Comparison of the UKs Economic Performance with That of Germany for the Last 5 Years - Case Study Example

Comparison of UK’s Economic Performance with that of Germany for the Last 5 Years Economy of the UK UK’s economy is the sixth largest world economy in terms of nominal GDP, and seventh in terms of Purchasing Power Parity (PPT) (IMF, 2009, pg 235). In Europe, it is the third largest in terms of PPT after Germany. Being the first nation in the world to realize industrialization, UK has enjoyed a significant role in the global market. However, in the 19th century, German greatly challenged UK’s economy and became the global economy leader. The economy of UK was negatively affected by the costs of first and second world wars. However, it still retains a significant position in the world economy. In 2007, the annual growth rate for UK was at an average of 2.68%, according to the IMF (2009, pg 321). Growth in its financial sector contributed a larger economic part, but this declined in 2008 when it suddenly entered into a recession due to the global financial crisis. This began with the Northern Rock’s collapsing and being taken over into public ownership in February the same year. On the other hand, other banks were also nationalized. Such banks included Royal Bank of Scotland Group, HM treasury controlled 70.33 % of RBS’s shareholding and 43% of Lloyds Banking Group (IMF, 2009, pg 324). This recession caused massive unemployment that rose from 1,600,000 in 2008 to 2,500,000 by the end of 2009(Christopher, 2009, pg 303) The economy of UK was the strongest economy in EU in terms of interest rates, unemployment and inflation, which remained relatively down during the 2008-9 recession. Since then, unemployment has reached its peak of 7.8%, which is the highest level since 1990s (ELGA, 2008, pg 7). On the other hand, interest rates have been reduced to 0.5% (IMF, 2009, pg 342). In 2008, UK experienced twin shock in its economy, that is, increase in prices of commodities and financial turmoil. UK obtains much of its revenue from exportation of financial services, while obtaining deficits from finished commodities like food. This creates a balance of payment deficits and therefore, the IMF advised it to increase its financial policy scope in order to promote external balance. Although it’s per person labor productivity has had a good progress for the past two decades, it still lags behind other European nations, but it has overtaken that of Germany. According to the Office of national statistics, UK officially entered into economic recession in 2008, the first time in its history. As a result, the rate of unemployment among the youths rose by 5.4% (ONS, 2011, 41). However, this recession was officially reported to have ended on 26th January, 2010. By May 2010, its economic growth rate was reported to be 0.4%, and 1.2% by the second quarter (ONS. 2011, pg 32). For the last 5 years, the economic indices have been reported to be as follows; Table 1; Changes in UK’s GDP between 2006 and 2010 Year GDP (billions of GBP) GDP change (%) 2006 2.9 2007 2.6 2008 1,448 0.6 2009 1’396 -4.9 2010 1.7 Source: ONS Statistics As the table illustrates, the GDP was worst in 2008 and 2009 because of the economic recession. However, a positive change was realized in 2010. Economy of Germany The economy of Germany is the largest economy in Europe. In the world, it is the fourth largest in terms of nominal GDP, second according to PPT, it is fifth. It is second in world’s exporter, accounting for approximately $1.120trillin in its economy (ONS, 2011, 13). About a third of its national output is realized from exports, thus making its balance of payment favorable, compared to that of UK that is normally characterized by deficits. The service sector accounts for about 70%, industry 29.1%, and 0.9% in the agricultural sector of its total GDP (IMF, 2009, pg 321). Most of its products are from engineering, for an example automobile, chemicals, metals and machinery. In December 2010, German’s unemployment rate was found to be 6.1%, lower than that of UK’s 7.8% (Boyes, 2007, pg 65). In Germany, the lowest growth figures of 1.0% and 1.4 % were reported between 2000 and 2002 (David, 2010, pg 75). During this period, the rate of unemployment was significantly high because of inflation and aging population that strained the welfare. The 2008-09 recessions put Germany in technical recession due to the global recession cycle (Boyes, 2007, pg 43). Its industrial output declined to 3.6% (Boyes, 2007, pg 48) during the period. To overcome unemployment and inflation related problems, the German government approved a $70 billion stimulus plan in January 2000 under Angela Markel (Boyes, 2007, pg 52). Steady consumer demand, increased exports, and rebounding manufacturing orders helped Germany to fight recession by the third quarter of 2009. The following table shows non-seasonally growth of adjusted GDP for the last 5years (2006-1010). Table 2; German’s Changes in GDP between 2006 and 2010 Year 2006 2007 2008 2009 2010 GDP (in billion Euros) 2242.20 2325.10 2428.20 2495.80 24 Change (%) +1.4 +3.7 +2.9 -3.5 +0.97 Source; ONS, 2007 The table clearly shows that the economy of Germany was experiencing positive growth from 2006 to 2007. However, this trend started dropping in 2008, due to economic recession, which worsened in 2009. However, it was able to fight this inflation and 2010, where it started experiencing positive growth. In 2008, the primary sector accounted for 2.4% of population’s employment (Christopher, 2009, pg 86). On the other hand, according to Christopher (2009, pg94) employment accounted for roughly 29.7% producing 29% of GDP. Many people are employed in the automobile and other engineering firms. Oligopoly in the Car Markets of European Union The automobile industry is the most luxurious industry. Increase in disposable income for both urban and rural sectors, together with increased financial