British Economy after Global Recession of 2008 - Coursework Example

British Economy after Global Recession of 2008 As the world is gearing up to prepare new agendas, engage in bilateral and multilateral ties, it seems that most of the countries have come out of the recession or credit crisis, as famously called which was caused mainly due to deregulation in the banking sector. Nevertheless to say that the recent economic crisis has resulted in the filing of bankruptcy by those companies which were considered as market leaders, banks which were rated ‘AAA’ by the banking institutions, inflation, employee layoffs increasing the rate of unemployment and soaring high prices of commodities. Where most of the nations were suffering huge losses from economic crisis, the United Kingdom was not spared as Royal Bank of Scotland filed for bankruptcy along with many other banks and companies inflicting a larger cumulative loss to the UK’s output as compared to any of the other post war recessions. According to Gregg and Wadsworth (2), employment raters remained higher during the latest economic crisis as compared to previous crisis which may be due to combination of high firm profitability levels going into the recession, supportive monetary and fiscal policies during the recession, reductions in real producer wages and relatively buoyant real consumer wages. This paper is based on the remark made by Gregg and Wadsworth and also Taberner (2010) who mentioned that the UK economy is inching towards recovery in 2010. This paper critically analyses the data pertaining to various factors that provide sufficient evidence and substantiate the earlier statements that Britain has attained successful recovery. Monetary Policies The British economy was officially declared to be in a recession in January 2009 when it was announced by the Office of National Statistics (ONS) that the preliminary estimate of gross domestic product (GDP) showed a fall of 1.5 percent in the last three months of 2008 after a 0.6 percent drop in previous quarter. As the banks were at the core causing recession to occur, central banks responded to the financial crisis and the recession by cutting interest rates to unprecedentedly low levels. It is further stated that Bank of England reduced the base rate from five percent to 0.5 percent between October 2008 and March 2009 and also embarked on the programme of ‘quantitative easing’ by buying assets which would include government bonds to boost the money supply and help companies borrow from the banks so as to create business opportunities for banks (Vaitilingam, 10). Horn (4) mentioned that the British rescue package for the banks consisted of two components which were the measures of Bank of England and measures of the government. The British government had set up a stimulus package for economic recovery wherein value added tax (VAT) was reduced to 15% for the period 0.12.2008 to 31.12.2009, tax cuts to low income earners, house owners and small and medium sized firms. The policies formulated by the government and Bank of England were economically beneficent because it provided a helping hand to the recession hit entrepreneurs to make a comeback in the market with the help of low tax cuts. UK Banks strengthened their resilience during 2009 which increased capital and decreased leverage sharply reflecting equity issuance and reductions in assets in roughly equal measure. The Bank of England and the UK government introduced several policies and schemes to deal with recession that has finally resulted in positive growth in its GDP for year 2010 in the third quarter. Office for National Statistics (http://www.statistics.gov.uk) reported 0.8 percent increase in the output which was mainly due to growth in each of the component aggregate series, namely services, construction and production. It is further reported that total production output rose to 0.6% in the third quarter of 2010 compared with an increase of 1% in the second quarter. Electricity, gas and water supply output decreased by 0.2% compared with the decrease of 1.3% in the previous quarter which shows that even though growth is in negative, it has improved as compared to previous quarter. Business investment for the second quarter of 2010 is estimated to be 0.7% higher than the previous quarter. This rise in business investment is mainly due to private sector manufacturing which rose by 10.9%. ONS estimates that the measures announced in June 2010 and previous budgetary discussion will add 1.77 percentage points to the consumer price index (CPI) in 2010/11 wherein tobacco, alcohol, road fuel, air passenger duty will share the major increase in CPI along with VAT which is 1.47 percent. According to the Inflation Report (2010) by Bank of England, CPI