Analyzing Economic Health of the UK - Essay Example

? Economy Contents Contents 2 Summary of the article 3 Analysis of the article and identification of linkage with the economic concepts 4 Economic challenges faced by the economy and rationale for the economic policy (ies) chosen by the government to overcome the challenges 6 Limitations of economic policy of the government 7 Findings and analysis 8 References 11 Summary of the article The economic article is about the health of the economy of UK in recent period of time. The article mentioned that UK avoided its third recession by registering a growth of 0.3% in the first quarter of 2013. This growth in the economy was observed after a flat performance over the last 18 months. The marginal growth in the economy of UK has been due to the progress in the services sector than contributions from the manufacturing industry. This was positive news for the economy of UK but the policy makers have struggled to register even modest pace of progress of the country’s economy. The government of UK has however faced lot of criticism from the people because of policy measures on austerity after it took office in 2010. Since the time the government of UK has reduced their spending, the economy of the country has become stagnant. This has been fuelled by the effects of recession. As compared to the last fiscal, the economy of the country has grown by a meager 0.3% in the first quarter of the current year. The last quarter of 2012 registered a lean growth of 0.3%. This showed that the economic depression in UK has been prevailing since the last year and is still continuing in 2012. According to the director of fixed income at Scotia Bank, Alan Clarke, the GDP growth rate of the country has been 1.2% for the last year. The slight increase in the economic growth rate is a sign of relief for the UK treasury but the challenge of reviving the economy still looms large over the policymakers. One of the major rating agencies, the Fitch Ratings emerged as the second major ratings agency to dismiss UK from its triple “A” credit ratings. The economy of UK saw unemployment levels rising in the month of February and the wages of labor also declined to minimum levels. The International Monetary Fund who were once a major proponent of the austerity measures of the governments commented that UK should consider to reduce government spending on the back of weak economic progress of the country. The British political administration headed by the Prime Minister commented that they would continue with the austerity policies in order to avoid the fate of Greece and other members of the European Union (Dow Jones & Company, 2013, p.1). The British administration still believes that it might take longer than expected for the economy to recover but the slightest progress in the first quarter of 2013 indicated that the economy is healing. There are no easy solutions for economic recovery from the situation of crisis built over the years. This is evident from the worldwide economic slowdowns in countries like US, Germany, China, etc. Analysis of the article and identification of linkage with the economic concepts The rime of Golden age in Europe and US saw the major economies of the world like UK passing through a phase of reconstruction and government policies on increased expenditure in order to boost the aggregate demand in the economy. This created increase in the flow of money in the economy of the countries like UK. This policy adopted by the policy makers could be linked with the economic theory proposed by the British economist, Keynes. The Keynesian theory of economics explained that an expenditure of one member in the economy leads to the income of another member. The rise in income level of the population led to the increase in aggregate demand which was supported by increase in production and increase in fiscal deficits of the government (Mankiw, 2011, p.39). In the later stages the increase in liquidity level beyond limit and excessive savings led to decrease in investments and fall of production levels. This caused inflation rates soaring high. This was followed by economic recession like the financial crisis in US which turned into a global meltdown. The economy of UK which already acquired huge deficits over the years was hit by the economic recession. The economic crisis in UK meant that the production units were closed due to erosion of capital. The decreases in production or supply led to the decrease in employment of people and the income levels fell. The fall in the income level led to the fall of consumption demand in the economy (Marshall, 2006, p.40). This could be explained from the supply demand curve shown below. A fall in supply is indicated by the shift of curve from IS2 to IS1. This caused the equilibrium demand to shift downward indicated by a fall of liquidity from Y2 to Y1. Due to circular flow of money, this again pulled down the production rates of the economy of UK and the GDP of the country headed into a downward spiral (Schotter, 2008, p.60). Thus the economic stagnancy of UK and downturn of the financial markets followed the theory of economic supply and demand. The stagnancy of the financial market could be attributed to the efficient market hypothesis. The events of the past as well as the information on current market events flow into the market which triggers reaction from the investors. The anticipation of the investors on economic stagnancy in future by looking at the government policy has not been able to boost market investments in UK. Due to this the economy of UK is still struggling for revival. Economic challenges faced by the economy and rationale for the economic policy (ies) chosen by the government to overcome the challenges Due to the economic recession and increase in government spending over the years created major challenges for the economy of UK. In order to boost the aggregate demand in the economy during the golden age, the policy makers followed the Keynesian economic theories. The government of UK incurred huge fiscal deficits and embraced Keynesian economic policies to achieve high growth rates in the previous years. These fiscal deficits posed major challenges to the UK government with the global meltdown of the economic recession. The policymakers were faced with a situation where the production in the economy slowed down and the government found itself in a position of fiscal deficit where the government spending also had to be limited. Thus the economic theory of increasing the government spending in order to boost the aggregate demand in the economy could not be followed. The monetary policies of reducing the interest