The Balance of Payment and the Exchange Rate - Essay Example

MACRO Table of Contents Introduction 3 Economic Growth 3 Unemployment 5 Inflation 7 The Balance of Payment and the Exchange Rate 8 Conclusion 10 References 10 Introduction The United Kingdom (UK) economy and the global economy had lately faced massive economic turmoil, which has dramatically influenced the macro and micro economic condition of the nation. The economic turmoil witnessed by the world including the UK ended the continuous flow of economic growth, stable inflation and rising employment. The UK economy is seen to be gradually emerging from the situation of economic turmoil. The attention of the government is now shifting to make it more sustainable, resilient and stable economy (Crown, 2014; OECD, 2013). In the backdrop of this, the paper will guide us to know more about the economy of the UK. It will also considered about the various issues and challenges related to economic growth, unemployment, inflation, and the balance of payment and the exchange rate Economic Growth Economic growth is often defined as the increase in the market value to the quantity of goods and services produced by the economy over the period of time. Economic growth can be measured in terms of the increase in the per capita gross domestic product (GDP) (The Saylor Foundation, 2014). Accordingly, the GDP growth rate of the UK has been identified to demonstrate constant fluctuation. The UK economy is ascertained to face with strong headwinds and challenges. Contextually, the sluggish progress of the global economy along with uncertainty related to euro zone is identified to generate considerable headwinds for the nation’s economy. Output of the economy has remained flat for the last two years demonstrating 3% lower than it was at peak. Besides, private consumption is identified to restrain particularly due to reducing real disposable income, precautionary saving, tight access to credit and deleveraging. Likewise, private investment is also ascertained to be suffering from declining demand for goods and services, increased uncertainty and rigid financial conditions. The sluggish growth experienced by the trading partners particularly in Europe has eroded the hopes of quick recovery from the challenges faced by the economy. Declining non-price competitiveness and the limited market share held by the UK in the emerging markets of the world has also hampered the rate of export growth. Notably, high household debt, alongside limited access to mortgages is reckoned to have continuous impact on the residential investment (Wehinger, 2011). According to Office for Budget Responsibility (OBR), GDP growth rate of the economy is expected to be raised by 2.7 % in the year 2014. The OBR has warned about the prediction that the economy might face with significant challenges to meet forecasted value because of the prevailing situation in Ukraine and there is a possible risk associated with it. IMF has also announced the same risk, but particularly in the technology sector of the UK (BBC, 2014; Guardian News and Media Limited, 2014; OECD, 2013). The percentage change in the main economic indicators for the United Kingdom is illustrated below. Source: (OECD, 2013) Unemployment It has been observed that factor of employment is one of the major indicators of the economic. Correspondingly, the increased rate of unemployment is ascertained to have considerable negative impact on the overall performance of any economy (Crown, n.d.). As a result of economic and financial crisis significant changes in unemployment rate was witnessed by almost all the countries in the world. Despite the challenges pose by economic recession, the rise in the unemployment rate in the UK has been moderate inconsistent to losses in output. The rise in the unemployment rate is ascertained to be quite similar to that of 1990s but is ascertained to be smaller when compared to the situation prevailing during the period 1980s. Nevertheless, it has been reckoned that if output growth continues to decline than it is anticipated that both unemployment and under-employment will possibly rise. Besides, uncertainty associated with the recovery trend is also projected to negatively influence the employment growth within the economy. In addition, the declining external demand as well as the ability to export is also identified to serve as strong determinant influencing the overall rate of employment. The subdued wage growth and rise in the part time job is ascertained to limit the job losses in the UK. It is reckoned that the financial instability will possibly increase the cost of capital, which in turn is expected to support labor-intensive activities. Correspondingly, the decline in the labor cost is anticipated to promote firms within the economy to retain employees. Besides, it is also projected that reduction in the job hours will favorably