A Massive Impact of the UK Recession on the Tourism and Other Industries - Term Paper Example

United Kingdom Recession affiliation Introduction According to Krugman and Wells, (2006), a recession is defined is the depression in the economy for at least a period of two quarters (six months) when the output and the employment in a country appear to be falling. A recession can be brought about by a vast number of factors including a decrease in factory productions, people purchasing less goods, high rise in unemployment, an unhealthy stock or a sudden drop in the personal wages of workers leading to a scarcity of choice, and opportunity costs. A recession comes bearing grieve consequences since it affects the factor of choice which is vital for the growth of an economy. Choice as a factor of growth is crucial in the growth of an economy since the economy needs consumers will and choice of products in order to relish and grow. That said, it is evident that the economy requires the input of consumers and produces who act as the driving force since they provide the necessary resources which include labour, land, physical and human capital etc. This paper will discuss the main reasons why the recent UK recession occurred and its impact in the tourism industry as a leisure market. The paper will aim at answering the why and the how questions in relation to the causes and the impacts of the 2008 – 2009 UK recession that occurred between the last quarter of 2008 and the second quarter of 2009. The paper addresses the reasons of the recession in the first section and the impacts of the recession on the tourism industry in the second section and finally a conclusion, which aim at giving a clear discussion and analysis of the first two sections. Reasons for the recession Verick and Islam (2010) argue that the 2008 – 2009 global recession (financial crisis) was largely accelerated by the global imbalances that were being experienced worldwide at that time in terms of a drop in interest rates, perceptions of risks, and the regulation of financial systems. The UK was, apparently, not left behind as it faced many financial problems including near bankruptcy of banks, a fall in its stock market, large levels of public debt, a tumbling currency and frozen money markets which were all factors that promoted a recession (Cooper, 2009). Among the leading causes of the recession was the devaluation of UK currency the Sterling Pound. The Sterling Pound during the recession had a devaluated by 25-30% from the value it once held in before the recession. This was in accordance with the basic economic theory that states that any decrease in the exchange rates of a currency will eminently aid in the increase of exports and thus stimulating growth in the country’s export sector. However, the depreciating sterling pound led to a phenomena of cost-push inflation, which led to a decline in the living standards of the residents. This eventually led to a situation where the cost of consumer goods grew rapidly thus causing a lower spenditure power of the individuals, thus UK became a less competitive state compared to some of its trading partners (Cooper, 2009). Another main factor is the UK budget deficit and the national debt. According to Ukpublicspending.co.uk, the UK national debt was at 35.57% of the total GDP for the year 2007. The figure rapidly increased during the recession to 36.61% at the end of 2008 and 44.26% by the third quarter of 2009. The recession increased the debt by 7.65%. The increase was due to the difficulties the deficit caused in the attraction of investors in to the country. It is noted that Asian investors significantly slowed down investments in the UK due to the deficit, which led to an imbalance between the consumption and the domestic production in the country that has continued to hinder the growth of the economy since. The third factor that lead to the 2008 – 2009 recession was the increased subprime mortgages issuance (Mortgage Mess) that UK experienced earlier. Eklavya (2008) argues that in the period of 2004 and 2007, there were not regulations monitoring the subprime mortgages being offered in that the mortgage industry used to sell mortgages to any individual without considering whether they are able to complete the payments on time or whether they were capably of paying them off at all. According to Verick and Islam (2010), the estimated value of subprime mortgages in the UK to be at an outstanding value of £ 0.53 Billion by the end of December 2006 which led to an increased bottle up of interest since most of the owners were unable to pay. This situation grew and resulted to a phenomenon where the value of the houses being mortgaged was higher than the mortgage price the realtors were issuing. The huge Mortgage Mess eventually led to foreclosures of majority of the subprime mortgages, which affected the independent mortgage brokers, and institutions, which caused a significant, slow down of the economic growth and due to a decreased customer spending rate and low investment rates. Low interest rates that the banks were issuing on loans was also a major contribution to the development of the recession in 2008. According to Taylor (2009), Elmendorf (2009) and Verick and Islam (2010), the UK Treasury had adjusted their the banks interest rates substantially to unprecedented levels that eventually created a debt-finance consumption explosion that led and promoted the immergence of a housing bubble that encouraged the development of a recession. Most economist argue that the this factors was also evident in most countries with other stagnating at an interest rate of 1% between the years 2004 and 2006 thus leading to a global recession. Although the low interest were aimed at improving lending of banks, it failed because it did