Success and Failures of Bank of England in Tackling Recent Economic Recession - Case Study Example

The success and failures of British government and Bank of England in tackling recent economic recession Introduction The recent recession has affected the western countries more severely than the Asian countries. European countries and America struggled to escape from the recession whereas Asian countries like China and India succeeded in overcoming the recession problems very quickly. UK seems to be one of the worst affected countries as far as the 2008 recession is concerned. Even though there are some positive signs of recovery, still UK seems to be under the severe recession problems. “Whilst late last year the mainstream institutions such as the OECD, IMF, and Treasury played safe producing forecasts for 2008 UK growth of 2% to 2.5% all pretty much in line with marginally below trend growth” (Walayat, 2008) Even most of the expert economists were failed to predict the current crisis and hence most of the organizations could not take any precautionary measures to tackle it. Inman (2009) has mentioned that ‘the unemployment in UK may cross more than 3 million in near future itself as Britains manufacturers, retailers and service industries feel the full effects of the downturn (Inman, 2009). Moreover, the article UK economy to stay in doldrums says that “the UK economy will remain stuck in the doldrums this year with growth of 1% or less predicted in 2010, a leading forecaster has warned. The Ernst & Young ITEM Club, which uses the Treasurys economic model for its forecasts, said the immediate prospects for the UK were "dismal” (UK economy to stay in doldrums, n. d). The following figure illustrates the UK recession forecasts of 2009-2010. (Walayat , 2007) It is evident from the above figure that the current recession seems to be the greatest of its kind in the UK’s history. Even though, UK government and Bank of England took many initiatives and measures, none of them seems to be working as expected and still UK economy continues to be in its downward growth trend. This paper analyses the recent recession in UK, its impacts on various economic sectors in UK and the initiatives taken by Bank of England and the Government to tackle the current recession. Recent recession and UK economy Real estate sector is one of the worst affected economic sectors in Britain as result of the recent recession. Construction activities were stopped almost fully because of the less demand in the real estate sector. The house prices have almost reached an all time low in the recent past. According to Inman (2009), the house prices would fall another 15%, while Capital Economics said it could be as much as 20% as the cost of the average home headed for a 50% fall from its peak in the summer of 2007 (Inman, 2009). It is evident that the economic activities of a country will be reduced considerably as a result of recession. In UK also, same thing is happening at present. The competitive advantages of UK organizations came down drastically because of the recession and subsequent reduced economic activities in the market. Most of the UK organizations reduced their spending on advertising like promotional activities while their counterparts in the Asian region started to exploit this opportunity with the help of massive advertising and promotional campaigns. In fact, Indian Automobile manufacturer TATA succeeded in acquiring the prestigious UK automobile companies Jaguar and Land rover. Sourya Biswas (2008) has pointed out that “Tata Motors has just created history by acquiring the British marques Jaguar and Land Rover, part of Ford Motors Premier Automobile Group” (Biswas, 2008). UK government is currently in a dilemma; how to tackle the capital outflow from UK to other countries like India China etc. For example, outsourcing of UK jobs has created a major problem in UK. UK companies cannot survive in the market without capitalizing on the cheap labour markets of India, China etc like countries. They are saving millions of pounds in this regard especially in this recession period. At the same time, outscoring of UK jobs results in capital outflow from UK which is not good for UK’s future growth prospects. In short, outsourcing serves both as a blessing and curse at the same time for the UK economy during this recession time. UK government is thinking in terms of prohibiting or controlling outsourcing, but as in the case of America, UK also cannot do that because of the serious political and economic implications involved in such measures. Sharp rise in unemployment was another major of impact 2008 recession caused at UK’s economy. The following graph illustrates the unemployment statistics of UK during the 2007-2010 periods. (Williams, 2008) It is evident from the above chart that from 2008 onwards, unemployment has risen steeply. This is because of the fact that many people lost their jobs because of the expenditure cut policies taken by organizations and the strict control enforced on new appointments. UK recession was deeper than anticipated. Even the UK government admitted that the 2008 recession was bigger than what they anticipated. Fresh information collected by the Office for National Statistics showed that the peak to trough decline in output was 6.4% of gross domestic