Impact of Recession on the UK Economy - Essay Example

Impact of Recession on UK Economy Recession in UK has travelled down from the failure of banks in US. The cascading effects of globalisation have made almost all major economies around the world vulnerable to the recessionary trends. The result of all this is the debt of financial sector has risen sharply from (Calbreath, 2008). It now stands at 74 percent higher than it was in 2000 and 10 times higher than in 1980. Quoting the figures from the Office for National Statistics, Monaghan (2009) indicated that the GDP figures recorded a dip of 1.5 percent in the final quarter of 2008. It was around that time when the government realised the seriousness of the issue. There are indications that things might be looking up, as we move along with the range of stimulus packages. The unemployment rate in UK experienced a dip of 0.1 percent and it stood at 7.8 percent in January 2010. But this figure is till 1.6 percent higher than that of last year, which makes thinks worrisome for the government (HRM Guide, 2010). Official figures indicate that the average earnings in UK have certainly bounced back in the recent past.1 Fig-1 indicates that there are indeed some recovery signals in the economy, as the earning potential of an average Briton is coming back to the comfortable zone. What could be of some concern however is, the falling graph of earnings in the later part of 2009. Monk (2009) also cites the October 2009 figures from the Office for National Statistics to highlight the higher number of borrowings in UK. The figure stood at £11.4bn in October, far higher than the forecast figure of £7.1bn. The consistent increase of net debt as a percentage of the GDP over the last couple of years has made UK economy more of a debt economy. OCED has also issued warnings to the effect that UK needs to put in place its fiscal measures to unburden itself from the pile of debt. It was predicted by some analysts in 2008, when the initial signals of recession started emerging that during the coming two years UK economy would be experiencing its weakest patch of the last 15 years (BBC, 2008). Well, if trace the journey of the recession, these concerns seems to have come true. Taking a historical perspective UK had a population of 38 million with GDP of just under £125 billion at constant 1995 market prices. By the end of the century, the population stood at 59 million with an increase of more than 50 per cent while the GDP stood at £800 billion, registering a fivefold increase (Lindsay, 2003). The benefits of globalisation seem to have percolated down to all sections of the society in good measure. The office of national statistics indicated that the unemployment rate in UK in 1900 stood around 5 percent. During the difficult times of 1930s the unemployment rates peaked to around 22 percent, but subsequently as a result of successful implementation of globalisation policies, once again the unemployment rates were below 5 below by the end of 20th century. Recessionary trends have once again brought back focus on the rising unemployment rate The latest figures from the office of national statistics2 indicate that the unemployment rate increased by 0.1 percent points to 7.8 per cent for July to September 2009. It is worthwhile here to mention that the unemployment rate started increasing particularly around the last quarter of 2007 when recession started showing its impact on economies all over the world. It is therefore quite apparent that while the economies benefitted immensely during the booming days of globalisation, it felt the pinch when the negative trends from other countries started impacting the economic indicators of UK as well. Over the years, UK has been able to develop into major global force, primarily due to its rapid economic development, which has helped the country in advancing particularly after the second world-war. Strong democratic setup and stability of government coupled with continuity in economic policies are considered as the strong points of the country. The ongoing policies of the government towards fostering stronger ties with emerging economies like India Brazil and China have also helped the nation’s economic prospects. Today, UK is considered as the second largest economy in EU. Social and economic indicators like social welfare, standards of living, unemployment, interest rates, inflation and inward and outward foreign investment are considered as the strongest points of UK’s policies (Datamonitor, 2009). Even in these turbulent times, the UK’s economy has seventh highest level of GDP per capita in the EU in terms of purchasing power parity (PPP), after Luxembourg, Ireland, the Netherlands, Denmark, Austria and Finland, and the third highest