influence the employment rate restricting further loss in jobs (Telegraph Media Group Limited, 2014; OECD, 2013). The graphical representation of the unemployment trend is depicted below. Source: (OECD, 2013) Inflation The rate of inflation is ascertained to be dropping especially driven sluggish economic growth and declining impact of increase in the indirect tax and continuous depreciation in the value of sterling. Although the inflationary risk is ascertained to be low but it is anticipated that the prevailing global economic condition burdened with the sluggish economic growth, alongside slow growth in wage rate are reckoned to negatively influence the rate of inflation in the economy. In addition, the weak monetary measures ensued across the globe is also expected to augment the inflation related risks. For instance, the fuel bubbles experienced by the world projected to raise the commodity as well as housing prices further resulting in increased financial instability. Nevertheless, the global cooperation is identified to reduce these risks to a certain extent (OECD, 2013). The graphical representation of the annual consumer price index (CPI) is illustrated below. Source: (OECD, 2013) The Balance of Payment and the Exchange Rate The constantly growing wealth especially housing as well as easy access to credit is ascertained to promote household to save less. It has been identified that despite the commendable growth witnessed by the UK economy prior to the crisis, less efforts were placed to cut deficits. Consequently, the increasing consumption growth and inflated exchange rate due to capital inflows has contributed towards massive current account deficits. During the year 2009, the government deficit stood to be 11%, which is reckoned to be one of the highest in the OECD listed countries. Almost all sectors in the UK is ascertained to experience substantial increase in debt that has eventually lead to sizeable increase in the domestic debt amounting almost five times of its annual output. Financial sector within the economy is identified to be the major contributor to the massive debt. However, other sectors are also ascertained to be burden with heavy debt. It has been observed that the government fiscal measures remain appropriate. In order to ensure the stability in the economy, it has been argued that government should focus on attaining fiscal sustainability. The monetary policy of the government has reflected considerable support to the national economy since the eruption of economic and financial crisis still it is anticipated that more consolidate step are required in order to ensure rapid recovery and to sustain stable growth (The World Bank, 2014; OECD, 2013). A tabular representation of fiscal indicators as a percentage of GDP is illustrated below. Source: (OECD, 2013) Conclusion It is observed from the foregoing discussion that the impact of the economic and financial crisis has dramatically influenced the overall economic growth of the UK economy hampering the employment rate and inflation as well as balance of payment and the exchange rate. It has been identified that the UK government has exerting significant efforts towards addressing the challenges faced by the economy as well as ensuring quick recovery from the debacle witnessed by it. Nevertheless, it has been anticipated that there is a greater requirement for the UK government to establish international as well as consolidate its fiscal and monetary policies for ensuring stable growth. References Crown, No Date. Business Cycles. Causes and Consequences of Fluctuations. [Online] Available at: http://www.teara.govt.nz/en/business-cycles/page-3 [Accessed July 15, 2014]. Crown, 2014. Helping Developing Countries Economies to Grow. Policies. [Online] Available at: https://www.gov.uk/government/policies/helping-developing-countries-economies-to-grow [Accessed July 15, 2014]. OECD, 2013. OECD Economic Surveys: United Kingdom. Overview. [Online] Available at: http://www.oecd.org/eco/surveys/UK_Overview_ENG.pdf [Accessed July 15, 2014]. The World Bank, 2014. Business Reforms in United Kingdom. Business Reform. [Online] Available at: http://www.doingbusiness.org/reforms/overview/economy/united-kingdom [Accessed July 15, 2014]. Telegraph Media Group Limited, 2014. There Are Still Serious Structural Weaknesses In The UK Economy. Comment. . [Online] Available at: http://www.telegraph.co.uk/finance/comment/rogerbootle/5592954/There-are-still-serious-structural-weaknesses-in-the-UK-economy.html [Accessed July 15, 2014]. The Saylor Foundation, 2014. Economic Growth. Article Source and Contributors. [Online] Available at: http://www.saylor.org/site/wp-content/uploads/2011/02/Economic-Growth.pdf [Accessed July 15, 2014]. Wehinger, G., 2011. Fostering Long –Term Investment and Economic Growth. OECD Journal: Financial Market Trends, Vol. 2011. No.1, pp. 1-21. Read More