The Effects of The Financial Crisis of 2008 on the UK Economic Growth - Dissertation Example

Table of Contents 2 Introduction 2 Literature Review 3 Aims and Objectives 5 Methodology 6 Research Findings and Analysis 6 Conclusion 7 References 8 Bibliography 10 Appendix 12 Abstract The financial crisis of 2008 had serious implications for the UK economy. This was reflected through its unemployment levels, deficits and GDP. The project begins with the introduction of the financial crisis and its implications on the economy. This is followed by the critical literature of the subject. This includes analysis of previous research findings of authors and practitioners, government survey results on different parameters such as wage rates, interest rates, unemployment rates and growth trends etc. The methodology section provides details about how the research would be conducted. In this case data is collected through secondary sources which include previous research findings by authors, academic journals, national statistics surveys, books etc. The data collected are out to statistical analysis such as correlation and regression analysis and represented in the forms of graphs and charts. Finally the key findings are represented in the form of findings and analysis. Introduction The financial crisis of 2008, also known as the great recession is considered by a number of economists as being the worst financial crisis after the Great Depression in 1930. Leading to the collapse of a number of financial institutions, bailout of banks and downfall in the stock markets it reflected through the growth and development of many of the advanced, developing and underdeveloped nations of the world. It significantly hit the housing market of nations, resulted in many evictions and foreclosures and high and prolonged unemployment too. The present project seeks to bring forth the impacts of the financial crisis on the economic growth of United Kingdom. Economic activity in the United Kingdom faced a downfall during the first half of 2008 and finally came to a standstill till its end. The weakening was driven by a fall in both residential and business investments. Initially a small stimulus was provided by the government; however, with the gathering momentum of the financial crisis UK’s labour market dramatically weakened finally leading to a considerable extent of unemployment. The project seeks to bring forth evaluation of the financial crisis of 2008 on the economic growth of United Kingdom. Literature Review The literature review on the subject brings forth the various economic factors which been influenced by the financial crisis of 2008 and which consequently reflected through the country’s economic growth and development. Before the impact of the crisis, UK was a highly developed; market based and diversified economy including extensive social welfare services which provided its residents with high living standards. Researchers still continue to believe that it has not been able to completely recover from the turmoil and still have a long way to go. The financial markets recovery is still going on (Ito, 2012). According to the findings of the US Department of State, United Kingdom entered into the middle of the recession during the third quarter of the year 2008. Since then the growth of the nation has remain patchy and influenced by many obstacles. The growth of the nation was retarded by the weak growth in credit in the nation, a diminishing or contraction of the real incomes in the nation. This was followed by a poor outlook by the major trading partner of the United Kingdom. The economy of United Kingdom continued to contract during quarterly intervals in 2010 and finally during the quarter of the year 2011 (US Department of State, 2012). This was responded by the intervention of the British Government. The British Government implemented a wide range of recovery and stability plans which primarily included a fiscal stimulus package, credit stimulus schemes and bank recapitalization too. The Government also introduced an effective monetary program which included very low rates of interests at 0.5% coupled with a quantitative easing program amounting to £325 billion. In spite of these recovery programs, United Kingdom continued to face poor employment levels and its domestic demand remained extremely weak too. In fact researchers admit that its unemployment levels are still to return to the re-recession level (Baumeister & Benati, p.5-7). In November 2011, its unemployment level stood at 8.4% which is considered to quite an alarmingly high rate for Britain. This was followed by the beginning of the 5 year austerity program under the governance of the Conservative Liberal Democratic coalition government