Impact of the Global Financial Crisis in the UK - Literature review Example

Impact of the Global Financial Crisis in the UK The financial crisis in the UK was a part of the global implications of the Sub-Prime crisis in the US. The impact of the financial crisis has been of a global nature. Increased level of globalization translated into increased vulnerabilities when the global financial crisis hit. Businesses were heavily interlinked and financial institutions held a significant degree of power in society. This paper will attempt to provide an exploratory view of the impact that the global financial crisis had on the UK. The global financial crisis had extreme implications in almost every industry in every country in the world. The only countries that managed to get through the financial crisis without being directly affected were those that did not have extensive interests vested in the economic infrastructure of the US. In October 2009, it was reported that "the UK economy unexpectedly contracted by 0.4% between July and September, according to official figures, meaning the country [was] still in financial crisis. It [was] the first time UK gross domestic product [had] contracted for six consecutive quarters, since quarterly figures were first recorded in 1955" (BBC News 2009). The UK has gone through considerably tough economic times in the past, but the most recent global financial crisis has had the most significant impacts on the UK’s economy and its social infrastructure. When financial institutions collapsed, a chain reaction took place which led to a massive disorientation of the fundamental functioning of society. “The U.K. economy shrank 6% from April 2008 through September 2009, the deepest slump since the government began maintaining records in 1955. Before the financial crisis, the U.K. had 63 consecutive quarters of growth stretching back to late 1992, according to the Organization for Economic Cooperation and Development” (Shah 2010). As a result of the global financial crisis, the UK commercial banking industry experienced a deceleration in its growth (Data Monitor 2009). While the UK commercial banking industry was able to continue experiencing an increasing in its value, the growth rate did not experience an equally favorable trend as a result of the global financial crisis. Figure 1: UK Commercial Banking Industry Growth Over the Years Source: (Data Monitor 2009) The implications of the global financial crisis led to the release of a large number of state-sponsored bail outs in an attempt to save the economic infrastructure from collapsing. This was followed by direct control and regulation of the banking sector by the government in an attempt to ensure that the self-destructing cycle did not continue. These direct control and bailout packages were part of the government’s attempts to restore the banking industry's confidence. However, the combined effect of all such measures did not manage to save the UK economy from the short term implications of the global financial crisis. What made the financial crisis all the more worse was the fact that the UK economy was to undergo an actual decrease in the growth rate at around the same time that the financial crisis hit. It is imperative to realize that the UK economy had been in a continuous and steady state of growth for over a year now and the financial crisis served to bring down the real estate industry and businesses. The short term impacts of the global financial crisis in the UK became unavoidable on account of the extreme decrease in demand from the consumers' end. This decrease in demand was not only observed in the case of consumables but also in the financial services sector. It is important to note that the UK economy has become very interlinked with the financial services sector over time. Because of the impact of the global financial crisis on the financial position of the UK, "the government took control of Bradford & Bingley's £50 billion of mortgages and loans and savings operations and branches were sold to Spain's Santander. The government also announced £37 billion rescue package for RBS, Lloyds, and HBOS. The Bank of England extended the existing £50 billion Special Liquidity Scheme to £200 billion, while a further £250 billion was pumped in under a debt guarantee scheme" (Data Monitor 2009). As businesses began to get desperate in an attempt to acquire money, banks withdrew their loan plans and tightened the loan dispersion systems. This caused the flow of money to dry down considerably, leading to an adverse impact on the execution of business dealings in the UK (Hall 2009). Funding that would have otherwise been easily sanctioned and acquired was refused. As a result, businesses had no choice but to put a hold on development plans that were in execution. Portfolio values for retail investors fell by an average of over ten percent. The value of instruments such as bonds and the like fell by over 30%, causing investment and security firms to experience considerable losses (Market Line 2009). The sterling experienced a major downfall in the face of the dollar and the Euro. This caused online businesses to experience major falls in revenue figures as well. "Consumables and Accessories sensitivity to consumer well-being is reflected in the economy's not-so-clean bill of health. With disposable income drying up, and the consumer's difficulty in squeezing some credibility out of the pound, the UK market has stalled, as credit-driven discretionary spending has contracted" (Market Line 2009). As a result of the current global financial crisis, the UK economy is undergoing economic instability which has not been seen since the 1930s. It would not be unjustified to state that this global financial crisis had implications on the UK that are far more severe than those of the financial crisis of the UK in the 1930s. As a result of