The United Kingdom, and Snippets about the Economy - Assignment Example

Contents Contents Introduction – United Kingdom, and snippets about the economy. 2 The Global Financial Crisis and the policymakers at Great Britain 3 Definition and explanation of important terms pertaining to this discussion 4 Finally, the sectoral impact of the crisis: the sectors which were affected the most 5 References 7 Bibliography 7 Introduction – United Kingdom, and snippets about the economy. In terms of Nominal GDP, the economy of the United Kingdom is the fifth largest in the world (International Monetary Fund, 2009). An economic superpower, the nation is also the second largest nation in the European Union as regards to purchasing power parity. United Kingdom was the first nation to industrialise in to the modern era and is the centre for world trade and commerce in the present century as well. The country saw a gamut of economic activities as a result of the global financial crisis in 2008 – 09. The central bank of the country, the Bank of England had cut interest rates to 1.0 per cent by the end of 2008, which is expected to drop to 0.5 per cent by 2010. The United Kingdom budget deficit was 5.3 per cent of GDP in 2008. With the economic stimulus packages and bank bailouts being worked upon, that is expected to rise to 11.3 per cent of GDP in 2009 and 13 per cent of GDP in 2010 (UK economic overview, 2009). Contractionary tendencies had resulted in United Kingdom having the58th lowest inflation rate in the world at end 2008. Inflation had jumped up to 3.6 per cent in 2008, but dropped back with the financial collapse and is expected to be 0.4 per cent in 2009 and 0.8 per cent in 2010The 3-month Treasury rate has similarly dropped, from 5.5 per cent in 2008 to an expected 1.3 per cent in 2009 and 2010. The official unemployment rate had reached 6.3 per cent in the United Kingdom by the end of 2008 according to the Office of National Statistics, reaching close to 2 million people unemployed. This figure is likely to grow to the 2.5 million – 3 million figures, or 8-10 per cent(UK Output, Income and Expenditure, 2009). In 2008, the United Kingdom was placed on the 43rd position on a list of nations ranked according to their national debts 47.2 per cent of GDP. This figure is expected to rise to 58.5 per cent of GDP by 2009 and 70 per cent of GDP in 2010, as an aftermath to the budget deficits of 2009-2010. The UK has the third highest current account deficit in the world of US$186 billion. It has a large trade deficit in manufacturing and has become a net importer of energy and North Sea extraction declines. The balance of payments for the country shows $468.7 billion of exports, which is the 9th largest in the world, and $654.7 billion of imports, sixth largest in the world. United Kingdom was the second largest recipient of foreign direct investment (FDI) in 2007 (Sassen, S., 2001). The Global Financial Crisis and the policymakers at Great Britain Government intervention for the British economy is underlined by the support that the government has extended to the to the financial sector. The different measures have different rates of exposure to the public sector in Great Britain and can be broadly classified as: Support measures: With radical moves like undertaking asset swaps against a broader range of collateral than usual the Bank of England has extended its balance sheet by lending. A new asset purchase facility has been put to place, under the purview of which the central bank will be authorised by the Treasury to purchase private sector assets. Deposit protection: The jurisdiction of the Financial Services Compensation Scheme (FSCS) has been broadened so as to increase its functionality. Guarantees: The government of Great Britain has taken initiatives to guarantee some bank debt – both unsecured and secured debt. The government has also taken steps to offer capital and asset protection to banks on the assets that are affected most by the fluctuations in the financial markets. Bank Recapitalisation and Nationalisation: The Government of Great Britain has procured significant equity stakes in both Royal Bank of Scotland and the new Lloyds Banking Group, along with the nationalization of the Northern Rock and Bradford & Bingley. Definition and explanation of important terms pertaining to this discussion Fiscal and Monetary Policy: The Fiscal policy refers to the use of the government spending ad the tax policies to affect the level of activity in an economy, while monetary policy refers to the various measures that are taken by the central bank of a country to control the level of money supply and the levels of interest rate so as to stimulate economic activities. Fiscal expansion, brought about by expansionary fiscal policies, aim to increase the level of private investment in an economy. Inflation and Deflation: Inflation refers to a rise in the general level of prices while deflations hints at the opposite – the lowering of the levels over a period of time. Unemployment: Unemployment, as measured by the unemployment rate, refers to the percentage of the available labour force without viable avenues for employment. Depression: