries were nationalized. The establishment of the National Health Service (NHS) in 1948 is one of the party’s biggest achievements. The victory of Margaret Thatcher and the Conservative Party in the 1979 elections brought about a change of direction in the UK economy. The Thatcher government was more focused on involving the private sector and developing the economy as a whole rather than on the creation of a welfare state. More recently, the Labour government of the late 1990s and 2000s adopted the "third way", a combination of the previous approaches to governance.

Structure and policies
Demographic composition Composition by age and gender Approximately 17.30% of UK's population is below 15 years of age and around 17% is above 65 years of age, according to MarketLine. The UK is a relatively old country, with a median age of 40.3 years in 2013, according to CIA – The World Factbook. Life expectancy has been increasing slowly but steadily, and as of 2013, life expectancy at birth was at 80.29 years for the total population. Religious composition The largest religion in the UK is Christianity, accounting for 71.6% of the total population in 2001. Historically, the Church of England and the Church of Scotland had significant roles to play in British society. The UK has evolved as a secular

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Social Landscape society that embraces people of various faiths. Due to the large number of residents with ethnic roots in the Indian subcontinent, in 2001, Muslims, Hindus, and followers of other religions accounted for 2.7%, 1.0%, and 1.6% of the total population respectively. Furthermore, 23.1% do not follow a religion or are unspecific of their affiliation.

Figure 24: Major religions in the UK, 2001
Unspecified or none 23.1%

Others 1.6% Hindu 1.0%

Christian 71.6%

Muslim 2.7%
Source: CIA – The World Factbook MARKETLINE

Education System of education Schooling is compulsory for all children aged between five and 16, and most children attend government-funded schools. The UK is famous for its educational institutions, especially its higher education institutions, which attract students from all over the world. While the systems in place in England, Wales, and Northern Ireland are broadly similar, Scotland has a different educational system. The Education Reform Act of 1988 introduced the National Curriculum for state primary and secondary schools in England, Wales, and Northern Ireland. Independent schools, which do not depend on the government for funding, can decide on their own curriculum. In general, the National Curriculum attempts to focus on a greater depth of knowledge across a narrower range of disciplines, while the Scottish curriculum attempts to focus on a broader range of disciplines. The National Curriculum covers core subjects, foundation subjects, and basic curriculum subjects. Core subjects include science, mathematics, and English; foundation subjects include history, geography, art and design, music, technology, ICT, and modern foreign languages; and the basic curriculum includes citizenship, religion, and physical education. Primary and secondary education Parents may choose to enroll their children in pre-school activities such as playgroups or nursery school before sending them to primary school. Children usually begin attending primary school between the ages of four and six. Parents can

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Social Landscape send their children to a local school, which must accommodate them without imposing any special conditions. The first year of secondary education usually starts between the ages of 11 and 13. Students who go on to pursue higher education are usually between the ages of 17 and 19. Tertiary education The majority of students who wish to pursue higher studies use the Universities and Colleges Admissions Service, although for certain courses different admission services may be required. While the UK’s universities are not owned by the state, most are financed by the government. Healthcare The NHS was established in 1948 as the single authority for public health in the UK. Since the devolution of power, the constituent countries of England, Scotland, Wales and Northern Ireland each have their own services that are mainly funded through public taxation. While independent healthcare organizations do exist, the health services of the constituent countries provide the majority of healthcare services. The Health and Social Care Act of 2012 was passed to curtail burgeoning costs against the backdrop of the UK’s aging population. While the government argues that the reforms will reduce costs by 45% while expanding treatment options, it remains to be seen if it can bring significant changes to the strained NHS.

Performance
Healthcare The UK's healthcare expenditure was $224.10 billion or 9.08% of GDP in 2011, according to MarketLine, reflecting the dependence of the population on public healthcare services. Physicians per 1000 population (head count) was 2.8 in 2011, which was lesser than the OECD average of 3.1. Nevertheless, nurses per 1000 population (head count) was 9.1 in 2011, which was above OECD average of 8.6.