inflation remained well above the 2% target, elevated by temporary effects stemming from higher oil prices, the restoration of the VATs standard rate. Thus it is evident from the above data, as reported by the Office for National Statistics, UK; the government has been successful in achieving positive growth in its GDP. Unemployment Gregg and Wadsworth (1) mentioned that while UK’s GDP was strikingly low during the recession, the same has less impact on the loss of employment as compared to previous recessions. This finding is purely contradictory to the data revealed by the ONS which shows that unemployment trend has increased and employment has decreased during the recession as shown in the following graph. It is pertinent to mention here that unemployment did not rise until the second year of recession during all the past recession which supports the claim of Gregg and Wadsworth. (Vaitilingam, 16). It is further mentioned that the employment rate for those aged from 16 to 64 years was 70.7 percent. It is evident from the figure that employment trend is increasing but it is reported that the growth is still lower by 270,000 than two years previously. Further unemployment rate fell by 0.1 percent on the quarter in August 2010 as number of unemployed people fell by 56,000 but consequently increased female unemployment by 36,000. Department of work and pensions, Great Britain (7) took strong action to support the economy and invested £5 billion in tackling unemployment and helping back into work. This has resulted in decline of people claiming Job Seekers Allowance as compared to previous year. The success of achieving good rate of employment was mainly due to the initiatives taken by the government to promote investment, skills and flexibility in markets to support jobs and business growth, introduced New Deals employment programmes to train people in necessary skills and provide employment. So far, the UK government has done extremely well to provide employment opportunities to the unemployed but it is important to note that the government has not introduced any polices or measures to help people with already existing skills and moreover training people to get skilled as per the market demand resulting in change of jobs from one industry to another industry as shown in the figure. (Office for National Statistics, 14) Macroeconomic Policies According to Vaitilingam (30) productivity growth is the key driver of economic prosperity. H.M. Treasury, Great Britain (2) in its fiscal strategy report mentioned that the government took comprehensive action to support the economy which has been successful in mitigating the impact of the downturn on businesses and individuals. The UK government formulated a strategy which included setting up of credible financial consolidation plan to ensure a sustainable public finance which is essential for economic stability and long term economic growth. It is further mentioned that sound public finances provide the conditions for growth, helping to maintain low long term interest rates and giving businesses the confidence to plan and invest for the future. The government’s fiscal policy objectives were to ensure sound public finances and that spending and taxation impact fairly within and between generations, which is a midterm policy and to support monetary policy and to allow the automatic stabilizers to help smooth the path of the economy over the short term. It is further reported that UK economy stabilized in the second half of 2009 aided by substantial macroeconomic policy stimulus and government interventions in the financial system to help erase the flow of credit to the economy. The policy interventions by the government resulted in modest growth in output during final quarter of 2009. In order to further boost the economy, the Budget 2010 economic forecast was to promote GDP growth by 1¼ percent in 2010 with fiscal policy, the lagged effects of monetary policy stimulus and easing credit conditions supporting the recovery (HM Treasury, 145). The interventions have resulted in gradual improvement in certain sectors like retail wherein the volume of retail sales in September was 0.5 percent higher than in previous year. Moreover the productivity across the whole economy increased by 1.4 % in the second quarter of 2010. Further businesses closed their operations as there were only 2.10 million enterprises that registered for VAT as compared to 2.15 million in previous year. This shows that there is a decrease in the number of sole proprietors, partnerships and corporate businesses (http://www.statistics.gov.uk). Office for National Statistics (http://www.statistics.gov.uk) reported that the current account deficit reduced as the income surplus increased by £ 6.5 billion to £ 11.3 