in UK. It was initiated with the aim of lowering budgetary deficit in UK from 11% of GDP in 2010 to 1% by the 2015. However, lower growth than that which expected has hampered the progress of the program and now it seems that the plan can be successfully met only after 2016 or 2017 (US Department of State, 2012). Being the leading and international financial centre the nation was affected by the crisis significantly in 2008. Many of the country’s banks laid-off their workers and took back their operations during the period of crisis, although many of them are hiring them back at present. Coupled with retarded economic growth, there was massive job cuts and unemployment (US Department of State, 2012). According to the findings of the labour force survey in 2008, employment rate in the UK stood at 75% which is no way in line with the previous employment peaks in the nation in 1968, 1978, and 1989. Moreover, the nation had experienced a continuous decline in unemployment rates since 1993. The introduction of minimum wage had little influence on the overall employment in the last decade. In the year 2005, the unemployment fell below 5% for the very first time after 1970 (Gregg & Wadsworth, 2010, p.26). The figure below depicts the change in employment in UK between 1979 and 2009 (Please refer Appendix). The project would discuss the trends in GDP an employment levels in depth in order to analyse the trend over the years and find at a conclusion in detail. Employment levels from the beginning of the recession in 1980s, 1990 and 2008 are shown in the following figure (Please refer Appendix). The latest recession bears a striking difference from the previous ones. While the lowering in GDP was distinctly worse than in the previous recessions, the rise in unemployment was seen to be much smaller at a level of about 3%. Also the period during which the fall in employment level took place was distinctly shorter or smaller as compared to the previous recession phases (Gregg & Wadsworth, 2010, p.27). This particular research finding puts forth that unemployment rates were not as bad as the previous year recessions. In fact the United Kingdom account for one of the smaller number of nations to have witnessed relatively small employment losses without the implementation of a government funded strategy of limiting working hours (Hetzel, p.205-206). Aims and Objectives The research aims to find the impact of the recession 2008 on the economic growth of UK. The recession of 2008 inflicted a greater cumulative loss on the output of UK as compared to the previous phases of recession. Also the employment rates remained higher as expected through the previous phases of recession. The research seeks to analyse this trend in comparison to the previous employment trends in UK. The implications of the employment trends on the overall growth of the economy would be analysed in the project. The project also aims to study such other factors as profitability of firms during the recessions, effects of the supportive fiscal and monetary policies of the government on the economic growth during the period too (Gregg & Wadsworth-a, 2012). Methodology A combination of survey studies, research conducted by practitioners and researchers on the subject will be used to pursue the research aims and objectives of the study. Secondary sources will be used for collecting data on the subject. This will include previous research results, annual reports of financial institutions in the United Kingdom, research results attained by the Labour force survey conducted by the Office of National Statistics, news articles, and other academic sources like books (Marshall, 2006, p.97). Some of the indicators which will be used for analysing growth trend in UK during the 2008 recessions are GDP, unemployment rates, wage rates, interest rates, and amount of fiscal and monetary policy interventions taken by the government (Harris, et al., 2009, p.83). The methods in which the data collected would be analysed are correlation and regression, and this would be represented in the form of graphs and charts (Roberts, n.d.). Research Findings and Analysis Based on the statistical analysis and inference, the research findings and analysis would be presented in the report. It will be primarily based on the impacts of the recession on the economic growth in UK. Factors such as interest rates, employments rates and wage rates trends would be also analysed in this context and their relevance to the topic (Sissons, 2009, p.173-177). Conclusion Conclusion will provide the brief summary project. This will include how the research results align with the aims and objectives; the implications of the research results, the comparison of the various