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Social Landscape

Figure 25: Healthcare expenditure, 2005–11

300.00

10.00

250.00

9.50

200.00

9.00

Percentage (%)

$ billion

150.00

8.50

100.00

8.00

50.00

7.50

0.00

7.00

2005

2006

2007

2008 Year

2009

2010

2011

Expenditure on Healthcare, Total(Absolute)
Source: Country Statistics, MarketLine

Total healthcare Expenditure as % of GDP
MARKETLINE

Education The UK’s literacy rate is 99%. In 2011, the state allocated 5.37% of GDP to education, and spent around $178.01 billion. Among the OECD nations, the UK has the highest number of people with a tertiary education, while the population with an upper-secondary education was just above the average as of 2010.

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Social Landscape

Figure 26: Education expenditure, 2005–11

250.00

5.90
5.80

200.00

5.70 5.60
Percentage (%)

150.00

5.50 5.40

$ billion

5.30 100.00 5.20 5.10
50.00

5.00 4.90

0.00

4.80

2005

2006

2007

2008 Year

2009

2010

2011

Expenditure on Education, Total(Absolute)
Source: Country Statistics, MarketLine

Public Education Expenditure as % of GDP
MARKETLINE

Outlook
The government faces a number of challenges when it comes to maintaining the level of public services on offer. Given the fact that the budget deficit is a clear point of concern for the authorities, they will face the challenge of maintaining current levels of expenditure on social welfare projects. In recent times, government expenditure and revenues have both increased dramatically, but expenditure has outpaced revenues to quite an extent. The government has publicly declared its goal of eliminating child poverty by 2020, and despite progress in the past, a recent forecast shows a likely increase in child poverty by the end of this decade. Another challenge facing the government is that of income inequality.

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Technological Landscape

TECHNOLOGICAL LANDSCAPE
Summary
The UK is at the forefront of research and development (R&D) and innovation. The government has helped to establish an environment conducive to the development of new technology in all sectors of industry. Expenditure on R&D and other measures to encourage R&D within the private sector have borne fruit, and the UK has emerged as a key exporter of technology. The Department for Innovation, Universities and Skills (DIUS) is the government department that oversees the progress of the UK in this regard. The DIUS envisions its role as involving the creation and maintenance of a ―worldclass research base‖ and utilizing this research base to ―support innovation across all sectors of the economy.‖ A few industries stand out in terms of innovation. Pharmaceutical, defense, e-commerce, and telecommunications firms are competitive with their counterparts across the globe. In the face of increasing global competition, innovation will help developed countries contend with emerging economic powers.

Evolution
The Royal Society, which is the national academy of science in the UK and the Commonwealth, is the most prestigious source of innovation in the UK. The Royal Society was set up in 1660, and in since 1850, has been the beneficiary of government support. In subsequent years, many research centers were established in various scientific streams. Some of the main R&D centers include the Biotechnology and Biological Sciences Research Council, the Council for the Central Laboratory of the Research Councils, the Medical Research Council, the National Environmental Council, and the Particle Physics and Astronomy Research Council. There are also many private R&D centers in UK.

Structure and policies
Intellectual property The UK Intellectual Property Office (UK-IPO), an executive agency of the DIUS, is the official body responsible for granting intellectual property rights in the UK, including trademarks, designs, patents, and copyright. Direct administrative responsibility for the examination and issuing of patents lies with the UK-IPO.

Table 9:
Year 2009 2010 2011 2012

Comparative performance on receipt of patents, 2009–12
UK 3173 4299 4294 5213 France 3140 4450 4532 5386 Germany 9000 12363 11919 13835 Japan 35501 44813 46139 50677
MARKETLINE

Source: US Patent and Trademark Office

Performance
Opportunity sectors Telecommunication services According to MarketLine, mobile penetration stood at 130.57 per 100 people in 2012 with total subscribers at 82.21

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Technological Landscape million. Mobile subscribers grew by an average of 10.88% during 2000–12. Internet users as of 2011 stood at 54.47 million, with a penetration rate of 87% in the same year. Internet subscribers grew at an average rate of 4.76% during 2005–11.

