Decline of British Economy - Example

Decline of British Economy The global economic crises has not spared United Kingdom and the economy has started shrinking with the currency Great Britain Pound (GBP) also faltering. There has been an unprecedented unemployment in United Kingdom, the inflation has been falling and interest rates have been cut to improve lending and purchase. Unemployment is increasing rapidly with more than two to three million people having lost their jobs. The International Monetary Fund has stated that there will be a decline of British Economy to the tune of 2.8 per cent in 2009. The current crisis is the worst that Great Britain is facing since the 1930’s.This crisis started initially in London and has spread steadily to all parts of the country. . The burst of the real estate bubble was the first sign of the impending crisis. The real estate crisis spread its tentacles to investment banking and hedge funds and economy of Great Britain has taken a real beating since the fourth quarter of the year 2008. The financial sector has long been the backbone of the British economy contributing 25% to the corporate taxes. The decline in the investment sector has thus hit all sectors quite hard. Industrial production and purchase of industrial goods has been on the decline leading to vicious cycle of poor sales, poor demand and less cash into the system. The growth rate has hovered around 8% for some time now. The possible collapse of the markets was predicted by experts but the warnings and advice were left unheard and the price has been paid. Britain has been considering USA as the role model in financial growth and has embraced privatization big time. The move towards privatization and an open economy under the leadership of Margaret Thatcher lifted the lid on protectionism of the economy. It was under Thatcher that shipping, mining and automobile manufacturing industries were privatized. Under the leadership of Thatcher, investment giants from USA started setting up their ventures in Britain. Great Britain became a center for Investment banking all around Europe. The most prominent one was Goldman Sachs, Merrill Lynch and Morgan Stanley Deutsche Bank and Credit Suisse .The loosening of reins was continued further by Tony Blair who came to power after Thatcher and it was more freedom to the financial sector. Capital gains were taxed less and equity and hedge market were allowed to flourish. It was not a big surprise to see London emerge as the Equity and Hedge fund capital of Europe under Tony Blair. Real estate prices started shooting up as a result; often prices shot up without any logical basis. The boom was based on debt and encouraging consumers were spending more money and the savings rate dropped down. Banks and financial systems vied with each other to promote lending often leading to taking up bad propositions or loans that would not have passed muster earlier. Non- performing assets were either ignored or swept under the carpet to be written off later. It was a belief that good times will last indefinitely. Long term investment was not viewed as financially viable with short term goals ruling the roost. The real estate bubble burst in Britain has added to the woes and tax payers money are used now to get ailing banks back on tracks. The Royal Bank of Scotland and HBOS have been bailed out by pumping in tax payers money and the process of nationalization has started with two monetary lenders being nationalized, the Northern Rock and Bradford & Bingley. HBOS has merged with Lloyds TSB while Alliance & Leicester has been bought by Abbey's Spanish owner Santander (BNC).A number of savings banks have been shut down by the British government and there are many people who are concerned about how safe their money is. The British government has come forward with Financial Services Compensation Scheme (FSCS) and it has to be seen whether it is the ideal solution. The British pound has lost more than 17% of its value and the GBP is seeing its worst fall after 1992. Exports have fallen sharply and the gap between the haves and have-nots and increased. Prices of several goods have fallen although food and consumer commodities are still priced on the higher side. Liquidity to the consumer has not improved and injection of cash into the system has not been as forthcoming as expected. Great Britain has changed track from a manufacturing based economy to service based economy. The Industrial revolution started in Great Britain triggered the great manufacturing boom across the world. Decline in the manufacturing sector was primarily because of the slowness in adjusting to technological advancements. The lack of skilled trained workers in the manufacturing sector led to the acceleration of decline in this sector. The taxation of profits was on a high leading to the downfall of the manufacturing sector. There are huge trade deficits and the balance of payments is on the negative side as the British economy has shifted its base from manufacturing sector to service sector. The shift has also affected the quality of output in the education sector as more graduates are being spun out focused on the services sector. This has led to a problem of needing immigrant services in the field of manufacturing sector as Great Britain still needs plumbers, carpenters and other work class forces. Companies are not willing to invest in those areas that will not satisfy their areas of operation and that has left Great Britain grappling in dark in manufacturing sector. The investment in British Universities, Engineering