rates in order to boost the flow of money in the economy could not be adopted. The fiscal policies of reducing the taxes and increase in government expenditure were avoided due to limitations of the UK treasury. This laid the rationale for the policies adopted by the government of UK. In order to overcome the challenges, the government of UK after assuming office in 2010 adopted the policy of fiscal domination. The policy makers of UK aimed to consolidate the position of UK treasury by reducing government spending (OECD, 2010, p.3). This created stagnancy in the economy of UK. The government adopted the alternate strategy of exploring the labor market and channelizing resources to increase the total productivity factor. This laid emphasis on the services industry as compared to the manufacturing units. The government of UK prepared to leverage on the existence of world class infrastructure and knowledge base to increase the production of the economy. This policy adopted by the government of UK has showed healing signs with marginal economic growth taking place at the rate of 0.3% in the first quarter of the current fiscal as compared to the last year. The British government headed by the Prime Minister has also commented on the justification of the policies. The ministry of UK felt that increase in the government spending at a time of economic recession would further deplete the treasury of UK and would put them in a situation of deep crisis where intervention of international financial agencies would be required for the bail out. This situation was faced by Greece in the crisis of Euro-zone. UK wanted to avoid the fate of Greece and this provided more rationale to their economic policies. Limitations of economic policy of the government The economic policy of the government of UK has been criticized largely by the people as the austerity policies of the UK government have not been able to boost the aggregate demand in the economy of the country. The International Monetary Fund who is a supporter of the austerity policies of governments also showed concerns over the cut in government spending of UK. The economic policy of UK government in reducing its government spending has several limitations. These limitations were accepted in order to achieve fiscal consolidation. The cut in government expenditure led to the decrease in private investments across UK. This resulted into fall of employment rates. The decrease in the number of jobs in the UK market led to fall of purchasing power of the people in the economy and hence, the consumption demand of the economy also lowered. Due to the circular flow of money, this again created a stagnated economy in UK in terms of the real GDP growth rates. The channelization of resources from the labor market, utilization of high quality of infrastructure and favorable policies of the service sector could not achieve economic growth rates as compared to industrial policies. Findings and analysis The fiscal policies of the UK government in reducing the government spending did not encourage private investments in the economy of UK. The conservative fiscal policies adopted by the government of UK and the partial slowdown of the manufacturing were offset to a certain extent by the favorable policies for the growth of services industry. The purchasing power parity of the people fell which created further decline of consumption demand and stagnation of production levels in the economy. Due to circular flow of money, the production level in the economy of UK also reduced. However, the fiscal policy adopted by the government of UK was set with an objective to attain fiscal domination in the long run. Hence, the growth rate of the economy was marginal in the period after economic recession. This could be explained with the help of the graph given below that indicates the level of GDP for UK (TRADING ECONOMICS, 2013, p.1). The stagnation in the level of production followed stagnation in the level of unemployment. The unemployment level in the economy of UK remained at 7.8% over the last two quarters (Office for National Statistics, 2013, p.1). This is visible from the graphical representation for unemployment rates of UK as shown below. Due to slight signs of recovery in the first quarter of 2013, the demand in the economy showed slight signs of recovery. Thus the demand in the UK markets surpassed the supply levels in the economy. A higher demand as compared to the supply of productions units led to the rise of inflation. The inflation rates have been represented by the graphical representation given below. The graph clearly depicts that the inflation rates marginally increased from 2.4% to 2.7% in the first quarter of 2013. The fiscal policies of the government are aimed at achieving an optimal balance between the level of aggregate demand in the economy and at controlling the inflation rates in the country. The UK government spends over ?400 billion in a year and also collects revenues of similar volume through taxes. This has created stagnancy in business investment and production in UK. The fiscal policy adopted by the UK government has been conservative in the years after the economic crisis and when the new government took office in 2010. The government, however, expects that although it might take longer than expected, the fiscal policy of the government of fiscal domination and engaging into service sector oriented growth is likely to heal the economic health of the country in the long run. The fiscal policies are framed by the government of UK in the times of economic recession with an aim of not allowing the fiscal deficits to blow out of proportion. This would safeguard the treasury of the UK government and also would also lead to steady growth of the economy of UK. References Dow Jones & Company. 2013. U.K. Economy Avoids Further Contraction. [Online]. Available at: http://online.wsj.com/article/SB10001424127887324474004578444153944938398.html. [Accessed on 20 June, 2013]. OECD. 2010. United Kingdom Policies for a Sustainable Recovery. [Pdf]. Available at: http://www.oecd.org/unitedkingdom/45642018.pdf. [Accessed on 20 June, 2013]. TRADING ECONOMICS. 2013. UNITED KINGDOM GDP. [Online]. Available at: http://www.tradingeconomics.com/united-kingdom/gdp. [Accessed on 20 June, 2013]. Mankiw, G. 2011. Principles of Economics. Cengage Learning; Stamford. Marshall, A. 2006. Principles of Economics. Osprey Learning; Washington. Schotter, A. 2008. Microeconomics: A Modern Approach. Cengage Learning; Stamford. Office for National Statistics. 2013. Index of Poduction. [Online]. Available at: http://www.ons.gov.uk/ons/index.html. [Accessed on 20 June, 2013]. Read More