The British Government, the Bank of England, and the British Economy - Essay Example

? The British Government, the Bank of England, and the British Economy Module The Bank of England is the central bank of UK, and itis the bank that serves the function of controlling the UK’s financial outlook. The Bank of England was started in 1694 with an objective of allowing the bank to operate as the banker of England. Presently, it is the bank in charge of the financial activities of the U.K government (Capie 2010). The bank has its headquarters at London, and has been the case since 1734. As from 1946, the bank was nationalised, and it has since monopolized the provision of banknotes in England and the Wales. The Bank’s roles of managing the country’s monetary policy are overseen by the Monetary Policy Committee (Goodwin, 2013). During times of public interest issues and economic adversity, the committee is authorised by the parliament and the treasury to employ the strategies it deems fit towards correcting the issue or situation in question. The major roles of the bank include supporting the country’s price and economic stability. Monetary stability is pursued through employing strategies to ensure that price increment does not go beyond the inflation projections of the government. Financial stability is pursued, by the bank, through the well-timed neutralization of the threats facing the country’s financial system. Financial and monetary stability are attained through the stimulation of the economic system and the manipulation of policy instruments. These strategies entail the bank’s cooperation with the treasury and the FSA (Financial Services Authority) (Capie 2010). The British Economy 2011 was a difficult year for the global economy with the UK not spared. In effect, this forced many forecasters to revise their yearly forecasts throughout the year. An example is the case of the OBR (Office for Budget Responsibility), which cut its GDP projections for the period between FY 2011 and 2013; it cut the projections from 2.4 percent, for the previous year, to 1.2 percent for a financial year, during November 2011. Furthermore, the events that followed continue to raise questions as to whether the revised figures will be realised following the worsening of the situation by the crisis in the Euro zone (Goodwin 2013). This outlook demonstrates that the financial and the monetary strategies that are altered by the bank of England, which works under the directives of the British government particularly the parliament and the treasury, which determine the stabilization strategies adopted. The poor outlook of the economy shows that the two actors have not been effective, in manipulating financial and monetary instruments to the favour of stabilizing the British economy (Gordon, Scanlon, Travers and Whitehead 2009). The Double Dip of 2012 The UK economy entered year 2012 from a weak point. The preliminary projections of GDP growth from the fourth quarter of 2011 showed that the output of the economy had contracted by 0.2 percent at the end of year 2011. The monthly output projections from official reports demonstrated that manufacturing capacity had reduced throughout the summer time. The reports showed that the service sector had demonstrated higher resilience during the same period. However, the worsening of the Euro zone crisis, starting July of 2011, triggered a sharp price decline and an increase in the volatility of equity pricing that consequently affected the outlook of both consumers and businesses. These changes demonstrate that the British Government and the Bank of England had failed in controlling price levels, and employing the strategies of containing price volatility. Partly, the situation could have been triggered by the Euro zone crisis, but it demonstrated a lack of competitiveness and skilfulness, among the two economic controllers, in manipulating financial and monetary policy to favour the resultant economic outlook (Goodwin 2013). The adverse effects of the non-controlled economic outlook were evident from the downturn evident among many businesses, during the autumn. The real damage of the situation on the UK economy was not apparent, until October, after monthly output projections from the services and the manufacturing sectors showed a month-on-month drop of 0.9 and 0.6 percent, respectively (see fig. 1 below). December’s PMI (Purchasing Manager’s Index) surveys showed more weakness when compared to those of preceding months. The balance of economic activity was generally lower than the levels attained in early 2011. This led to the outlook that the UK economy would suffer a technical recession throughout the fourth quarter of 2011 and the first quarter of 2012. This effect demonstrates that the British Government and the Bank of England were not able to effectively counter the reduction of economic production, which they would have addressed through reducing the cost of funding. For example, through a reduction in the interest rates required for the credit facilities offered to businesses and individual producers, UK’s exports to the Euro zone and the world would have expanded (Gordon, Scanlon, Travers and Whitehead 2009). Fig. 1 ‘Graph showing Official Monthly output projections’ (Goodwin 2013) The uncertainty about the future of the Euro zone impacted UK’s domestic demand negatively. This effect was evident from the findings of surveys administered to explore the consumer and business outlook, which reflect levels that characterised the recession of 2008-2009. The negative sentiments regarding the economic performance of UK resulted in reluctance, among consumers and businesses, to spend, until the uncertainty of the crisis has cleared. This situation shows that the British Government and the Bank of England are by far not able to contain the UK debt crisis, and are not showing any capacity to clear the debts in the near future. In case the economic outlook showed positive advance towards the resolution of the crisis, the economic outlook of businesses would be higher. Consequently, this would trigger an increase in spending among consumers and businesses (Goodwin 2013). In the domestic economy of the UK, the austerity program worked against economic growth in some financial year-quarters of 2011 and 2012. The situation culminated in the increment of the main rate of VAT during the January of 2011, which increased the inflation rate of 2011 by about 1 percent, which triggered a cut in spending among consumers. There were also major cuts in government investing, which triggered a GDP reduction of about 0.3 percent during 2011. The program also impaired the economy’s employment creation as well as an increase in job loses in the public sector, which made it difficult for the private sector to compensate the drag in the public sector. The results were that the increasing unemployment level increased the pressure experienced by households, which increased the sentiments against the future of the economy (Goodwin 2013). These changes demonstrate that the British Government and the Bank of England are grossly unable to contain the UK economy. In this case, instead of stimulating spending through price control, the situation is the opposite as it led to the increase of product prices. Another major