Figure 27: Internet users, 2007–11
56.00 54.00 88.00 86.00 84.00

Percentage of population (%)

Number of users (million)

52.00 82.00

50.00
48.00 46.00 44.00

80.00 78.00 76.00 74.00 72.00

42.00 40.00

70.00 68.00

2007

2008

2009
Year
Number of users

2010

2011

Percentage of population
MARKETLINE

Source: Country Statistics, MarketLine

Software market According to MarketLine, the UK software market had total revenues of $15.9 billion in 2011, representing a compound annual growth rate (CAGR) of 2.2% between 2007 and 2011. In comparison, the French and German markets grew with CAGRs of 2.7% and 3.7% respectively, over the same period, to reach respective values of $14.3 billion and $22.5 billion in 2011.The network and database management segment was the market's most lucrative in 2011, with total revenues of $3.9 billion, equivalent to 24.7% of the market's overall value. The general business productivity and home use applications segment contributed revenues of $3.7 billion in 2011, equating to 23.2% of the market's aggregate value. The performance of the market is forecast to accelerate, with an anticipated CAGR of 5.8% for the five-year period 2011–16, which is expected to drive the market to a value of $21.1 billion by the end of 2016. Comparatively, the French and German markets will grow with CAGRs of 5.1% and 5% respectively, over the same period, to reach respective values of $18.4 billion and $28.7 billion in 2016.

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Technological Landscape
Aerospace and defense market in the UK According to MarketLine, the UK aerospace & defense market had total revenue of $33.2 billion in 2011, representing a compound annual growth rate (CAGR) of 2% between 2007 and 2011. In comparison, the French and German markets grew with CAGRs of 0.8% and 3.7% respectively, over the same period, to reach respective values of $44 billion and $37.4 billion in 2011.The defense segment was the market's most lucrative in 2011, with total revenue of $18.2 billion, equivalent to 54.7% of the market's overall value. The civil aerospace segment contributed revenue of $15 billion in 2011, equating to 45.3% of the market's aggregate value. The performance of the market is forecast to accelerate, with an anticipated CAGR of 5.4% for the five-year period 2011–16, which is expected to drive the market to a value of $43.2 billion by the end of 2016. Comparatively, the French and German markets will grow with CAGRs of 1.3% and 2.6% respectively, over the same period, to reach respective values of $46.9 billion and $42.5 billion in 2016.

Outlook
The UK has the world's largest aerospace industry outside the US. Apart from being a key supplier of aerospace requirements, the country also excels in the fundamental areas of research. Furthermore, the country also develops advanced technology for nanomaterial and the usage of wave and tidal energy. As the UK is at the forefront of new technology, there is a good possibility of it developing relatively nascent fields such as nanotechnology, space research and tourism, and alternative energy. According to the Innovation Union Scoreboard 2013, the UK ranked fourth in terms of quality of human resources, third for research systems, first for linkages and entrepreneurship, and fourth for finance and support. The UK has all the required makings to be at the frontier of innovation.

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Legal Landscape

LEGAL LANDSCAPE
Summary
The judicial system in the UK is considered to be among the most fair and transparent in the world. Scotland and Northern Ireland each use a different legal system to that employed in England and Wales, but both are based on the same fundamentals. There are a number of laws governing business in the UK. These laws are largely conducive to the business environment. The most important laws relate to the incorporation of business, taxation, monopolies, and restrictive trade practices, intellectual property rights (IPR), and labor laws.

Evolution
There are three different legal jurisdictions in the UK, which each have their own legal system; these are based on English law, Northern Irish law, and Scots law. English law uses a common law system, while the law of Northern Ireland is based on the common law system and is partly influenced by English law. Scots law is influenced both by the ancient Roman law and by civil law, and as a result, it is called a mixed legal system. Laws pertaining to the commercial and business sector are common for the whole region. Although the labor law was formed in 1823, all laws were amended after the formation of the European Union (EU). Similarly, all laws relating to company law, commercial law, competition law, and IPR have been amended.

Structure and policies
Structure of the judicial system The UK does not have a single criminal or penal code, and there is an emphasis on the separation of the judiciary and the prosecuting authorities. England and Wales, Scotland, and Northern Ireland have separate legal systems. Common law principles apply for English and Northern Irish law, while civil law principles along with some elements of common law form the bedrock of Scots law. For England, Wales, civil cases in Scotland, and Northern Ireland, the Supreme Court is the highest court. Furthermore, for criminal cases in Scotland, the highest court is the High Court of Justiciary. In the past, the structure of the judicial system has been criticized for being archaic, besides lack of transparency. In response to this criticism, the Constitutional Reform Act 2005 was passed, laying the foundation for the establishment of the Supreme Court of the UK, which started functioning in 2009 and took over the House of Lords' jurisdiction as the highest court in the land. The Supreme Court hears all appeals from England, Northern Ireland, and Wales, and civil appeals from Scotland. Tax regulations Corporate income tax From April 2013, the corporate tax rate is 23%. The small profits tax rate is 20% for profit between £0 and £300,000 ($460,209). Profit between £300,000 ($460,209) and £1.5m ($2.30m) is taxed between the main corporate income tax rate and the small profits rate on a sliding scale basis. Individual income tax Income tax rates are progressive, with a maximum of 45% beyond £150,000 ($230,105) from financial year 2013–14.

