Marketing in the United Kingdom - Cover Story

Business America, August 27, 1990 by Robert McLaughlin

The resurgence of the British economy that began in 1981 is now entering its ninth year, the longest running growth period in British postwar history. The rate of real gross domestic product (GDP) growth achieved since 1981 has been one of the highest among countries of the Organization for Economic Cooperation and Development (OECD). The central themes of the government's economic policy have been to reduce the role of the state in the economy, to cut public spending, and to revive U.K. industry. Specific measures have included tax reform, abolition of capital controls, privatization of national industries, deregulation of financial services, and labor law reform. These steps have brought about significant structural changes in the economy in the past 10 years that will help make the United Kingdom more competitive in the integrated European Community of the future.

International trade is vital to the economy, and the United Kingdom maintains an open economy with few major trade barriers. In 1989, exports of goods and services totaled approximately 25 percent of GDP. Britain accounts for nearly 6 percent of the total of world exports of visible goods. Major items in U.K. export trade include aerospace products, electrical products, electrical equipment, machinery, and chemicals. Major imports include agricultural products, raw materials, and semimanufactured goods.

Our Largest European Market

In 1989, the country's major trading partners, in order of total two-way trade, were the Federal Republic of Germany, the United States, France, and the Netherlands. The United Kingdom remains solidly entrenched as the United States' largest European market. U.S. exports to the United Kingdom last year totaled almost $21 billion. Demand for U.S. goods is expected to grow as the United Kingdom's industrial sector continues to invest to prepare for a more competitive European Community following the completion of the single market.

The U.K. economy slowed considerably in 1989 in response to higher interest rates, the weapon chosen by the government to battle inflation. Real GDP growth declined to 2.3 percent, well below the 1988 figure of 4.5 percent. The interest rate policy initiated in mid-1988 brought base (prime) rates from 7.5 to 15 percent by the end of 1989. The higher rates cut the growth of consumption, retail sales, and investment in housing, but also caused increases in retail prices.

Investment, excluding housing, rose an impressive 5.3 percent in 1989, reflecting business response to structural reforms carried out by the government, preparations for the European Community's Single Market initiative, and the recovery in local and global demand since 1982. Concurrent with the continued growth of the economy has been the shift of the United Kingdom from a net exporter to a net importer during the 1987-89 period. In 1989, real merchandise exports rose 1.7 percent as imports grew over 10 percent. Unemployment continued to fall and by year-end 1989 had settled to just under 6 percent.

The U.K. current-account deficit widened from $26 billion in 1988 to an estimated $34 billion in 1989. Most of the deficit resulted from a 15 percent rise in non-oil imports and strong internal demand that diverted goods from the export sector.

The Economic Outlook

The U.K. Government releases forecasts for the economy in the spring and autumn. In the budget presentation in March 1990, the Chancellor of the Exchequer presented the government's economic forecast. Real GDP growth of I percent was predicted for 1990 and 1.5 percent real growth for first-half 1991. In 1990, growth of consumer expenditure is projected to slow to 1.3 percent, after rising 6.7 percent in 1988 and close to 4 percent in 1989. This will help slow down the growth of imports from 7 percent in 1989 to I percent in 1990 and will contribute to a 7.3 percent gain in exports over the comparable 1989 level. The current-account deficit is expected to fall to 15 billion pounds sterling in 1990, down from the 21 billion-pound deficit in 1989. Inflation, as measured by the retail price index, is expected to rise 7.3 percent in 1990, after increasing 7.5 percent in 1989.

The Thatcher government has set out and pursued a series of medium-term financial strategies, instead of attempting to fine tune the economy by short-term adjustments of fiscal policy. These strategies have established targets for three- and four-year periods and have assured that fiscal policy does not interfere with private sector economic decisions. The commitment to this policy may be tested in 1990 as high interest rates slow the economy to near recession levels.

Best U.S. Export Prospects

The demand for imported goods in the United Kingdom--a market consisting of England, Scotland, Wales, and Northern Ireland--is wide and changing. The following industry sectors are expected to experience the most buoyant growth and provide the best opportunities for U.S. exporters over the near and intermediate term.

The U.K. market for computer software and services in 1989 was estimated at $4.5 billion, with a projected annual growth through 1990 of 25 percent. Imports from the United States in 1988 were valued at an estimated $3 billion. The projected annual growth of U.S. exports through 1990 is 25 percent. Software markets are exceptionally difficult to measure since software is often merged with other elements of computer systems during the initial sale and installation, and the value of the software content is obscured.