On Aug. 29, market research institute GfK, which tracks consumer confidence in the United Kingdom, noted that confidence in the country has risen to its highest level since October 2009. (According to a scale devised by GfK, confidence rose from -16 in July to -13 in August.) On Aug. 30, the British Chambers of Commerce announced that it had revised its gross domestic product growth expectations for 2013 from 0.9 percent to 1.3 percent. The chamber cited stronger performances in the British service sector and in household consumption as the proximate causes for the revision. Meanwhile, the European Union released a more cautious look at the future of the British economy, forecasting 0.6 percent growth for 2013 in its spring economic report.
Since officially climbing out of recession in the third quarter of 2012, the United Kingdom has seen further economic improvement. The economy grew by 0.3 percent in the first quarter of 2013 and by 0.7 percent in the second. The British statistical office reported that the unemployment rate between April and June 2013 was 7.8 percent — 0.2 percentage points lower than the same period in 2012.
Facilitating a Recovery
Several factors have helped the United Kingdom's modest economic recovery. Even though the country still has a trade deficit (2.3 percent of gross domestic product as of 2012), it has started to export more goods, especially outside the European Union. This has been aided by the relative weakness of the pound since late 2012.
According to the statistical office, the United Kingdom exported 78.4 billion pounds (roughly $121 billion) worth of goods in the second quarter — its highest level ever recorded. Taken together with services, this figure would amount to 127 billion pounds, roughly 4 percent higher than the same quarter in 2012. Exports outside the European Union exceeded 40 billion pounds and grew by 7.5 percent from the first to the second quarter, while exports to the bloc rose by only 2.3 percent.
The economic recovery of the United States will play an increasingly important role in that of the United Kingdom. The United States is the island nation's largest export market, accounting for 14 percent of all British exports, and its largest foreign investor. An economically healthy United States could help compensate for the decline in demand in Europe. Because of its already strong economic ties to Washington, London adamantly supports a possible EU-U.S. free trade agreement.
The fact that the United Kingdom is not a member of the eurozone has also helped facilitate the country's economic recovery. Unlike struggling eurozone members, the United Kingdom has been able to implement economic and monetary policies relatively quickly — without outside interference — to sustain domestic demand. And unlike the eurozone finance ministries and the European Central Bank, the British Treasury and the Bank of England have collaborated to implement stimulus programs. In April 2013, for example, London launched the "Help to Buy" program, which subsidizes household mortgages.
To ensure that its lax monetary policy, which the Bank of England has promised to maintain for an extended period, goes beyond the banking sector, the Bank of England and the Treasury have also implemented policies that encourage banks to lend more money to house buyers and to small and medium-sized companies through the Funding and Lending Scheme, which was launched in mid-2012. These programs came in addition to the country's quantitative easing program, through which the Bank of England has purchased assets worth 375 billion pounds since 2009 in order to inject money directly into the economy.
The European Central Bank is also considering measures to more directly help areas outside the banking sector, but it is constrained in targeting a specific country or region and by the conflicting interests of the 17 eurozone members. While the United Kingdom's small and medium-sized enterprises still face tight credit conditions — as do those elsewhere in Europe — Bank of England and government policies have improved access to credit somewhat. On Aug. 30, the Bank of England released data showing that mortgage approvals in July reached their highest level since March 2008. Mortgage lending and consumer credit both increased by more than 600 million pounds in July compared to a month earlier.
However, such policies are not without risk. Housing prices in the United Kingdom have been rising since mid-2011, particularly in the London area. According to the British Office for National Statistics, home prices increased by 3.1 percent from June 2012 to June 2013. Prices are now at similar levels to those in mid-2008 but remain slightly below their peak in January 2008. In 2007-2008, there was double-digit growth in home prices annually. The increases have led to fears of a real estate bubble, but since prices are rising relatively slowly, such a bubble is unlikely to occur anytime soon.
Ties to the Eurozone Crisis
But despite the strong U.S. ties and independent monetary policy, the British economy is still affected by the eurozone crisis and the cohesion of the European Union. London estimates that some 3.5 million British jobs are directly or indirectly tied to exports to the European Union. Around half of the investment in the United Kingdom comes from other EU countries. Over the past decade, British exports to the European Union fell by 10 percentage points but are still slightly higher than 50 percent. And while exports are up outside the European Union, such increases probably will not offset the persistent low demand in Continental Europe.
Of course, the United Kingdom's economic recovery will matter to British voters. Highlighting strong European economic ties to voters has become more important as the negotiations over the British relationship with the European Union evolve. Euroskeptical voices will call louder for complete institutional detachment.
London has no strategic interest in leaving the bloc entirely. It profits greatly from access to the common European market, and its membership is important to hinder the formation of a united Continental bloc that could pose a threat to the island nation. London's policies will strain the bloc's institutional framework in the coming year, and as they do, the government's main challenges will be to ensure that its demands for a return of power from Brussels do not isolate it from Europe economically.