in the G8, after the US and Canada (Datamonitor, 2009). As pre the recent ‘Doing Business 2010’ published by the World Bank, United Kingdom has been able to improve its standing by one place. While in the 2009 ranking UK stood at sixth place, in the recently released 2010 report, UK has been placed as the fifth best country in the world for doing business3. This is certainly no mean achievement. While on the one hand it vindicates the policies adopted by the government of UK in carrying forward the liberalisation policies, on the other it is an indication towards the longevity of globalisation policies despite the ongoing recession. It is interesting to note that while UK was one amongst the first few countries experiencing the impact of recession, the recovery signs were quite late in appearing on the horizon. Analysts argue that a smaller manufacturing base and lesser amounts of stimulus packages were the basic reasons for this late recovery. It is also being argued that the government of UK needs to firm up the process of recovery at an early stage with proactive efforts to minimise the expected £178billion budget deficit and high levels of household debt. If such measures not resorted to by the government, it might lead to another round of downturn in the economy (Beckford, 2010). It will be worthwhile here to point out that similar projections in the recent past have come true as far as the adverse impacts are concerned. Projections from the IMF in the beginning of 2009 indicated that UK’s economy might experience more difficulties in coming months. With forecasts of UK’s GDP shrinking to 2.8 percent in coming days, the IMF report indicated that around 50 million jobs are bound to disappear around the world, if the recession continues. The report also indicates that4, “Britain's economy will be the hardest hit in the developed world in what is expected to be the ‘deepest recession’ since the Second World War”. There were many instances in UK in the last decade when different types of jobs were outsourced to cheaper destinations in the Asian subcontinent or towards Africa. This also resulted in many job losses for the country. The trend of outsourcing is also an inevitable component of globalisation, which allows companies to look for cost effective measures in order to compete with others around. Recession provided further fillip to these tendencies, as profit margins became rare commodities. In view of the competition, profit margins have become quite thin, which forces the management towards taking cost-cutting initiatives, that includes outsourcing, retrenchments, relocation of employees, pressure on employee benefits etc. UK too is affected by the phenomenon of outsourcing and availability of skilled workforce at cheaper rates from places like India, China, Philippines, Malaysia etc. While the employability within the country was already under pressure from these developments, the recessionary trends have also resulted in job losses. Sending across some warning signals, John Philpott, Chief Economic Adviser at the CIPD, says; "The latest unemployment figures are good news on the face of things, but only on the face of things. Taken in the round, the latest figures show that the UK jobs market remains in a far from healthy state and it would be wrong to conclude that unemployment has peaked.” The Office for National Statistics measures UK economy in different ways depending upon the context and requirement of the information. i. The full UK accounts or national accounts follow the sequence of accounts system laid out in 1993 and the European System of Accounts 1995. ii. On the other hand more relevant figures for the common citizen are spelled with the help of figures like GDP, Retail Sales Index, Index of Production and Index of Services, termed as short term indicators. iii. Balance of Payments and Trade in Goods and Services are other key indicators. iv. HM Revenue & Customs (HMRC), HM Treasury and Communities and Local Government (CLG) also provide statistics for this theme. With a manufacturing sector less than that of Japan and Germany, the government of UK appeared to have not found a strong reason to pump in large amounts of stimulus packages. While in some other major economies like US, Japan, Germany etc. the larger manufacturing sector started experiencing the pinch as demands slowed down. This in turn translated into job losses and rapidly shrinking economy. These governments therefore got into active mode and announced a number of measures benefitting these sectors. This resulted in better improvement in the GDP figures which is a measure of the total value of goods and services within the boundaries of the country. Therefore the GDP figures of UK did not indicate the desired