product rather than the original 6.2% estimate. The new figures confirmed that the six successive quarters of negative growth from spring 2008 until autumn 2009 were the toughest for the economy since the Great Depression of the 1930s, harsher even than the slump of the early 1980s Despite the pickup in activity at the end of last year, output was 0.2% lower at the end of the first quarter of 2010 than it had been a year earlier (Elliot, 12 July 2010). The reports from various sectors at present shows that the UK economy at last started to show signs of revival now. The construction industry which was drastically down earlier started showing signs of revival now. Inman and Hawkes (2010) written on guardian .co.uk that this week “commercial property and spending on infrastructure projects spurred a jump of 4% in overall bricks-and-mortar spending in the third quarter, after a 9% rise in the previous quarter” (Inman and Hawkes, 31 October 2010). BBC News also expressed similar opinion. According to BBC News, dated 27 January 2010, “the UK economy has come out of recession, after figures showed it had grown by a weaker-than-expected 0.1% in the last three months of 2009 (BBC News, 27 January 2010). The following chart confirms the revival of UK economy at the latter periods of 2010. (BBC News, 27 January 2010) Macroeconomic policies used by British government and Bank of England over last two years Whenever, a sharp recession occurs, the governments and the financial institutions respond quickly by artificially stimulating demand in the economy, through increasing public spending, interest rate cuts or tax cuts. Once the crisis starts to recede these emergency measures are gradually withdrawn (Why those working in the financial sector need to tell the truth about the crisis, n. d). In UK also the government and the bank of England started their work immediately. Government and the Bank of England started to pump more money into the market as the Americans did in order recover quickly from recession. But, the policies of the government and the bank of England are debatable. Many economists in UK believe that the efforts of Bank of England and the UK government were poor in tackling the recession. Nobody in UK has any clear idea about the remedial measures. Nobody, either the administration or the Bank of England knows the right strategies needed to bring the UK economy back on track. They are simply trying some macroeconomic policies, but not sure about the outcomes. The figure given below illustrates bank rates in UK from 2007 onwards (See appendix for more illustrations about the bank rates and its effect on different sectors in UK). Even though the Inflation is rising rapidly, the Bank of England decided to keep the interest rates higher, which is a risky decision. In order to escape from the recession problems, the economic activities in the country should be improved and for that purpose, the interest rates should be lowered. (Williams 2008) The Bank of England must be careful not to raise interest rates too much too soon. Such an outcome could make the unfolding economic slowdown too excessive, and lead to some increase in official interest rates seems necessary for inflation to hit the 2% target. But for that to happen, a period of below trend growth (2.3-2.6%) this year and next is inevitable (Williams 2008) Growing inflation is one of the worrying factors of UK economy. Everything is expensive in UK at present except the people. At the same time many of the UK public are struggling to find enough funds for their family budgets. As mentioned earlier, unemployment has reached an all time high and the economic activities are poor; still the Bank of England has not taken any serious measures to increase the economic activities or to reduce the inflation. Many of the economists still do not understand the Bank of England policy of still maintaining a higher interest rate for the banking aids to the public. Douglas Hamilton written on Heralscotland that “The Bank signalled that it saw no immediate need to add further stimulus, but left the door open to doing so, with inflation set to fall near the target for an extended period from early 2012”. But it should be remembered that the Bank has “already pumped £200 billion into the economy, mainly through a programme to buy gilts – UK Government bonds”(Hamilton 11 Nov 2010). The above £200 helped to increase the demand in the market as it is seen in the construction sector now. But according to many economists, further aid is necessary and Bank of England should pump more funds into the market in order to give momentum to the economic revival process. At the last meeting of the Bank of Englands Monetary Policy Committee (MPC), only one member suggested a modest rise in rates to 0.75%.The Bank has said that it is not overly concerned about price rises, even though they are rising at more than 3% a year, above the 2% target (UK Recession news and information, n. d) The Bank of England still believes that the factors pushing prices higher are temporary and no drastic changes in its policies are required now. But the bank’s beliefs and policies are hard to understand for many of the economists. Elliot (2010), the economic reporter of guardian.co.uk has mentioned that the Bank of England believe that the global