sector, and Technological sector has not been too much in the recent years and that has also led to the downfall of the manufacturing sector. A better model of economy will be to take every sector forward. Financial investment banking did create job and wealth for Great Britain but what was forgotten was that companies in all sectors should be flourishing for the economy to flourish. Every sector of the country is interdependent on each other for the wheel of economy to roll forward. For example, an advertising company needs to try new design and communication concepts to develop and market new innovative products. This service industry is dependent on manufacturing company to move forward. This will not be possible unless money is spent on research and development for the service sector. All countries on the path of development like China have invested heavily on manufacturing sectors and this has to be noted by Great Britain. Education sector should be revamped giving priority to secondary technical education so that the halt or decline in manufacturing sector can be stemmed. The focus should be to train more people for manufacturing sector. The time has been set once again for the basics like tight financial management. The immediate priority of every debt holder in Great Britain at this time of crisis is to make an honest appraisal of the debt levels and prioritising it. Every person should avoid mortgaging of their home and should look at closing out secured loan payment. There are wide spread fear that more and more people will lose the homes as repayment has become tougher. The main reason for the delay in repaying loans will be the job loss that leads to unemployment. Unemployment has been on rise and is expected to increase further. Redundancy has been a factor when companies are trimming down the workforce to overcome the tide of recession and it can also happen when workforce or company is shut down. The last three months of the year 2008 has shown that the consumer spending has come down by 0.7%.The construction and manufacturing sector has also come down drastically. Economists in Great Britain do predict a gloomy year 2009 .The growth rate is poised for slow down with the first chances of revival probably occurring in the year 2010. The decline in the colonization in the 1950’s and 1960’s has brought the decline of the economy of Great Britain first. One main reason is that Great Britain could not embrace the modernization that was required of age and was unwilling to throw away protectionism as a policy. That policy is still in place with a bureaucracy dependent nature of the British government and the inability to attract talent to manufacturing sectors. White collar jobs have become the norm with blue collar jobs moving away. The situation has started turning dangerous with the job loss mounting and there is wide spread fear that the country will be pushed into a sense of insecurity. The advantage of having insurance cover and other social measures has to be driven home by the government and other social agents. The figures for the fourth quarter of the year 2008 are as follows House hold saving increased by 4.8%.This was an increase from 1.7% in the previous quarter. The figure clearly shows the change in the mindset of the people as they are willing to save more by consuming less. But the good news was nullified by the fact that the economy has shrunk 1.6% . The big factor affecting the imbalance at this present scenario will be once again the focus on wage difference between public and private sectors. The public sector has been the lone provider of jobs in the disadvantaged regions of Great Britain and this has led to a situation where high paying private jobs can be accessed by a few regions only. The big debate is whether too much of privatization led to the downfall of British Economy and focusing back on public sector can save the gloomy economy? Too much spending by Investment Banks led to the downfall of financial sector and that has created a situation of the government nationalizing some banks. The government will be under severe pressure to create more jobs in public sector to curb the redundancy or job loss that come out of private sector. The question is should the skill sets be improved or should public sector take in people not wanted by private sector due to lack of skill? That means the government should be spending more on the improvement in this skill set of the labour force encouraging them to be updated. The government should be willing to chalk out new ideas in that area. Government has yielded to trade union controlling public sectors and has agreed to an increase of wage of 2% till 2011.Private sectors has been in process of cutting down jobs and wages and it was a surprise to see increase in wage from public sector. The decision has not been welcomed by all and there has been wide spread demand to the scrapping of the decision. The decision if taken forward has lead to an imbalance between wages in the public sector and private sector. Unions want a substantial raise in local job and private sector is feeling the pressure of not being able to pay pension as public sector. The government should encourage the competition among public and private sectors to avoid the imbalance in the region. A given increase in government employment may cause a bigger fall in private sector employment in a region of low unemployment compared to one with a higher level. The official figures that has come out is not to the liking of every one as public sector has created 30,000 jobs in the