1. UK ECONOMY
SITUATION & PROSPECTS
Peter Matheson
Economic Counsellor
British Embassy, Washington D.C.
January 2012
1

2. The UK recovery faces significant headwinds
Quarterly GDP Growth
Percentage change on previous quarter
1.5
2011 Q3 OBR forecast
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: ONS and OBR forecast
 The UK has experienced sluggish growth over the past year.
 Externally generated shocks have largely been to blame. Commodity prices in particular
have pushed up inflation, squeezed household income and held back consumption.
 The UK grew by less than 1 per cent in 2011 but the OBR expect little extra growth
until mid-2012.
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 The biggest risk facing the UK economy is a crisis in the eurozone. Assuming this

3. Growth is predicted to pickup after 2012
Annual GDP Growth Forecast
Source: OBR, Nov 2011 2011 2012 2013 2014 2015 2016
Annual GDP growth % 0.9 0.7 2.1 2.7 3.0 3.0
 The OBR expect the economy to gain momentum through next year.
 Growth is expected to rise above its trend rate (2.3%) by 2014. 3

4. Trade and investment will drive the recovery
Contributions to GDP Growth
Contributions to annual GDP growth (percent)
3.5
OBR Forecast
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2011 2012 2013 2014 2015 2016
Other Net Trade Investment GDP
Source: OBR, Nov 2011
 The OBR expect the recovery to be driven by investment (red bars) and net
trade (blue bars).
 HMG’s prosperity goals to boost trade and investment are therefore key. 4

5. By 2014 UK growth will be 2nd highest in the G7
Average annual GDP Growth forecasts
2011-13 2014-16 Average annual GDP growth (percent)
3.5
3
2.5
2
1.5
1
0.5
0
Italy Japan France UK Germany US Canada
Source: IMF World Economic Outlook, September 2011
 The IMF expects the UK to grow by 1.7% on average between 2011 and 2013 – in the
middle of the pack of the G7 economies.
 From 2014 the UK is expected to be the second fastest growing economy in the G7,
growing by 2.7% per year between 2014 and 2016. 5

6. Unemployment is lower in the UK than most
advanced economies
Unemployment Rate (per cent)
12
Historical Data IMF Forecasts
Eurozone
10
France
UK
8
US
Germany
6
Japan
4
2
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: IMF World Economic Outlook Database, September 2011
 The UK’s unemployment rate is lower than many advanced economies and is
expected to stay so based on the IMF’s forecasts.
 The current UK unemployment rate is 8.3%, compared with 8.6% in the US and 6

7. A competitive pound offers opportunities for UK
exporters
Sterling exchange rate index Dollar & euro exchange rates to pound
Sterling effective exchange rate index, 2007 = 100 Exchange rate to the pound
105 2.2
100
2
dollars per pound
95
1.8
90
1.6
85
1.4
80
euros per pound
1.2
75
70 1
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Source: Bank of England Source: Bank of England
 Sterling has depreciated by more than 20% since 2007 against a broad basket of
currencies (left hand chart), including against the dollar and euro (right hand chart).
 A weaker pound makes UK exports cheaper abroad, making UK businesses more 7

8. Geographical split of UK exports
Distribution of UK Exports
Africa
Australasia
3.9% Top 20 largest export markets for the UK
2.2%
Other Asia Share of UK 2010 value in
Export Market
12.3% Exports (%) £ billion
1 USA 16.5 72.21
Japan
2 Germany 8.9 38.71
2.0% 3 Netherlands 7.2 31.32
4 France 6.4 28.14
China Eurozone
2.3% 5 Ireland 5.8 25.32
42.2%
6 Belgium 3.7 16.27
Rest of
Americas 7 Spain 3.5 15.08
4.5% 8 Switzerland 3.2 14.20
9 Italy 3.2 14.00
10 China 2.3 10.26
11 Japan 2.0 8.65
12 Sweden 1.9 8.47
United States 13 Australia 1.9 8.39
16.5% 14 Singapore 1.6 7.11
15 Canada 1.6 7.03
Rest of Rest of EU 16 India 1.4 6.13
EFTA
Europe 5.9% 17 Hong Kong 1.4 6.06
4.6%
3.4% 18 Denmark 1.3 5.67
19 Norway 1.3 5.50
Good and Services Exports in 2010 20 Saudi Arabia 1.2 5.41
Source: ONS Pink Book 2011
 The UK exports all over the world.
 65% of UK exports are sold in the European Union and United States.
 Looking ahead, the rapidly expanding emerging markets of Asia, Africa and Latin America
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9. UK exports are diverse, with a mix of
goods and services Goods Exports, 2010
Food, Semi-
UK export split between goods and services beverages
& tobacco
Other
Goods
Manufact
ured
4%
6% Goods
£ billion value of UK exports (current prices)
11%
500
Total Exports 450 Chemicals
Finished 19%
400
manufact
350 ured
goods
Services Exports 300 32%
250 Oil and
other
200 Other Energy
Motor
consumer 13%
Cars
150 goods
7%
8%
Goods Exports 100
50 Services Exports, 2010
Transport
0 services Other
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 12% services
21%
Source: ONS Travel
services
12%
 The UK is a top ten global manufacturer, and
goods comprise over 60% of our exports.
Other
Financial business
 Within services exports, financial services are a services
25%
services
30%
huge strength. But three quarters of UK service 9