Depression refers to a state of the economy where the economy contracts resulting in a mismatch between the levels of Aggregate Demand and Aggregate Supply, and finally resulting in high levels of unemployment. Aggregate Demand: The economy consists of four sectors – the household, the business fraternity, the government and finally, the foreign purchasers of exports. The sum of the demand for current output by all these sectors is known as Aggregate Demand. Aggregate Supply: The aggregate supply refers to the sum level of output all firms in an economy will produce at each value of the Aggregate price level. Exchange Rate: Exchange rate between two countries is the price of one countries currency in terms of the other currency. Globalisation: The phenomenon of lowering down of barriers to international trade, thereby promoting an atmosphere of business activity where the resources are used according to the best possible manner. Finally, the sectoral impact of the crisis: the sectors which were affected the most The ongoing financial crisis has affected almost all sectors of the economy as shown by the contractions that they have shown. Of all the sectors, metal products, financial services and hospitality sectors remain the most vulnerable. The reasons for this vulnerability are many – the cyclical nature of the sectors revenue models, the weak financial positions that companies find themselves in, and the general contractions that are ensuing in the global markets. One of the prime factors which can help a company to ride the rough weather in this financial crisis is the financial position of the company. In case the organization can generate enough from its retained earnings or external borrowings successfully, it will be able to see the recession away, and even lay a platform for further growth – through consolidation and inorganic growth. A direct relation with profitability and the financial position of a company can be drawn, the metal and financial services sector of the British economy are perhaps the least profitable among the others with profitability rates around 8 – 10%. The hospitality (hotel and restaurant) sector is also similarly poised with a gearing ratio ( Debt/ Capital). This makes the above sectors highly vulnerable to credit crunch. Interest cover is another important measure of a company’s financial standing – it shows the relation between a company’s profits and the interest payouts it has to make on the debt it has taken. Lower interest cover will imply a higher risk of default on the part of the company – Britain’s metal products sector has a interest cover ratio of 3 as compared to 27 for the engineering sector. The economy and equity betas are measures with which the cyclical nature of a sector can be understood. The economy beta shows the responsiveness of the output produced with relation to the overall changes in the GDP based on the data available for the last 20 years, while the equity beta measures the volatility of the shares of a company with respect to the movement of the share market. Metal products have a value of 1.5 corresponding to equity beta as compared to 0.7 for utilities (International Financial Crisis,n.d.). One of the prime reasons which affect the status of the metal product sector is the exposure to the volatile and weak global metal market. A low price to earnings ratio for the sector also shows the sectors problems concerning future growth. Thus low profitability, coupled with the lowest interest coverage among all the sectors, shows the problematic road ahead for the sector. The financial services has seen a lot of direct intervention from the government, which however will not stop the sector for showing poor returns for the shareholders as shown by the low Price to Earnings ratio. The hospitality sector of the British economy is faced with issues of cyclical revenue flows and a low interest coverage – it is exposed to the worsening conditions in the credit markets and the global economy as a whole. References International Monetary Fund, 2009, [Online] Available: http://www.imf.org/external/pubs/ft/weo/2009/01/weodata/weorept.aspx?pr.x=68&pr.y=19&sy=2006&ey=2009&scsm=1&ssd=1&sort=country&ds=.&br=1&c=112&s=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a= [26 May 2008] Booth P., 2009, Verdict on the Crash: Causes and Policy Implications, The Institute of Economic Affairs UK economic overview, 2009, [Online] Available: http://www.economy-news.co.uk/uk-economy-0704.html [26 May 2008] UK Output, Income and Expenditure, 2009, [Online] Available: http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=1129 [26 May 2008] Sassen, S., 2001, The Global City: New York, London, Tokyo, Princeton University Press International Financial Crisis, No Date, University Libraries, [Online] Available: http://www.libraries.psu.edu/psul/researchguides/socialsciences/crisis.html [26 May 2008] Bibliography Litterick D., 2008, Financial Crisis: Emergency measures fail to halt stock market plunge, [Online] Available: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3160813/Financial-Crisis-Emergency-measures-fail-to-halt-stock-market-plunge.html [26 May 2008] Read More