the financial crisis, the value of assets came down drastically while the figures showing the debt remained stationary. Hence a wide gap between need and affordability was created (Global Economic Crisis 2009). The implications of the global financial crisis on the UK became quite apparent when figures for the second half of 2008 showed that the economy had shrunk by almost 1.5 percent. As a result of this, GDP figures fell causing the pound to come down to a level that had only been observed before in the mid 1980s (Global Economic Crisis 2009). As the value of the sterling continued to fall, the price of commodities continued to increase. The fall of the value of the sterling can be attributed to two specific causes. The first cause lies in the fact that imports became very expensive. The price of imports increased greatly within the span of a few months. Figure 2: Oil Price Comparison for US & UK Source: (Smith 2008) From the consumers' perspective, the value of currency increased significantly. As a result, consumers became increasingly selective about their expenses. The decrease in disposable income led to a saving-trend in which consumers demanded more value for each unit of currency and refused to make a transaction unless the value for their money was clearly present. In order to counter this new approach adopted by the consumers in the UK, retailers were forced to reshape their operations in an attempt to bring down operational costs (Market Line 2008). As a result of all the bail outs and other circumstances discussed above, the UK has fallen under considerable debt. Almost 1.5 trillion pounds of debt is currently coming pushing down development in the UK. This figure is a very rough approximate sum of debt that exists in the form of numerous credit and mortgage based loans in the region. As a result, more and more people in the UK are becoming insolvent with each passing year (UK Financial Crisis 2010). It comes as no surprise that debt-relief companies are getting swamped with applications from individuals and organizations seeking debt-relief assistance and advice on the same. Many financial institutions collapsed after going bankrupt and many managed to survive. Some of the organizations were able to save themselves by the government sponsored bail-out packages. Companies such as these were able to start developing a cost-effective restructuring of operations from square one without having to lose everything. What makes the financial crisis more dangerous for the UK is that once the bailout funds dry out and the remodeled business models come into play, they will have to face low levels of demand along with a decreased inclination among consumers to spend disposable income. Terms of credit will be shorter now than they ever were before and lenders will place high demands for lending money. Organizations will also have to face more tightly regulatory requirements in the face of limited resources and dwindling revenue streams. Figure 3: UK GDP Growth Source: (BBC News 2010) Current standing of the UK economy in the financial crisis “The UK economy has come out of financial crisis, after figures showed it had grown by a weaker-than-expected 0.1% in the last three months of 2009. The economy had previously contracted for six consecutive quarters - the longest period since quarterly figures were first recorded in 1955. There has been recent recovery signs - last week, UK unemployment fell for the first time in 18 months” (BBC News 2010). The global financial crisis led to a major increase in unemployment in the UK. This was observed because many companies closed down on account of bankruptcy. Organizations that did not file for bankruptcy either scaled back their operations or had to lay off large parts of their workforce. A highly damaging cycle was created in which consumers continued to cut back expenditures on account of lost jobs. Hence, the UK economy underwent a deflation which eventually led to inflation. The inflation was further stimulated by the impact of the global financial crisis on the lending ability of multination and national banks operating in the UK. Unemployment was perhaps one of the largest implications of the global economic financial crisis on the UK. The financial crisis was linked heavily with financial services and a large part of the UK workforce is employed in this sector. As a result of the global economic financial crisis, a large number of consolidations were observed as well as massive downsizing measures. This led to a high volume of layoffs, leading to a sharp increase in unemployment. Figure 4: Employment in the UK Source: (Oxford Economics 2009) Unemployment has observed a significant increase from the time the global financial crisis hit. While the initial unemployment count was no more than in the tens of thousands, the unemployment is now well over 2.5 million. The UK has never recorded figures of such a nature since 1994. What is more worrying is that the rate of unemployment is steadily crawling towards 10% without showing any chances of decreasing (BBC News 2010). As a result of the global financial crisis, the inflation in the UK has risen by almost 3.4% (BBC News 2010). It is important to note that this rise is far more than what the UK had been expecting. It comes as no surprise that the cost of the housing has also increased in the balance. The global financial crisis had also had an effect on oil prices around the world. As a result of the increase in oil prices, almost every part of the society’s infrastructure and every industry have had to bear increased costs. These costs of transportation are rising on account of rising fuel prices. The rising cost of transportation is being complimented by the rising cost of housing and the similarly rising cost of consumer products. The UK had to face severe affects of the global financial crisis in the short