The Financial and Economic Activities in the UK - Case Study Example

Is the UK Economy of Recession? Introduction Recession has been one of the important areas of discussion for the economists because it can take an economy many years back by slowing down its economic activities. The interdependency among countries because of the increasing globalisation and internationalization has enhanced the risk of transfer of recession from one state to another. According to National Bureau of Economic Research (NBER), recession is a “significant decline in economic activity lasting more than a few months” (Recession Org website). However, a general view about regression is that it is the negative GDP growth of an economy for the period of two or more consecutive quarters. The financial crisis that emerged from sub prime-mortgage crisis in 2007 in the United States transformed into a global recession. The financial and economic activities of about all the countries have been severely affected by this sub prime-mortgage crisis. The industrialised economies have been hit hard in this crisis. The UK economy underwent the impact of this crisis in the second quarter of 2008. During this period, UK faced the largest contraction in economy on record. However, the latest statistics of UK are predicting that era of soaring borrowing and economic downturn is over. Therefore, in this report, through official statistics, views of policymakers and other supporting data, it will be evaluated, whether UK economy is out of recession or not. Analysis At the end of year 2008, British economy could not come out of recession, showing the lagging position of economy and everyone was afraid of the potential relapse in the following year. Although the recession emerged from sub-mortgage crisis in the United States, however, UK economy was at disadvantage because it was highly dependent on the financial sector. The poor performance of UK financial sector along with the increasing levels of consumers debt, were keeping the state at a lag behind the other industrialised states, thereby, preventing UK economy to recover from global recession. The official statistics that have been published in January 2010 reveal that British economy is out of recession. While we cannot answer this question exactly, unless there have been some visible trends in the economic conditions. Before analysing whether UK is out of recession or not, looking into what has happened to UK during the last few years (particularly before recession) will be very significant. During the last ten years, the investment and growth in UK has remained passive however, the economy has faced high levels of FDI. The financial sector has become stronger both domestically and internationally whereas; the manufacturing sector has gone down. Moreover, the growth of financial sector spurred the total employment and housing bubble along with boom in retail consumption enhanced the household wealth (Killick, 2008). Recession has really proved to be a severe drastic period in the history of UK. Since during the last ten years, the UK economy has become more dependent on the financial sector, therefore, when the recession hit the financial sector, the real crisis in UK began. Therefore, it can be well said that UK recession was the crisis of financial sector and crisis of credit. It has affected the consumers and businesses thereby, increasing the borrowing. Moreover, the increased borrowing limited the ability of the government to recover the crisis by using tools of fiscal policy. Therefore, it can be argued that trends in UK economy over the last ten years led the economy to undergo the impact of recession. The official statistics published for the last fourth quarter of year 2009 show that finally after one and a half year, the economy at length returned to growth. No doubt, the number was disappointing however; a positive sign has been seen and at least, it is no longer negative. Based on the official data, the economists confirm that recession is over however, UK economy has gone many years back. The quarterly report of National Accounts showed that during the second quarter of 2009, the economy of UK contracted by 0.6 percent which is less by 0.2 than the preliminary estimate of 0.8 percent (FIGURE). Although a decline has been seen in the contraction of UK economy however, the figure is still disappointing. Business survey data of the Institute of Chartered Accountants in England and Wales (ICAEW) showed that professionals’ optimism in third quarter of 2009 has increased and confidence measure is 4.8 in June as compared to -28.2 in March (Kollewe, 2009). Although this optimism is encouraged however, the growth of other economies, such as Germany was 0.7 percent in second quarter of 2009 (Ewing, 2010), created a perception that UK economy has been unable to recover from recession. The projections made by World Economic Outlook show that projected growth of UK economy in