accessibility from financial institutions has made it easy for many people to buy cars. For the last two years, the rate of car purchasing has increased by 38% (Anonymous, par 2). Many types of luxurious vehicles are coming up, thus increasing competition in this, industry. In order to deal with competition, industries are resorting to the creation of personality for their own brands. Being the world’ number one motor vehicle’s producer, EU economic development is centered on this industry. Oligopolistic industries are characterized by very few firms in the industry, ease of entry, perfect knowledge about the market, branding of products, and the maximizing assumption. In EU, the car industry is oligopolistic since the number of firms in the industry is very few, with a high concentration ratio. Anonymous, par 2) states that oligopoly in EU’s car industry accounts for about 67% of the market share; therefore, these firms are usually interdependent. This means that an action by one firm directly affects other firms. Therefore, car firms keep predicting on the likely action of the other firms so as to keep pace in growth and profits through sales. Entry into this industry ha only few barriers, like financial constraints. The main type of competition in oligopolistic markets is non-price competition through advertising so as to highlight product differences. In EU, the car industry is oligopolistic, rather than perfectly competitive. A perfect competitive market has many buyers and sellers, who are free to buy what they want depending on prices. However, in UK, the car industry is dominated by firms like Renault, PSA Peugeot Citroen, BMW, Volkswagen, Opel, among a few others. In order to stand competition from their rivals, these firms keep predicting on mew models that other firms are likely to develop. This ensures that their models are the most superior, so as to retain the market. The European Commission has played a big role in the market being oligopolistic rather than perfectly competitive (Anonymous, par3). For example, it has encouraged competition among key players thus competing out the weak ones. It has also improved regulation of the internal market in the car industry through the introduction of whole vehicle-type-approval system. This system allows vehicles to be inspected only in one country, which can then be sold to other countries without further tests. Other foreign investors like Toyota and Honda are also being encouraged to invest in EU car industry. In spite of this, the oligopolistic nature of completion in the car markets is still oligopolistic as very few investors can effectively rise the capital require. On the other hand, stiff competition from developed and long existing car industries is still very tough. Therefore, many manufacturers opt to invest in other nations like Africa and US, where competition is minimal. Therefore, the market remains to be dominated by few manufacturers, who have long served in this industry. Germany is the largest motor vehicle producer in EU, and it has become very hard for competitors from other regions to compete with its firms. For example, Renault from France cannot compete with German’s BMW in Germany, but can do well in France. Therefore, the Renault firm will find it better to continue venturing in France, where it dominates the market, rather than go to lose in Germany. Therefore, the fact that the firms have captured reasonable market shares in their respective location has made it hard for other competitors to penetrate and survive in their markets (Anonymous, par 7). For example, though Japanese Honda has ventured in EU, it only operates a smaller market compared to its homeland Japan. Hence, domestic firms continue to thrive in EU thus making such markets unattractive to other firms. Capital base is another challenge that has left car markets in EU oligopolistic, together with market policies. EU’s market policies favor domestic large firms to foreign and small firms. The huge capital required has made potential car industry investors to invest elsewhere or in other perfectly competitive industries like communication and technology. References Anonymous. Car Industry in European Union. Retrieved 2011-07-22, from http://www.investineu.com/content/automotive-industry-eu. Anonymous. Automotive Industry. Retrieved 2011-07-22, from http://ec.europa.eu/enterprise/sectors/automotive/index_en.htm. Boyes, R. (2007). "Germany Starts Recovery from €2,000bn Union". London: Times Online. Retrieved 2011-07-22, from http://www.timesonline.co.uk/tol/news/world/europe/article2317382.ece. Christopher, D. (2000). Major Recessions: UK and the World, 1999-2009, Oxford University Press, p303. David R. H. (2010). Euro Area Annual Inflation up to 1.4% - Euro stat. Retrieved 2011-07-22, from http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/Prices/Content100/pre110j.psml. Europe Local Government’s Association (ELGA). (2008), "From Recession to Recovery", Retrieved 2011-07-22, from http://www.lga.gov.uk/lga/aio/1215871, p7. International Monetary Fund. "United Kingdom" . Retrieved 2011-07-22, from http://www.imf.org/external/pubs/ft/weo/2009/01/weodata/weorept.aspx?pr.x=68&pr.y=19&sy=2006&ey=2009&scsm=1&ssd=1&sort=country&ds=.&br=1&c=112&s=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a=. International Monetary Fund (2009). World Economic Outlook Database, October 2009". Retrieved 2011-07-22, from http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/weorept.aspx?sy=2007&ey=2009&scsm=1&ssd=1&sort=country&ds=.&br=1&c=134&s=NGDP_RPCH%2CNGDPD%2CNGDPDPC%2CPCPIPCH%2CLP&grp=0&a=&pr1.x=41&pr1.y=9. Office for National Statistics (ONS) (2011). European Union Economic Growth. Retrieved 2011-07-22, from http://www.statistics.gov.uk/cci/nugget.asp?id=192. Office for National Statistics( ONS) (2011). Labor Market Statistics". http://www.statistics.gov.uk/pdfdir/lmsuk0311.pdf. Retrieved 22 July, 2011.   Read More