term implications. But the worst part is that the affects of the global financial crisis may continue on account of the global credit crunch that links financial institutions across the world. The credit crunch is an aspect of the global financial crisis that is expected to last well into the long run for the UK economy and can have extensive impacts on monetary policy development in the future. What is even more worrying is the fact that the short term consequences of the global financial crisis are moving towards a direction where investments were falling. Not only are revenues failing to acquire momentum but investing parties are either considering withdrawing their investments or not proceeding with investment plans that had already been made in the past before the financial crisis hit. As a result, businesses aiming to recover from bankruptcy or those that avoided bankruptcy but are looking towards making up the large losses are having a lot of trouble in developing themselves. The global financial crisis served to decrease demand across the world. This decrease in demand was not only for domestically manufactured products but also for products imported. Hence, exporting countries such as the UK face a critical situation. Countries such as these have numerous industries that generate a large share of their revenues from exports (Smith 2008). The decrease in global demand of products will serve to tighten the revenue streams the existed because of the exports. As a result, the exports of the UK will become an equation of the global demand for UK products and services. However, in analyzing the implications of the global financial crisis in the UK and its impacts, it is extremely important to note that the impact of the global financial crisis on the UK is of a lesser intensity than it was on other countries. This was because a wage-spiral policy was not taking place (Smith 2008). This prevented an early rise in interest rates which was the case observed in most of the other countries that were hit by the financial crisis. Also, the price of oil had experienced a fall a few days back which helped to provide a bit of a cushion in the sudden increase in prices. It should also be noted that an increase in competition has taken place after the fall of the value of the sterling. While the presence of things such as these serves to make the impact of the financial crisis in the UK somewhat less harmful than it was for other economies such as the US in particular, there is little doubt that the household sector will suffer the most (Smith 2008). But even in this case, the low rate of interest serves to provide a ratio of household debt service that is still within reasonable perimeters. To take a summary look, factors that may have adverse implications in the long run include those such as the credit crunch and the loss of extremely important wealth from the housing sector on account of the heavy reliance of financial services on the housing sector. Also, the UK household sector is currently in a position where the debt has reached a very high level and decreased income is leaving very little capacity for savings let alone for the payment of this debt. As a result, organizations involved in the debt are faced with the singular option of retrenchment. Of the few aspects that can be trusted to be of any help to the UK in recovering from the impacts of the global financial crisis, the most important is the fact that the UK is currently not in a position where it has a lot of excess inventory. Also, the household debt service ratio is not currently in an excessive state. There is little doubt that 2010 is being seen as a year in which numerous global economies will begin their recovery. However, the time it will take for these economies to fully recover and return to their original levels of stability is far more than a few years. The causes of the global financial crisis were highly diverse. From the housing bubble to the credit bubble, numerous industries came under the collapse caused by the global financial crisis (Data Monitor 2010). The UK was lucky that it was able to avoid the worst of the implications of the global financial crisis but the time to recover and to go back towards steady growth will take a few years. The UK economy will require continuous support from the government and it will be suitable for the UK if small businesses continued to struggle on for the next few years instead of closing down or considering retrenchment. The UK economy will be able to recover considerably soon from the implications of the global financial crisis but until the recovery process comes to a complete execution, the UK will still face complexities such as unemployment, rising commodity prices and the like. It is clear from the above discussion that the global economic financial crisis has had significant affects on the UK economy. The discussion also shows that the impact of the financial crisis is one that is limited in its short term impacts. The impact of the financial crisis is still influencing the UK economy and it will take the UK a few years to fully recover from the impacts of the financial crisis. While the assistance from the government managed to prevent a complete disaster, the short term and long term affects can still be seen clearly. List of References BBC News. (2009) Record financial crisis for UK economy. Retrieved 2010, from [online] available from [accessed 16 May 2010] BBC News. (2010) UK economy emerges from financial crisis. Retrieved 2010, from [online] available from [accessed 17 May 2010] BBC News. (2010) UK inflation rate rises to 3.4%. Retrieved 2010, from [online] available from [accessed 17 May 2010] BBC News. (2010) UK unemployment increases to 2.5 million. Retrieved 2010, from [online] available from [accessed 16 May 2010[ Data Monitor. 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