the last quarter of 2009 was -1.5 (IMF, 2009). However, UK economy grew by 0.3 percent in quarter four of 2009 (Figure 1). On the other hand, the growth other economies was either in negative or very slow such as growth in Germany was about zero during the same quarter (Ewing, 2010). The GDP growth of UK for fourth quarter of 2009 is 3.3 percent lower than the same quarter of 2008. The output of production industries and service industries has increased by 0.4 percent and 0.5 percent respectively, construction output fell by 1.0 percent and government and house hold expenditures have increased by 0.4 and 1.2 percent respectively (Chamberlin, 2009). The slight increase in growth of UK and increasing optimism of people is a good sign that UK will come out of recession, however, saying that it is out of recession will be a premature decision. The countries like Japan and Germany had faced greatest falls in the output levels because of these economies are dependent on manufacturing sectors and recession hit this sector largely. Because of this reason, a slight stability in world economy during 2009 benefited these two economies. Increase in levels of manufacturing outputs could never benefit UK economy because of the small contribution of manufacturing sector to GDP in UK. This is one of the major reasons of lackluster growth of UK. The better growth of UK economy in fourth quarter of 2009 than Germany as compared to first three quarters is also because of the reason that output levels have a very temporary effect on GDP and the countries showing great GDP growth because of output level are more susceptible to further decline, which is also known as W-shaped recession. The growth statistics of UK during the last quarter of 2009 actually show that UK economy has crept back into growth from a deep recession that started in second quarter of 2008 (Figure 2). The total contraction that UK economy has faced between April 2008 and September 2009 is 6.0 percent, which is the deepest recession in the history of the state; however, the total contraction reported by Office of National Statistics in 2009 is 4.8 percent. According to Brian Hilliard, U.K. economist at Société Générale, UK economy is crawling out of recession (Norman & Parkinson, 2010). The optimistic views of economists are surely encouraging the hopes of coming out of recession however; the fear of falling back into contraction in consideration to pace of expansion figures is also not evitable. According to chief executive of Centre for Economics and Business Research, Douglas McWilliams, the economy is not apparently going to be as strong going forward and 2010 will be again a tough year for the UK economy. According to International Monetary Fund, the global recovery is off to a stronger start at different speeds in many economies as compared to the anticipated statistics. IMF official statistics of UK for fourth quarter of 2009 actually revealed that UK economy is emerging out of recession at weaker than expected pace. However, IMF predictions for the year 2010 reveal that UK economy will further grow by 1.3 percent in 2010. Therefore, as compared to France and Germany, UK economy is expected to show slightly higher growth this year and more rapid growth in 2011. The government forecasts for UK economic growth in 2010 is 1-1.5 percent, which is quite buoyant. According to Global Competitiveness Report published by World Economic Forum 2010, the most problematic factors for doing business in UK during the recession period were access to financing, inefficiencies of government bureaucracy, tax regulations and tax rates (Figure 3). While announcing the new budget for UK, David Cameron argued that “to show the world we are back open for business, we need real action to get our economy moving – and urgently” (Wardell, 2010). The initiatives taken by UK government in this regard include new tax regime policies and one-off growth package of 2.5 billion pound ($3.7 billion). The idea is that with a hope to recover from recession, UK government is taking active initiatives. Although, government is confident about the prospects of UK economy but it is also cautious when it comes to support the economy. Actually, UK government was not prepared to undergo the recession; however, it is quite prepared to recover from this recession. The UK government got deeper into debts and recovering growth in financial sector is very important otherwise, no other sector of UK would help the economy to recover from recession. Since the UK economy has overexposed to the global financial system, therefore, its dependence on international developments is not letting the economy to sustain in long term. The year 2009 ended with the hopes that UK economy will recover from recession soon, however, the declining value of Pound against dollar and euro again created the recession risk. The decline of Pounds by 1.5%, against the dollar in March 2010, created concerns for