improvement. But, if the prevailing figures are an indication, and the viewpoints of analysts are to be taken in right spirit, the government of UK will help its cause by stimulating the growth and demand within the services sector. If the services sector continues to be under pressure, this is bound to make the job market more volatile, because companies are bound to look for cheaper alternatives. As we see an upsurge in the ‘pressure to deliver’ the right product at the right time, the management prefers to have the unitary model in place. This is the reason that many companies in UK as well as in Germany have started outsourcing a range of lower levels and middle levels jobs to people from the Indian subcontinent. Analysis of this trend by Frost (2004) predicted5 that despite half hearted attempts by some countries to enact legislation for arresting the outsourcing trend from high cost regions to lower cost regions, such a trend appears irreversible for now. Both Germany and UK are the affected nations as far as job losses are concerned. Some companies have tried to reason out the decision with the Unions, but some others have simply given the mandatory notice to the workers to look elsewhere. Mergers and acquisitions are another form of ‘strategic fallout’ of the pressure under which some of the companies have to work. For example, the merger of American car giant, Chrysler, with Germany's largest industrial group, Daimler-Benz did hit the media headlines during the middle of the year 1998, but after some time there appeared some indications suggesting that not everything is going smoothly with the merger proposal. While coming out with the stories of ‘significant progress’ towards the merger, media stories also suggested that negotiations floundered on couple of occasions including on issues concerning HRM, and doubts were also being expressed on the future of the merger (BBC, 1998). This also points out how the underlying philosophy of managing diversity tends to imply that an organisation can gain massive competitive advantage, resulting in enhanced performance with the help of a satisfied human capital, but problems start appearing once the human capital appear distracted. It rests on the premise that the organisation will be able to serve increasingly diverse customers, meet increasingly complex business and management problems by actively seeking and managing a diverse workforce (Stephenson and Lewis, 1996). References: 1. BBC (1998). Daimler and Chrysler 'to merge'. Available online at http://news.bbc.co.uk/1/hi/business/88873.stm (Feb 2, 2010) 2. BBC (2008). UK economy 'at risk of recession'. Available online at http://news.bbc.co.uk/2/hi/business/7212545.stm (Feb 1, 2010) 3. Beckford, Martin (2010). Why was Britain the last major economy to come out of recession? Available online at http://www.telegraph.co.uk/finance/financetopics/recession/7079737/Why-was-Britain-the-last-major-economy-to-come-out-of-recession.html (Feb 1, 2010) 4. Calbreath, Dean (2008). Americans' addiction to borrowing root of crisis. Available online at http://www.signonsandiego.com/news/nation/20080921-9999-1n21debt.html (Feb 1, 2009) 5. Frost & Sullivan (2004). Anti-Outsourcing Legislation Unlikely as Global Outsourcing of IT Jobs Grows, Says Frost. http://www.romcallcenter.com/news2.html (Feb 2, 2010) 6. HRM Guide (2010). ‘UK Unemployment- Labour Market Statistics’. Available online at http://www.hrmguide.co.uk/jobmarket/unemployment.htm (Feb 1, 2010) 7. Kollewe, Julia (2009). ‘IMF: UK economy will be hardest hit in worst recession since second world war’. Available online at http://www.guardian.co.uk/business/2009/jan/28/ilo-global-unemployment-to-soar (Feb 1, 2010) 8. Lindsay, Craig (2003). ‘A century of labour market change: 1900 to 2000’. Labour Market trends, March 2003. Labour Market Division, Office for National Statistics. Available online at http://www.statistics.gov.uk/articles/labour_market_trends/century_labour_market_change_mar2003.pdf (Feb 1, 2010). 9. Monaghan, Angela (2009). UK recession: it's official but will it be the worst? Available online at http://www.telegraph.co.uk/finance/financetopics/recession/4321675/UK-recession-its-official-but-will-it-be-the-worst.html. (Feb 1, 2010) 10. Monk, Ed (2010). ‘UK borrowing rise puts recovery in doubt’. Available online at http://www.thisismoney.co.uk/news/article.html?in_article_id=494405&in_page_id=2&ct=5 (Feb 1, 2010) 11. Stephenson, K. and Lewis, D. (1996). ‘Managing Workforce diversity, macro and micro level HR implications of network analyses’. International Journal of Manpower 17 (4). 12. World Bank (2009). ‘Highlights from Doing Business 2010’. Available online at http://www.doingbusiness.org/Documents/DB10_Overview.pdf (Dec 14, 2009) Read More