Many investors trade currency pairs involving the British pound, so having some quick indicators with which to evaluate the U.K. economy can be quite helpful. The nation had the world's fifth-largest economy in 2014, as ranked by the World Bank.
The country, which is part of the 28-nation European Union but is separate from the 19-nation eurozone, ranks near the top in terms of economic freedom. The U.K. is ranked as the fifth-most-liberal nation out of 43 European countries, benefiting from attributes including a highly advanced financial industry and largely unfettered trade. The rest of this article explores several key economic indicators for the nation.
UK Economy Information Sources
Here's where we gathered the information on the U.K. economy to put together this article.
Office for National Statistics
The Office for National Statistics ("ONS"), the largest independent producer of official statistics in the country, provides many of the top economic indicators covered in this article. The ONS, which performs the census in England and Wales every 10 years, collects and publishes statistics important to the economy, as well as overall society, at a local, regional and national scale.
The World Bank is another place traders can go if they are interested in gathering information on the U.K. By bringing up the website of this international financial institution, investors can look up data based on an indicator, country or topic.
1. Gross Domestic Product ("GDP")
Many consider GDP the traditional yardstick used to measure the economy, so it is a perfectly reasonable place to start when assessing the strength of business conditions in the U.K. Every quarter, the ONS releases three reports on GDP, a preliminary estimate and two revisions. Every report supplies an estimate on how much the nation's GDP has increased from the prior quarter. It also reveals how much each of the four groupings—production, services, agriculture and construction—either rose or dwindled.
When using GDP as a means of evaluating the strength of an economy, investors might benefit from keeping a few of its limitations in mind. For starters, while GDP is the benchmark measure of economic might, its use has drawn substantial criticism. Academics, economists and even world leaders have spoken out against GDP, asserting that it is a less-than-ideal means of gauging the economic prosperity of nations.
GDP Per Capita
While GDP can provide market observers with a rough sense of how strong an economy is, GDP per capita can grant some insight into the standard of living the people there enjoy. In addition, this particular economic indicator can help traders understand how much money residents have to spend. To calculate GDP per capita, simply take a nation's GDP and divide it by the country's population.
2. Labor Market Statistics
Every month, the ONS releases a Labour Market Statistics report. Each of these reports contains figures such as the employment rate, the unemployment rate and the net gain or loss experienced by both the number of employed and unemployed persons. In addition, the LMS report contains other relevant information such as average weekly earnings with and without bonuses.
3. Inflation Measures
The ONS releases reports containing data on the Consumer Prices Index ("CPI") and the Producer Price Index ("PPI"). The government office emphasizes that the CPI, which was originally published as the Harmonised Index of Consumer Prices in 1997, adheres to European regulations and international standards. To create the CPI, the ONS measures the price change in a basket of fixed goods and services purchased by consumers. Alternatively, the PPI represents the prices UK manufacturers pay for materials and fuels.
4. Household Expenditure
Investors who want to learn more about UK consumption patterns can look into the Household Final Consumption Expenditure, which is contained in the quarterly Consumer Trends reports produced by the ONS. These reports detail household spending measured in volume terms and current prices, which are adjusted for inflation.
In the third quarter of 2015, household spending rose £2.5 billion, or 0.9%, from the prior period. This report noted that household spending had risen every three-month period since Q4 2011 when measured on a year-over-year basis.
5. Retail Sales
Every month, the ONS issues a report on retail sales in the U.K. These documents contain a first estimate of these transactions, measured both in terms of their value and volume, and adjusted seasonally and non-seasonally. These reports also depict how retail sales activity either increased or declined compared to the last month or prior year, respectively. Economists harness these reports to estimate consumer spending and gauge the output of the retail sector.
6. Consumer Confidence
Investors interested in measuring the confidence of consumers in the U.K. can look to market research firm GfK, which generates a Consumer Confidence Index on a monthly basis. The firm conducts the UK Consumer Confidence Barometer on behalf of the European Union. In doing so, the market research firm performs similar surveys in each European country.
In conducting the latest survey, GfK spoke with roughly 2,000 individuals at least 16 years of age and asked them several questions. These include how they feel the general economic situation has changed in the last 12 months; how they believe their household's financial status will change during that time; and how good a time it is to save.
In the report showing the Consumer Confidence Index for December 2015, it was revealed that the measure rose one point to +2 during the month. This report, which contained information on all of 2015, revealed that the index had an average of +3 during the year and managed to stay positive for each of those 12 months. It was the first time the index was positive all year since 1974.
7. Balance of Trade
The ONS releases the monthly UK Trade, which indicates whether the nation experienced a trade surplus or trade deficit. The report also delves into the matters surrounding any chance in the nation's balance of trade. For example, the country's trade deficit reached an estimated £4.1 billion in October 2015, up from £3.1 billion the month before. This increase was attributed to the value of imports increasing £2.3 billion between September 2015 and October 2015.
The U.K. Balance of Trade, which fell as low as -£5.4 billion in December 2014 and reached as high as £3 billion in March 1981, has averaged -£1.4 billion between 1995 and 2015.
8. Balance of Payments
The ONS releases a quarterly report on the Balance of Payments, which summarises how much money is flowing into the U.K. versus how much is flowing out of the nation. Some investors turn to this information to get a better sense of how the country's currency will fare relative to others.
The ONS reports include the nation's current account deficit, current account balance and the financial account. The reports also contain information on the nation's income, trade in goods and services, transactions involving the country's external assets and liabilities, as well as current and capital transfers.
9. Benchmark Interest Rate
The U.K. is not part of the eurozone, so the Bank of England is responsible for setting its interest rate. The body that dictates this specific rate is the BOE's Monetary Policy Committee. Traders may look to the nation's benchmark interest rate. This rate can have an impact on broader interest rates in the nation and therefore the value of the British pound relative to other currencies.
Between 1971 and 2015, the benchmark interest rate in the U.K. dropped to as little as 0.50% in March 2009 and increased to as much as 17% in November 1979. During this more than 40-year time frame, the benchmark rate averaged 7.89%.
10. Halifax House Price Index
The Halifax House Price Index is the longest-running housing price series in the U.K. and is based off data going back to 1983. The housing price information, culled from regions across the country, is used to calculate a "standardised" house price.
Housing prices in this index, which derives its name from a major mortgage lender, compare values on a quarterly basis in order to smooth out short-term price fluctuations.
11. Public Sector Finances
Traders can also look to fiscal information released by the ONS to get a better sense of the financial health of the U.K. Every month, the nation releases data on its budget, net debt, net borrowing and net cash requirements, as well as how these measures compare to prior time periods.
Investors can use the sources of information and top economic indicators listed above as part of conducting due diligence on business conditions in the U.K. With this data, they will be better-prepared to consider trades involving the British pound.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.
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Retrieved 29 Dec 2015 https://tradingeconomics.com/united-kingdom/interest-rate