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Legal Landscape
Capital gains tax A capital gains tax is imposed at a rate of 18–28% for individuals, trustees, and personal representatives on taxable gains. Indirect tax The standard VAT rate is 20.0%. A reduced rate of 5% is applicable to certain items. Zero-rated exemptions are also applicable to some specific items.

Performance
Effectiveness of the legal system In the 2013 Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal, the UK ranked the 14th freest economy in the list and fifth out of the 43 countries in the European region. The UK’s index score of 74.8 was higher than the European average of 66.6. This score indicates a business-friendly environment. The UK ranked highly in terms of business freedom, trade freedom, monetary freedom, property rights, financial freedom, and freedom from corruption, but did not score as highly in terms of fiscal freedom.

Outlook
The government is focused on creating the best business environment in the G20. Through reforms and deregulation, the UK government wants to encourage more investment in the country, and the latest incentive is a further cut in corporate tax, which will be reduced to 20% by 2015. The patent box regime, an incentive scheme that would encourage businesses to retain and commercialize existing patents and to develop patented products, is effective from 2013. Moreover, the patent box would incentivize the creation of high value jobs and activity linked with the development, manufacture and exploitation of patents in the UK. Moreover, the government has reduced the top income tax rate to 45% to make the UK’s tax regime competitive with other G20 nations. However, the UK government needs to continue with deregulatory reforms in order to attract investment.

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Environmental Landscape

ENVIRONMENTAL LANDSCAPE
Summary
In the UK, the Department for Environment, Food and Rural Affairs (DEFRA) holds the responsibility for drafting and implementing environmental protection and sustainable development policies. DEFRA identifies its priority as ―the need to tackle climate change internationally and through domestic action to reduce greenhouse gas emissions, and to secure a healthy, resilient, productive, and diverse natural environment.‖ Environmental policy in the UK now aims to tackle air, water, noise, and land and soil pollution as separate problems.

Evolution
The first initiative geared toward the environment in the UK was the establishment of the Control of Pollution Act 1974, followed by the Environmental Protection Act 1990 (EPA), the Water Resources Act 1991, and the Land Drainage Act 1991. Environmental conservation activities in the UK were increased with the establishment of the Environmental Act 1995. This act brought the following institutions under its control: the National Rivers Authorities, Her Majesty's Inspectorate of Pollution, the waste regulation authorities in England and Wales, and the London Waste Regulation Authority.

Structure and policies
Environmental regulations DEFRA is the government department responsible for environmental concerns in the UK. DEFRA’s aim is to ―enable everyone to live within our environmental means.‖ Traditionally, environmental policy in the UK has been based on the "command and control" principle, whereby possible polluters are given certain quotas or standards and the authorities carefully monitor these and deal strictly with any infringements. The concept of integrated pollution control prescribed in the EPA looks at dealing with pollutants in such a way that their harmful effects on the environment as a whole are reduced.

Performance
Environmental impact The UK has made significant improvements in reducing the impact of economic growth on the environment. It achieved strong progress in controlling major air pollutants and agrochemicals. This progress reflects both the reshaping of the economy and the strengthening of the UK’s environmental policies in the EU context. The 2009 Renewable Energy Directive sets a target for the UK to achieve 15% of its energy consumption from renewable sources by 2020 compared to 3% in 2009, and the amount of biofuel in the transport fuel mix is to be a minimum of 5% by 2014 from the present 3%. In its attempts to meet its target, CO2 emissions in the UK came down from 572.58 million metric tonnes in 2003 to around 532.44 million metric tonnes in 2010.