economy will get back to its normal state within nine months from now according to Elliot (10 Nov 2010). In other words, the bank is not going to implement any major policy changes in the recent future. The Bank still waits for the developments in the global economical arena in order to decide whether any changes in policies required or not. “The Bank of England decided that it would hold off from so-called QE2, keeping the programme at £200bn and maintaining interest rates at 0.5%” (Kollewe, 4 November 2010). Phil Maynard reported for guardian.co.uk, that even the Bank of England governor doesnt see how the Bank intends to tackle inflation (Maynard, November 10, 2010). The positive developments at the time of writing this paper, might encourage Bank of England to continue its policies in its present form. In other words, the interest rates fixed at .5% in March 2009 may continue even for longer period s than anticipated. The pound also shows signs of recovery and which is another positive sign for the Bank of England and other governmental policy makers. Conclusions Even though most of the countries in the world were affected by the recent recession, UK seems to be the worst affected country. Most of the productive sectors in UK remain standstill from 2007 to 2010 because of the recession. All the industries in general and real estate sector in particular faced still challenges during the recession period. Unemployment reached all time high and the inflation also started to grow beyond the control Both the government and the Bank of England had no clear ideas about how to tackle the recession problems. They have injected some funds to the market based on the macroeconomic principles they learned and waited the market to do the rest. Moreover, the bank of England did nothing to reduce the interest rates in order to improve the economic activities. In fact the problems were so severe that the measures taken by the government and the bank of England were not adequate enough. Fortunately, during the last quarter of 2010, the UK economy started to show signs of a revival. References 1. BBC News, (27 January 2010), UK economy emerges from recession, [Online] Available at: http://news.bbc.co.uk/2/hi/8479639.stm [Accessed on 14 November 2010] 2. Biswas, S. (2008), Jaguar and Land Rover: Tata Motors acquires a rich legacy,[Online] Available at: http://www.domain-b.com/companies/companies_t/Tata_Motors/20080326_jaguar.html [Accessed on 14 November 2010] 3. Elliott, L (10 November 2010), Mervyn King warns of global threats to UKs economic recovery ,[Online] Available at: guardian.co.uk http://www.guardian.co.uk/business/2010/nov/10/mervyn-king-economic-recovery-g20 [Accessed on 14 November 2010] 4. Elliott, L (12 July 2010) UK recession even deeper than first thought, [Online] Available at: guardian.co.uk http://www.guardian.co.uk/business/2010/jul/12/uk-recession-deeper-than-first-thought [Accessed on 14 November 2010] 5. Hamilton D. (11 Nov 2010) Bank of England not expecting double-dip recession in UK, , [Online] Available at: heraldscotland, http://www.heraldscotland.com/business/markets-economy/bank-of-england-not-expecting-double-dip-recession-in-uk-1.1067472 [Accessed on 14 November 2010] 6. Inman P. (2009). Unemployment will soar above 3 million in 2009, say chambers of Commerce, [Online] Available at: http://www.guardian.co.uk/business/2009/jan/01/unhappy-new-year [Accessed on 14 November 2010] 7. Inman P and Hawkes A (31 October 2010), Construction gives UK economic recovery an unstable foundation [Online] Available at: guardian.co.uk http://www.guardian.co.uk/business/2010/oct/31/construction-supports-uk-economic-recovery [Accessed on 14 November 2010] 8. Kollewe J. (4 November 2010) Interest rates and quantitative easing held [Online] Available at: guardian.co.uk http://www.guardian.co.uk/business/2010/nov/04/interest-rates-quantitative-easing-held[Accessed on 14 November 2010] 9. Maynard,P.( November 10, 2010) The Business: Inflation and QE2, [Online] Available at: guardian.co.uk http://www.guardian.co.uk/business/audio/2010/nov/10/the-business-podcast-inflation-qe2-bees[Accessed on 14 November 2010] 10. UK Recession news and information, (n. d) Interest rates may hit 8% by 2012 [Online] Available at: http://www.ukrecession.com/2010/08/interest-rates-may-hit-8-by-2012/ [Accessed on 14 November 2010] 11. UK economy to stay in doldrums, (n. d), [Online]. Available at: http://www.ukrecession.com/2010/04/uk-economy-to-stay-in-doldrums/ [Accessed on 14 November 2010] 12. Walayat , N. (2007) UK Economy GDP Growth Forecast for 2008 - NO Recession [Online]. Available at: http://www.marketoracle.co.uk/Article3186.html[Accessed on 14 November 2010] 13. Walayat N. (2008), UK Economy Heading for Recession 2009, All Gloom and Doom? [Online] Available at: http://www.marketoracle.co.uk/Article5544.html [Accessed on 14 November 2010] 14. Williams T (2008), Economics Weekly Scenarios highlight risk of UK recession [Online]. Available at: http://www.fxstreet.com/fundamental/analysis-reports/economics-weekly/2008-07-01.html[Accessed on 14 November 2010] 15. Why those working in the financial sector need to tell the truth about the crisis, (n. d) [Online] Available at http://postrecession.wordpress.com/ [Accessed on 14 November 2010] Appendix (Williams, 2008) Read More