dimensions which are studied in the project. A summary of the cumulative effects of these factors on the economic growth of UK will be provided in the conclusion. It is seen that the growth of the UK economy has been severely retarded by the economic crisis of 2008. Even though the fall in employment levels during the crisis of 2008 was much lower compared to the previous phases of recession, the impact on the nation’s growth was found to be significant. Effective monetary programs were introduced by the government which included quantitative easing program of £325 billion and low rates of interests at 0.5%. Despite these recovery efforts, employment levels remained low in the economy and it continued slow rate of growth. References Baumeister, C. & Benati, L. (2010). Unconventional monetary policy and the great recession estimating the impact of a compression in the yield spread at the zero lower bound. Working paper series no 1258 / October 2010. [Pdf]. Available at: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1258.pdf. [Accessed on April 24, 2012]. Gregg & Wadsworth-a. (2012). The UK labour market and the 2008-9 recession. National Institute Economic Review April 2010 vol. 212 no. 1 R61-R72. National Institute of Economic and Social Research. Gregg, P. & Wadsworth, J. (2010). Jobs in the recession. CentrePiece Summer 2010. [Pdf]. Available at: http://cep.lse.ac.uk/pubs/download/cp317.pdf. [Accessed on April 24, 2012]. Harris, J. E. Et al. (2009). An Introduction to Qualitative Research for Food and Nutrition Professionals. Journal of the AMERICAN DIETETIC ASSOCIATION. American Dietetic Association. [Pdf]. Available at: http://www.nutrociencia.com.br/upload_files/artigos_download/pesquisas%20qualitativas.pdf. [Accessed on April 24, 2012]. Hetzel, R. L. (2009). Monetary Policy in the 2008–2009 Recession. Economic Quarterly—Volume 95, Number 2—Spring 2009—Pages 201–233. [Pdf]. Available at: http://www.richmondfed.org/publications/research/economic_quarterly/2009/spring/pdf/hetzel2.pdf. [Accessed on April 24, 2012]. Ito, A. (2012). Fed’s Evans Says Guidance on Tightening May Curb Inflation. [Online]. Available at: http://www.bloomberg.com/news/2012-03-22/fed-s-evans-says-guidance-on-tightening-may-curb-inflation.html. [Accessed on April 24, 2012]. Marshall. (2006). Data Collection Methods. Sage Publications. [Pdf]. Available at: http://www.sagepub.com/upm-data/10985_Chapter_4.pdf. [Accessed on April 24, 2012]. Roberts, R. (No Date). The Impact of Economic Recession on Customer Loyalty to Banks. [Pdf]. Available at: http://www.ivoryresearch.com/Proposal-The-Impact-of-Economic-Recession-on-Customer-Loyalty-to-Banks.pdf. [Accessed on April 24, 2012]. Sissons, P. (2009). Welfare reform and recession: past labour market responses to job losses and the potential impact of Employment Support Allowance. Institute for Employment Studies. People, Place & Policy Online (2009): 3/3, pp. 171-182. US Department of State. (2012). Background Note: United Kingdom. [Online]. Available at: http://www.state.gov/r/pa/ei/bgn/3846.htm. [Accessed on April 24, 2012]. Bibliography Baimbridge, M. (No Date). The choice of exchange rate regime. ID-4208M: INTERNATIONAL MONETARY ECONOMICS. Lecture 7. Government Accountability Office. (1999). Federal debt. [Pdf]. Available at: http://www.gao.gov/new.items/d04485sp.pdf. [Accessed on April 24, 2012]. International Monetary Fund. (2005). Global Financial Stability Report: Market Developments and Issues, Issue 2. International Monetary Fund. Lehman, D & Png, I. (2007). Managerial economics. Wiley-Blackwell. London Business School. (2008). The roots of the crisis and its finish line. [Pdf]. Available at: http://www.london.edu/DeansPaper.pdf. [Accessed on April 24, 2012]. MSNBC. (2009). Recession, bailout costs push deficit to record. [Online]. Available at: http://www.msnbc.msn.com/id/29144295/ns/politics-more_politics/t/recession-bailout-costs-push-deficit-record/. [Accessed on April 24, 2012]. O’Tool, R. (2007). The best-laid plans: how government planning harms your quality of life, your pocketbook, and your future. Cato Institute. Png, I. (2002). Managerial economics. Wiley-Blackwell. Portes, R. (2009). Global Imbalances. London Business School and CEPR. [Pdf]. Available at: http://pages.stern.nyu.edu/~dbackus/CA/Portes%20imbalances%20Feb%2009.pdf. [Accessed on April 24, 2012]. Wiedemer, J. D., Wiedemer, R. A. & Janszen, E. (2006). Americas Bubble Economy: Profit When It Pops. John Wiley and Sons. Appendix Figure 1: Annual Change in GDP and Employment in UK (Source: Gregg & Wadsworth, 2010, p.26) Figure 2: Employment levels in UK from the beginning of the recession for the 1980s, 1990s and 2008-09 recessions (Source: Gregg & Wadsworth, 2010, p.27) Read More