failure by the two players are evident from the slow-down of the public sector, which is triggering an increase in unemployment levels, through the loss of public sector jobs and a slowed creation of employment. The government and the bank should have played an important role in fostering borrowing among private sector players, as the increment of investment would trigger an increase in job creation – which would offset the increasing unemployment levels. For example, instead of lessening the difficulty of borrowing among small and medium-sized enterprises, the two economic controllers have not enforced the changes that would make credit conditions friendlier. Through the access of credit among SMEs would increase the level of investment and business expansion, which would trigger an improvement in employment creation. One area that the British Government and the Bank of England would address to promote borrowing among players include controlling or reducing inter-bank rates, which would help reduce the cost of credit for businesses. In the area of UK’s export capacity, the failure of the UK government and the Bank of England can be traced in areas like the depreciation of the UK Sterling Pound. The two economic players should contain the depreciation of the pound, which will increase the cost-competitiveness of UK products as well as increase the economy in relative unit labour value. For example, in terms of the economy’s competitiveness and the cost of labour, the economy has improved by about 14 percent since financial year 2007-08. However, the economy’s export capacity declined during 2011, which triggered a negative growth globally. Fig. 2 ‘Relative Unit labour-costs’ (Goodwin 2013) Fig. 3: ‘UK’s exports in relation to World Trade’ (Goodwin 2013) Description of the Main Macro-economic factors in play in UK’s situation MBD (2013) identified the contraction of the UK economy by about 0.3 percent during the months of October, November and December of 2011, and further, during the 2012’s first quarter based on a review of government projections. In this case, the changes showed that the UK economy went back into recession. During the second quarter of 2012, there was an unprecedented economic plummet of 0.5 percent. The economy emerged from recession, during the third quarter of 2012 after realizing a growth of 1 percent during the period between July and September of 2012. The rebound was triggered by the heavy spending of tourists during the Summer Olympics held in London (MBD 2013). Further review of the economic performance indicates a risk of recession or growth. These economic changes were triggered by different macro-economic factors. The first is inflation, as CPI (Consumer Price Index) yearly inflation marked a high of 2.7 percent during the period October to December 2012, up from September 2012’s level of 2.2 percent. The CPI rate is higher than the Bank of England’s projection of 2 percent, for the period after 2009. RPI (Retail Price Index) inflation which covers housing, increased to 3.1 percent as of December of 2012, up from 3 percent during November of 2012. Among the triggering causes of the inflation were electricity costs, which increased by 3.9 percent from the 2011 prices; gas prices were higher by 5.2 percent and the price of food and non-alcoholic drinks rose by 3.8 percent (MBD 2013). The second factor was interest rates since the MPC (Monetary Policy Committee) set an interest rate of 0.5 percent, during its July 2012 meeting. The committee did not make further efforts towards easing the economic constraints facing the economy. According to the IMF, the UK economy’s weakness can be addressed using cutting interest rates below 05 percent (MBD 2013; Goodwin 2013). The failure to cut the interests further has stalled the rate of monetary stimulus, which helps increase economic performance. The third factor was house prices as the price of a typical home dropped by 0.1 percent during the December of 2012. Generally, the price fell by 1 percent throughout 2012, which reverted the 1 percent increment registered during 2011, leaving the typical home at a value of ?162 262 (Poucher and Buehler 2008). Consumer spending was another factor, as the economy’s retail spending, which was expected to increase by 1.2 percent during 2012, but was subdued during July. However, the favourable weather and the London Olympics helped increase the sales of drink and food. On average the amount in sales rose by 0.1 percent, which, further compressed consumer spending, in the economy. Manufacturing contributes about 14 percent of UKs economy. The reduction of investing in manufactured triggered the adverse economic conditions, but it later increased considerably during the last quarter of 2012, particularly during December (Goodwin 2013). The reduction of business investment in the UK economy over year 2011 and 2012 was another factor contributing to the adverse economic conditions. The factor is likely to affect the UK economy further, as the forecaster forecasts that investment levels would increase by 3.9 percent during 2013, and a further 8 percent between year 2014 and 16 (Goodwin 2013). This shows that investment levels will remain at levels below the 2007 levels, until year 2015. The reduction of consumer spending triggered a reduction in the economy’s import levels, which further affected the outlook of the economy throughout the two years. During the same period, there was a characteristic reduction in the exports of the economy, which further slowed the economy (Poucher and Buehler 2008). Conclusion The Bank of England is the central bank of UK. The bank oversees monetary and financial policy, which aids it to control important changes like inflation and stimulating the economy. The success levels of the British government and the Bank of England is evident in the difficulties that faced the UK economy during year 2011 and 2012. These areas that demonstrate the failure of the two economy control agencies include the reduction of GDP projections, a drop in the economy’s output, the downturn among many businesses and an increase in the unemployment level. Other changes that demonstrate the failure of the bank and the UK government include product price increment due to the austerity program and the loss of employment in the public sector. The macroeconomic factors leading to the 2011 and 2012 crisis in the UK economy include inflation, the unfavorable interest rates, a reduction in housing prices, a decrease in consumer spending and a slow-down in manufacturing. Others include the reduction in business investment, exportation and importation. Bibliography List Capie, F., 2010. The Bank of England: 1950s to 1979. Cambridge: Cambridge University Press. Goodwin, A., 2013. The UK economic outlook. Oxford Economics [online] Available at: [Accessed on 17 April 13]. Gordon, I., Scanlon, K.,Travers, T. and Whitehead, C., 2009. Economic impact on the London and UK economy of an earned regularization of irregular migrants to the UK. Glaeconomics [online] Available at: [Accessed on 17 April 2013] MBD., 2013. UK Macro Economic Activity. Market and Business Development [online] Available at: [Accessed on 17 April 2013] Poucher, J. and Buehler, B., 2008. 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