With a gross domestic product (GDP) of $2.8 trillion in 2018 and a population of more than 66 million, the United Kingdom has the fifth largest economy after the U.S., China, Japan and Germany. The U.K. is made up of England, Scotland, Wales, and Northern Ireland. Its quality of life is generally considered high, and the economy is quite diversified. The sectors that contribute most to the U.K.'s GDP are services, manufacturing, construction and tourism.
Sectors that Contribute to the Economy
According to the U.K. Office for National Statistics (ONS), the services sector is the largest sector in the U.K., accounting for more than three-quarters of the GDP. The service industry in the U.K. comprises many industries, including finance and business services, consumer-focused industries, such as retail, food and beverage, and entertainment. Manufacturing and production contribute less than 21% of the GDP, and agriculture contributes less than 0.60%.
After two flat years, the U.K. manufacturing sector grew 2.5%, and construction output grew 7.1% in 2017, according to The Blue Book: 2018 from the U.K. ONS. The food products division is the largest within the U.K. manufacturing sector, contributing to 18.3% of total U.K. manufacturing in 2017 – a 7% increase from 2016.
At the same time, growth in the service sector slowed, caused by weakness in consumer-focused industries, which declined from 4.5% in 2016 to 1.8% in 2017. The distribution, hotels and restaurants sector of consumer-focused industries grew at its weakest annual rate in 2017 since 2012 at only 2.1%. Business and finance services were the largest contributors to the growth of the services sector in 2017.
Tourism is another big money-maker for the U.K. In 2017, visitors who are residents of other countries spent £24.5 billion, or $31.76 on travel and tourism in the U.K., according to the ONS. However, visits in June 2018, peak season for tourism, fell by 9% on a yearly basis to 3.2 million. Overseas visitors spent £2.0 billion, 11% less than the previous year, according to ONS.
U.K. exports were worth £629.4 billion in 2018, or 29.8% of GDP. Cars were the biggest goods product group by value at £33.3 billion. Financial services accounted for 58.5 billion of total exports in 2018. The EU is the country's largest single trading partner and accounted for 44% of exports in 2017.
Effect of Brexit on the U.K. Economy
The U.K.'s June 2016 decision to leave the European Union (EU), otherwise known as "Brexit" (short for British exit), is having a negative impact on its economy. Research from the Centre for European Reform reveals that the vote to leave the EU cost the U.K.'s public finances £17 billion per annum, or £320 million a week, by September 2018.
"Britain’s decision to leave the EU damaged growth, largely thanks to higher inflation and lower business investment. The U.K. missed out on a broad-based upturn in growth among advanced economies in 2017 and early 2018. And the economic cost of the decision so far is sizeable, if not disastrous," said deputy director John Springford.
The U.K.'s Office for Budget Responsibility, an independent watchdog, suggests that this has to do with several areas that have been affected by the uncertainty related to the Brexit negotiations. They include declines in business investments, as well as the prospect of less access to foreign markets. This has spurred declines in the exchange rate that are raising inflation and reducing consumer income, and as a result, consumer income and spending are contributing less to economic growth.
In September 2018, the International Monetary Fund (IMF) projected economic growth for the U.K. of about 1.50% for 2018 and 2019, which is lower than the growth of about 1.75% that occurred in 2016 and 2017. The IMF noted that the driving factor for the slowdown is Brexit-related effects, which, as the Office for Budget Responsibility also noted, have depressed investment, income growth and consumption.