billion. The balance of payment improved from the deficit of £ 11.3 billion to £ 7.4 billion which was mainly due to trade in goods and services. Regarding trade in goods, exports increased by £ 3.2 billion to £65.5 billion which was mainly due to an increase in the exports of finished manufactured goods, semi manufactured goods, etc. Though there were various interventions and policies prepared by the government, the efforts were not sufficient enough to save the companies to close down their companies as mentioned above. The government has achieved minimal success rate through trades in goods and services, mainly in export category which gives rise to speculations about the strategy defined by the government authorities as to how these strategies fail to create opportunities to business enterprises. Conclusion The housing market was the epicenter of the crisis which initially created opportunities in various sectors, mainly banking sector; later triggering worldwide credit crisis due to deregulation. Though the recovery policies have been worked out by the UK government, it is pertinent to mention here that fiscal policies were not enough to promote entrepreneurial success as most of the companies had close down their businesses. Deficit had reduced from £ 11.3 billion to £ 7.4 billion which were mainly due to export of goods but export in services were not so high as compared to goods instead services were imported. The strategies formed by the government to tackle unemployment during credit crisis were awesome as employable skills were generated keeping in view the market demand. The unemployment rate had drastically reduced over the period of time due to training, skill development policy and by promoting entrepreneurship. The GDP of the United Kingdom showed positive growth wherein the total productive output rose to 0.6% and business investment for the second quarter of 2010 is estimated to be 0.7% higher than the previous quarter. The government of Great Britain has successfully recovered from the latest recession, courtesy great policies to promote employment, skill development, entrepreneurship which in turn promotes GDP. Works cited 1. Bank of England 2010. Inflation Report, The Monetary Policy Committee, England, Accessed 7th November 2010. Web. www.bankofengland.co.uk 2. Department for Work and Pensions (COR), Great Britain: Department for Work and Pensions 2009. Building Britain's Recovery: Achieving Full Employment, The Stationery Office, UK. Print 3. Great Britain: H.M. Treasury 2010. Budget 2010: securing the recovery, economic and fiscal strategy report and financial statement and budget report, The Stationery Office, UK, Print 4. Gregg Paul and Wadsworth, Jonathon 2010. The UK Labor Market and the 2008-2009 Recession, Occasional Paper, Centre for Economic Performance, Great Britain Accessed 8th November 2010. Web http://cep.lse.ac.uk 5. Horn, G.A 2009. Assessment of the banking rescue packages and the economic recovery plans of the Member States - The examples of the UK and Germany – Briefing Paper, IMK, Düsseldorf, Accessed on 8th November 2010 Web. http://www.boeckler.de 6. Office for National Statistics. 2010. Economic and Labour Market Review, Vol 4, No. 8, August, Palgrave Macmillan, Great Britain. Accessed 7th November 2010, Web. http://www.statistics.gov.uk/ 7. Office for National Statistics. Balance of Payments, 28th September 2010 Accessed on 8th November 2010, Web http://www.statistics.gov.uk 8. Office for National Statistics. Businesses, 27th September 2010 Accessed on 8th November 2010, Web http://www.statistics.gov.uk 9. Office for National Statistics. CPI and the Budget, 29th June 2010 Accessed on 8th November 2010, Web http://www.statistics.gov.uk 10. Office for National Statistics. Employment, 13th October 2010 Accessed on 8th November 2010, Web http://www.statistics.gov.uk 11. Office for National Statistics. GDP and the Labor Market, 26th October 2010 Accessed on 8th November 2010, Web http://www.statistics.gov.uk 12. Office for National Statistics. GDP growth, 26th October 2010 Accessed on 8th November 2010, Web http://www.statistics.gov.uk 13. Office for National Statistics. Productivity, 29th September 2010 Accessed on 8th November 2010, Web http://www.statistics.gov.uk 14. Office for National Statistics. Retail Sales , 21st October 2010 Accessed on 8th November 2010, Web http://www.statistics.gov.uk 15. Taberner, Peter 2010. The UK Economy Inching to Recovery in 2010 – British Chamber of Commerce Study says the worst is over, Suite101.com. 13 Jan 2010 Accessed 8th November 2010. Web http://www.suite101.com/ 16. Vaitilingam, Romesh Recession Britain – Findings from economic and social research, Economic and Social Research Council, Swindon, Web. http://www.esrc.ac.uk Read More