policymakers of Bank of England. Andrew Sentence, the Monetary Policy Committee member of Bank of England argued that there is a chance of a double dip recession however; UK has exited recession during the last quarter of 2009. In an interview of Kate Barker, a policymaker of Bank of England, he argued that UK is unlikely to get back to recession. Moreover, the current UKs budget deficit of 12.6% of GDP could harm UK’s recovery from recession; therefore, Labour plans have been presented to reduce the deficit by 4.7 percent by 2015 (UK Recession website, 2010). On the other hand, opponents of these plans argue that actions need to be taken quickly and European Union report challenges the determination of these plans. Therefore, UK economy is out of recession is really not justified because the recovery is uneven. Therefore, based on the UK economic growth of 0.3 percent in the fourth quarter of 2009 and expected decline in the growth during the first quarter of 2010, two contrasting views have appeared. One group of economists suggests that UK is expected to sustain its recovery from recession but this recovery will be fragile. The other group of economists suggests that UK economy will face a double dip recession and it will go into recession without undergoing full recovery from recession. Nevertheless, one thing which is actually evident is that UK economy is crawling out of recession but no doubt it is not completely out of recession. Moreover, the scope of UK economy to come out of recession is increasing such as the decline in value of pound, which is being considered quite pessimistic, may accelerate foreign direct investments. The recovery from recession is not possible through economic growth only but political factors do play a major role in it. If UK economy has been facing severe affects because of drying up capital flows during recession period, the government could look for other better alternatives. Therefore, along with economic growth, a political and cultural revolution is important for UK to recover from the deep recession. Conclusion Based on above discussion, it can be concluded that UK economy contraction by 0.6 percent in the second quarter of year 2009, actually raised concerns. However, the economic growth of 0.3 percent in the last quarter of 2009, created an optimistic view that UK economy is heading out of recession. The projections of economic growth in the first quarter of 2010 showed an expected decline in economic growth, which is creating two opposite views that UK economy will recover but recovery will be fragile and the other view is that UK economy will face double dip recession. However, through official statistics, views of policymakers and government initiatives, it is proved that UK economy is actually crawling out of recession. References Chamberlin, G. (2009) Economic and Labour Market Review. Office for National Statistics. [Online] Available from: http:// www.statistics.gov.uk/downloads/theme_economy/EconReview_1009.pdf [Accessed 26 March 2010]. Ewing, J. (2010) Growth in Germany neared Zero at End of 2009. [Online] Available from: http://www.nytimes.com/2010/01/14/business/global/14mark.html [Accessed 26 March 2010]. IMF. (2009) World Economic Outlook Update. [Online] Available from: http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm [Accessed 26 March 2010]. Kollewe, J. (2009) Surge in business confidence means UK recession at an end. [Online] Available from: http://www.guardian.co.uk/business/2009/aug/24/uk-recession-over-survey-suggests [Accessed 26 March 2010]. Norman, L. & Parkinson, J. (2010) 4th UPDATE: UK Economy Creeps Out Of Recession In Fourth Quarter. [Online] Available from: http://online.wsj.com/article/BT-CO-20100126-709740.html [Accessed 27 March 2010]. Recession Org Website. (n.d.) What is Recession? Economic Recession Definition. [Online] Available from: http://recession.org/definition [Accessed 28 March 2010]. Schwab, K. (2010) The Global Competitiveness Report. World Economic Forum. [Online] Available from: http://www.weforum.org/pdf/GCR09/GCR20092010fullreport.pdf [Accessed 26 March 2010]. UK recession. (2010) Pound Falls after UK Recession Risk. [Online] Available from: http://www.ukrecession.com/ [Accessed 28 March 2010]. UK recession. (2010) UK Unlikely to Return to Recession. [Online] Available from: http://www.ukrecession.com/ [Accessed 28 March 2010]. Wardell, J. (2010) UK Government Announces Growth Package, Lowers Deficit Forecasts In Pre-Election Budget. [Online] Available from: http://www.washingtonexaminer.com/world/no-voter-friendly-giveaways-expected-in-post-recession-pre-election-british-budget-89021902.html. [Accessed 27 March 2010]. Appendix Figure 1: GDP growth in UK 2005-2009 Source: Office for National Statistics UK Figure 2: Real GDP Quarterly Growth in UK 2004-2009 Sources: Office for National Statistics UK1 Figure 3: The Most Problematic Factors for Doing Business Source: World Economic Forum Read More