last year and private sector has been forced to cut more than 1,05 000 jobs. Private sector has lost the sheen and it is public sector that has kept the job hopes open. Regarding the salary that has been doled out, Public sector is way ahead with 3.7 % increase and the private sector was forced to cut down the wages to 1.1%. The already simmering tension between public sector and private sector on pension has been taken forward by pay package. The government is forced with this decision because of the elections round the corner. The decision of the government to increase the pay package for public sector has raised another question with government debt sky rocketing during the recession. The big question is about the responsibility of government in these trying times. Honda the largest employer in the private sector had proposed a wage cut and has followed the steps of automobile giants like Toyota and Jaguar Land Rover. These companies have come forward with pay cut and have avoided the job loss which is good. The economy is on a deflationary trend and the companies are struggling to overcome these problem. It is the willingness of the employees to have job that has led to a situation of lower pay package and the government needs to take that factor into account. The manufacturing sector in the form of construction is the worst hit in this financial crisis and these areas has to be supported by the government now. The deflationary trend shown now is expected to last longer and that will affect all sections of workers in private sectors. The situation was a repeat of what had happened in 1960 but this time it is expected to last a year longer creating pressure all round. The salary of nurse has been raised 2.4 % in the year 2009 -2010 and they will get 2.25 % increase next year. Experienced teachers will get an increase of 2.3% till 20011.Police will see a salary increase in 2.6% in salary till 2009-2010 and 2.55 % in 2010-2011. To get into more details, in the year 19991, a nurse was drawing a salary of 21,042 Pounds. The same nurse will receive a salary of 31,974 Pounds in 2009. At present they are drawing a salary of 31,225 Pound. The Retail price index which determines the price pay rises fell to zero for the first time in 49 years. The pay rise has opened a Pandora box as senior civil servants are also pressing for pay rise. The reason cited is that there is discrepancy in pay when compared with private parties. With RPI inflation used as a benchmark for wage deals by employers across the country, its plunge into negative territory raises the prospect of pay being pegged at present levels for millions of workers. Government should subsidies the wages of workers who have been put on reduced hours because of falling demand. The deflation can turn advantageous as consumers has less to dish out as mortgage cost and fuel price but the price of other goods and services are on rise. So the good times will not last long. Senior civil servants earning up to Pound 200,000 a year are pressing for three percent increase. The unions have claimed public sector to be free of recession and that claim can be acknowledged by all. The decision of senior civil servants will be announced next week. It is the vanishing of jobs that has to be the top most priority of government now. The government should not be complacent that it is not exposed to the financial crisis like the private sector and the toxic effects associated with it. Currently, the focus of government is lessening the interest rates but that is not enough to bail out private sector. The government and the financial managers may not even be recognizing the dimensions of the unfolding crisis. The era of dreaded pink slip should be avoided in this time in private sector and the trade unions who have handled the public sector should understand that private sector also needs to be supported. The new orders may not be coming and the panic button may be pressed forward by the private sector and this tendency should be curbed by the government by supporting it. Reference list Business, Economics, Article by Christine Buckley and Gary Duncan dated March 24,2009, viewed 3 April, 2009. Details of increase of pay for public sector can be viewed at daily mail website http://www.dailymail.co.uk/news/article-1164342/Public-sector-pay-goes-private-workers-suffer.html News, Article by Michael Lea dated March 29,2009, viewed 3 April, 2009. Details of investment and financial sector can be viewed at Spiegel website http://www.spiegel.de/international/europe/0,1518,609391-2,00.html News, Article by Mathieu von Rohr and Thomas Hutelin dated February 23,2009 viewed, 3 April,2009. Details of British economy can be viewed at Irish Times website http://www.irishtimes.com/newspaper/breaking/2009/0327/breaking23.htm News, Article dated March 27, 2009 viewed, 3 April, 2009. Details of British manufacturing sector can be viewed at bathcf website http://www.bathcf.co.uk/2007/08/07/on-the-decline-of-british-manufacturing/ News, Article by Florian Bay dated August 07, 2007 viewed, 3 April, 2009. Details of Recession in British can be viewed at Scotsman website http://www.money.scotsman.com/scotsman/articles/articledisplay.jsp?article_id=9989066§ion=Home&prependForce=SM_ News, Article by Liam Tarry dated February 24, 2009 viewed, 3 April, 2009. Details of The Decline of the Empire and the Economic ‘Decline’ of Britain can be viewed at tcbh.oxfordjournals http://tcbh.oxfordjournals.org/cgi/content/abstract/14/3/201 News, Article by Jim Tomlinson dated March 14, 2001 viewed, 3 April, 2009. Read More