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Environmental Landscape

Figure 28: Carbon dioxide emissions (million metric tons) and growth (%), 2003–10
600.00 4.00

580.00

2.00

0.00

Million metric tons

560.00

Growth (%)

-2.00

540.00
-4.00 520.00 -6.00 500.00

-8.00

480.00 2003 2004 2005 2006 Year
Volume
Source: Country Statistics, MarketLine

-10.00 2007 2008 2009 2010

Growth rate
MARKETLINE

The renewable energy market in the UK According to MarketLine, the UK renewable energy market had total revenues of $6.7 billion in 2011, representing a compound annual growth rate (CAGR) of 12.4% between 2007 and 2011. In comparison, the French and German markets grew with CAGRs of 3.4% and 3.3% respectively, over the same period, to reach respective values of $11.7 billion and $23.5 billion in 2011. Consumption increased with a CAGR of 9.1% during 2007–11, to reach 29.2 billion kWh in 2011. The market's volume is expected to rise to 43 billion kWh by the end of 2016, representing a CAGR of 8% from 2011. Market performance is forecast to decelerate, with an anticipated CAGR of 8.6% for the five-year period 2011–16, which is expected to drive the market to a value of $10.1 billion by the end of 2016. Comparatively, the French and German markets will grow with CAGRs of 6.9% and 6.7% over the same period, to reach respective values of $16.4 billion and $32.5 billion in 2016. Wind energy market According to MarketLine, the UK wind energy industry had total revenue of $2.1 billion in 2011, representing a compound annual growth rate (CAGR) of 26.2% between 2007 and 2011. In comparison, the French industry expanded with a CAGR of 34.6%, and the German industry contracted with a compound annual rate of change (CARC) of -0.4%, over the same period, to reach respective values of $1.4 billion and $6.5 billion in 2011. Industry production volumes increased

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Environmental Landscape with a CAGR of 24.8% during 2007-2011, to reach 12.8 billion MWh in 2011. The industry's volume is expected to rise to 21.2 billion MWh by the end of 2016, representing a CAGR of 10.7% for the 2011–16 period. The performance of the industry is forecast to decelerate, with an anticipated CAGR of 16.2% for the five-year period 2011–16, which is expected to drive the industry to a value of $4.3 billion by the end of 2016. Comparatively, the French and German industries will grow with CAGRs of 12.2% and 4.7% respectively, to reach respective values of $2.4 billion and $8.2 billion in 2016. Biofuel Market According to MarketLine, The UK biofuel consumption market had total revenue of $4,669.9m in 2011, representing a compound annual growth rate (CAGR) of 51.5% between 2007 and 2011. In comparison, the French and German markets grew with CAGRs of 17.1% and 1.7% respectively, over the same period, to reach respective values of $5,599.9m and $8,373.6m in 2011. Market consumption volumes increased with a CAGR of 41.9% during 2007–2011, to reach 12.7m barrels in 2011. The market's volume is expected to rise to 22.9 million barrels by the end of 2016, representing a CAGR of 12.4% for the 2011–16 period. Biodiesel sales had the highest volume in the UK biofuel consumption market in 2011, with total sales of 8.7 million barrels, equivalent to 68.3% of the market's overall volume. In comparison, sales of bioethanol had a volume of 4 million barrels in 2011, equating to 31.7% of the market total. The performance of the market is forecast to decelerate, with an anticipated CAGR of 15.5% for the five-year period 2011–16, which is expected to drive the market to a value of $9,608.7m by the end of 2016. Comparatively, the French and German markets will grow with CAGRs of 17.9% and 8.6% respectively, over the same period, to reach respective values of $12,757.9m and $12,674.3m in 2016.

Outlook
The UK government started a green initiative of budgetary support to increase environmental awareness in the country in 2008. The government’s main objectives were to equip the country for the challenges of the future, and confront climate change in the medium term. The UK adopted the Climate Change Act 2008, which made it the first country in the world to have a legally binding long-term framework to cut carbon emissions. Under the act, the UK government has to report annually to lawmakers on its progress in meeting its carbon targets. The government has set an overall target of an 80% reduction in emission of pollutants from 1990 levels by 2050. The future energy policies of the government will focus on both reducing energy bills and carbon emissions. The best way forward for the government to implement a greener and cheaper climate policy would be to help lower the cost of renewable energy by creating and supporting infrastructure for growth in that market.

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Appendix

APPENDIX
Ask the analyst
MarketLine’s Country Analysis Practice consists of a team of economists, analysts, and researchers, all with expertise in their given fields. For any questions or comments about this report, you can contact the author directly at reachus@marketline.com

Disclaimer
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, MarketLine. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that MarketLine delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such, MarketLine can accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect.

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Appendix

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