not cover the overpriced asset gap as it contributed greatly to the immergence of the mortgage mess discussed earlier. The low interest rates that were being issued at the time and the subprime mortgages being issued resulted into a credit crunch, which was among the contributing factors to recession. According to McHugh (2007), the high subprime mortgages issued during the period of 2004 and 2006 and the reduced interest rates that the banks were offering at the same period led to a sudden shortage of loan funds available to organizations and individual hence a credit crunch. Bloom (2009) argues that majority of the commercial and investment banks faced huge loses due to the risky mortgage loans issued thus other lending organizations and banks were reluctant in offering loans to anyone thus leading to a shortage of funds in circulation (Bloom, 2009). This situation can is described as key factor that led to recession since the liquidity was decreased leading causing even more difficulty and increase in the cost which led to decreased consumer spending and investment (Cooper, 2009). Impacts of the recession on the tourism industry Recession is globally known to hinder the development of any industry in a country. The 2008 – 2009 UK recession was no different as it affected tourism due to the financial and economic downturn it brought. The United Nations World Tourism Organization (UNWTO) research data on international tourism states that tourism gradually started declining during the first quarter of 2009, turning out to being the last to experience the weight of the recession where they experienced a negative trend in the number of international visitors arriving in the country and the prevailing financial hardships. This paper will majorly focus on the two main tourism sectors in the UK, that is, domestic and inbound overnight tourists where the tourism industry is defined as any facilities that offer food and drinks serving activities, accommodation services, passenger transportation services, cultural activities, travel agency activities and / or sport activities. According to the United Kingdom Tourism Survey, The number of inbound tourist that arrived in the country during and after the recession declined by 7% and the number of domestic tourists decreased by 5%. The number of outgoing tourists from UK to other countries also experienced a dramatic decrease of 15%. The lack of outside traveling UK tourists was due to the decrease in employment and the inflation that took place during the inflation period. Since banks and other lending facilities were not offering loans, investors who are considered as tourists were unwilling to venture into business in to the country since the country was having a credit crunch at the time leading to a negative report on the number of tourists arriving into the country (The United Kingdom Tourism Survey, 2010). The tourism industry faced a huge loss in terms of investment and opportunities to grow. This was because during the recession, inflation was arising which consequently meant that the cost of goods and services suddenly increased. According to the United Kingdom Tourism survey (2009), the inflation rate in the UK rose from 1.09% to 1.6% over a period of one month meaning that the prices the tourism industry had set before the inflation would incur as loses since they had to pay more for offering the same services they used to offer for a smaller price. The United Kingdom Tourism survey (2010) states that the tourism industry also incurred multiple losses since they were forced to reduce their accommodation to rates in an attempt to attract visitors. This move was due to the recession as the hotels needed money to run their businesses and banks and other lenders were not offering loans. They resulted to a desperate move of reducing their accommodation rates so as to get enough money to continue running their businesses (The United Kingdom Tourism Survey, 2010). Another impact of the recession was a loss of employment as many people were laid off in order for the companies to minimize expenditure and to keep their businesses running. According to the World Travel Market report (2010) Up to 8% of the Global competitors left the tourism industry due to the recession and more were expected to follow while 16% of the hotels and 14% of airlines businesses went down. The reports indicate that the travel revenues for the UK fell by 46% during the first quarter of 2009 to the third quarter of the year 2011 (The United Kingdom Tourism Survey, 2010). The recession brought about indirect and induced effects from the tourism industry, which was estimated to have totalled to over £204 million. Induced and indirect effects are referred to as the impacts faced by the household income based on the direct expenditure of tourist. This refers to industries such as cultural and heritage industries whose main clients are tourist who are attracted by the diverse culture in the country. These industries also suffered because the tourism industry could not be r4elied on thus they suffered the same impacts of losses and lying off of employees. Conclusion The UK recession had a massive impact on all industries in general although the tourism industry and other export depended industries did not face the same challenges at first. The effects of the recession proved that the tourism industry was vulnerable and volatile to the economy just like any other industry contrary to what was believed before. Efforts are in place to ensure that the tourism industry recovers fully from the recession. As it was observed, people opt to keep their money and of other essentials of life and they prefer to stay at home during such times (The United Kingdom Tourism Survey, 2010). 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