10. Growth Strategy: The UK aims to create the
most competitive tax system in the G20
“The most competitive tax system in the G20 is
the first of our economic ambitions.”
“Our corporate tax rate (will come) right down
to 23%; 16% lower than America, 11% lower
than France and 7% lower than Germany – the
lowest corporation tax in the G7.”
Chancellor George Osborne
The most competitive tax system will include:
 The lowest corporate tax rate in the G7 and among the lowest in the G20.
The rate is currently 26 per cent and by 2014 it will reach 23 per cent
 Making the UK the best location for corporate headquarters in Europe.
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11. The UK faces an exceptional fiscal challenge…
Advanced economies fiscal balances in 2011
Fiscal balance as a share of GDP in 2011 (defined as Public Spending minus Public Revenue)
15
Surplus
10
5
0
-5
Deficit
-10
-15
Korea
Luxembourg
Greece
Austria
Ireland
Netherlands
Cyprus
Slovenia
Sweden
Israel
Malta
Belgium
Switzerland
Estonia
Hong Kong SAR
Singapore
Italy
Japan
Slovak Republic
United Kingdom
Australia
Denmark
Iceland
Canada
France
Finland
Germany
Spain
Czech Republic
Portugal
Norway
United States
New Zealand
Taiwan
Source: IMF World Economic Outlook, September 2011
 According to the IMF, the UK is running one of the largest fiscal deficits in the advanced
world, which is not sustainable. In 2011, the IMF estimates the UK had the third largest
fiscal deficit as a percentage of GDP in the G7.
 The fiscal deficit is the difference between public spending and Government revenue 11

12. Extra austerity measures announced in the Autumn
Statement have put public finances back on track
Government Deficit Target Government Debt Target
Cyclically adjusted current balance (per cent of GDP) Public sector net debt (per cent of GDP)
2 80
78
1
76
0 74
72
-1
70
-2
68
-3 66
64
-4
62
-5 60
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
March 2011 Forecast March 2011 Forecast
November 2011 Forecast excluding new austerity measures November 2011 Forecast excluding new austerity measures
November 2011 Forecast with new austerity measures November 2011 Forecast with new austerity measures
Source : OBR, Autumn 2011 Statement
 The sharp deterioration in public finances between March and November is clear by the
shift from the blue line to the red dotted line in charts above. Without additional austerity
measures, the government would have missed its debt and deficit targets.
 Consequently, the government announced additional savings of £8bn in 2015/16 and 12

13. The OBR predicts that the Government will
achieve its fiscal mandate
 In each Budget Report and statement on the economy, the OBR confirms whether or
not Government policy is consistent with a better than 50% chance of achieving the
fiscal mandate.
 After announcing additional austerity measures in the Autumn statement, the OBR’s
November 2011 report concludes that current policy is consistent with this aim.
Per cent of GDP
Outturn Forecast
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Cyclically-adjusted surplus on -5.5 -4.5 -4.6 -3.9 -2.7 -1.6 -0.6 0.5
current budget
Public sector net debt 52.9 60.5 67.5 73.3 76.6 78.0 77.7 75.8
Source: OBR, November 2011
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14. CONCLUSIONS
> 2012 will be a tough year for the UK economy;
> Growth expected to pick-up;
> The balance of growth will move more towards exports and investment;
> Our fiscal strategy is expected to pay dividends
> Our growth strategy will complement this.
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15. 15

16. The UK’s credible fiscal framework has kept
the cost of issuing public debt down
Cost of issuing government debt – 10-year yields
Yield on 10-year government bonds
8
Italy
7
6
5
UK 4
France
3
Germany
2
US
1
0
Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011 Oct-2011
Source : DataStream
 Although the UK faces considerable fiscal challenges, the government’s commitment to
hitting its fiscal targets has kept the cost of issuing government debt low.
 By contrast, yields on government debt in other countries, notably in the eurozone, have
risen substantially. This reflect investor fears of a eurozone crisis and its impact on the 16

17. Summary of Economic Indicators
Forecast by Office for Budget Responsibility (OBR), Nov 11
OBR forecasts (percentage change year on year, unless given)
2011 2012 2013 2014 2015
Real GDP growth 0.9* 0.7 2.1 2.7 3.0
CPI Inflation 4.5 2.7 2.1 2.0 2.0
ILO unemployment rate (%) 8.1 8.7 8.6 8.0 7.2
Current Account (%GDP) -2.3 -2.6 -1.8 -1.6 -1.4
2011-12 2012-13 2013-14 2014-15 2015-16
Public net borrowing (%GDP) 8.4 7.6 6.0 4.5 2.9
The next OBR forecasts will be released with the 2012 Spring Budget.
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