How Financial Crisis Affected Businesses in the UK Economy - Case Study Example

Financial Crisis affecting UK Economy Introduction The Global Financial Crisis in 2007-2008 is known to be the worst financial crisis ever since the Great Depression in 1930s. The crisis has resulted in an overall threat to the world’s largest financial institutions and stock markets. Many international and national businesses have failed due to this crisis as well as a severe decline in the consumer wealth. UK, alongside USA, had also entered this financial crisis which disturbed one of the main hubs of global finance. The first big commercial bank that required an emergency funding from the government due to the crisis was The British bank Northern Rock. Thus, British faced the worst financial crisis in a number of decades; with several business operations affected, there are still aftereffects that can be seen such as the large sum of national debt. Britain also faced falling housing prices which contributed to the capital city’s despair. The Prime Minister at that time, Gordon Brown, had given a bank bailout plan which was accredited and which created a template followed by US and countries across Europe later. However, the recession was seen as persistent by the economists. The British currency had also fallen in value outside the Eurozone. Britain managed to play a major role in order to coordinate and find an international response to the financial crisis. There were G-20 meetings in April 2009 that were hosted by London, and PM Brown drafted a well-aimed and ambitious plan to fix the international financial regulations. After these meetings, the British finance ministry had to announce more bad news that the country was not breaking even on banking interventions and would probably end up losing more than $87 billion (Rayner, 2008). The financial crisis thus wiped off the country’s major banks, investors, companies, and markets. It was one of the days during the crisis when the pound suffered the worst one-day fall since 1992 on Black Wednesday. This indicated the severe global recession that was going to hit Britain and last for a very long time. The stock market had also been starting to face the shockwaves of the American corporate meltdown. Economic experts had analyzed that Halifax Bank of Scotland, Britain’s biggest mortgage lender, had lost about 13% of its value and had high risks of being immensely affected by the global financial crisis (Rayner, 2008). The royal Bank of Scotland and Barclays also had a 9% decrease in their share prices. Thus the feat grew that other major investment banks would be affected severely following the collapse of Bear Stearns. Since the banking system was in serious trouble, the Bank of England made an attempt by putting £5 billion in the money markets in order to restore the confidence of people and investors in the banking system (Rayner, 2008). But this attempt was not good enough to protect the economy from the viral financial crisis with predictions that there was still worst to come. The share holdings of thousands of ordinary investors were devalued along with a 3.9% fall in the FTSE-100 index which had serious implications on pensions. The crash of the economy was triggered when the US investment bank Beat Stearns was sold over the weekend and snapped by JP Morgan Chase, its rival, for just £116 million, this amount was less than a percent of what the bank was worth. Bear Stearns was the world’s ninth biggest investment bank and its collapse had brought fears on the other banking giants that were in serious trouble (Rayner, 2008). This financial crisis had severe affects on the banking system and it was marked as the worst crisis ever in ‘living memory’ (Rayner, 2008). Analysis and ordinary people claimed that they don’t think anyone has seen such events of seriousness and magnitude affected the financial markets. More than 3 million homeowners in UK faced in increase in their mortgage bills of about £300 a month since the new home loans were to be taken out at a very high interest rate than before. British families were already suffering the impact of the credit crunch and then the household bills which increased immensely in one year. The intervention of £5 billion from The Bank of England also had a limited impact as there was a need for an amount which was five times more than that money. The sterling faced the worst fall of about 2% against other leading currencies (Davies, 2010, p. 5). The financial crisis had seen some of the worst falls in the history of Britain. The top 100 companies had fallen by about 20% in one year along with the stock market crash of £8 billion from its value. The collective funds were at a surplus of £15 billion but they fell to a surplus of £7 billion (Rayner, 2008). The pension holders were also badly hit as the stock market fell. Oil prices had also reached a record breaking price of $112 per barrel and the dollar reached a price as low as $1.59 against the Euro (Rayner, 2008). The effects of the financial crisis had reached a wide range of economic aspects. Since many industries had seen a downturn and bankruptcy was a part of the major and leading organizations, the consumer behavior and buying patterns were also affected severely. The overall economic recession in countries like Germany, France, and the UK caused a negative impact on the business and non-business consumers. Since the crisis was multi-dimensional, so were the impacts that took place on the consumers such as job uncertainty, employments, decrease in saving rates, greater consumption risk, fewer credit financing opportunities, higher product and services prices, and others (Elpidorou, 2013, p. 15). The retail market of the UK was recognized as one of the consumer markets which were most severely affected. Consumers had started to purchase very carefully and their focus had increased towards the efficiency buying in order to cut down the waste and premium products. However consumers didn’t reduce their regular consumption but their buying behavior seemed to shift to products which were low priced and good quality. The economic sluggishness due to the crisis was more likely to influence the consumer interests in discounts because of which retailers believed in expanding their market share (Elpidorou, 2013, p. 15). Food retailing is an aspect which was in greater question as consumers spent a greater amount of money on food. Food retailing was the most stable part of the retail market and it was predicted to have gained a market share through efficient marketing strategies and production. The problem started where the retailers failed to provide a good buying experience to the consumers and offered a low variability of the products. These factors were the ones which hindered their market growth (Addo, 2010, p. 44). UK consumers were seen spending more time in their homes. There was huge shift in the buying behavior. Buying behavior is usually influenced by the advertising and promotions which are external buying behavior factors and can be identified as marketing approaches used by companies to attract their consumers. External factors are rather the most important factors which influence the purchasing behavior of consumers in the market environment. Advertising and promotion can prove to be a costly venture for the retail companies as it requires studying the market, carrying out analysis, evaluating the consumer demands and needs, and creating promotional schemes (Davies, 2010, p. 5). Advertising had greatly become limited at the time of the financial crisis as the top companies were facing turndowns and severe economic pressures; thus the consumer buying behaviors were also influenced. However, this was the time when the online market became a rather more broadly used medium than the traditional methods. Online advertising and buying required less expenses and it offered consumers easy ways of comparing prices and gathering information that eased their purchasing decisions. The financial crisis also greatly affected the unemployment rates. The unemployment rates had reached a new record level of as low as 5% (Addo, 2010, p. 44). The workers of different groups were affected in different ways. As the financial crisis begun, the unemployment rate saw a sudden increase of more than 40%. The male-dominant sectors which included the construction and manufacturing were rather hit harder in the first phase of the crisis than the other sectors. Unemployment among men became greater than in women. Before the crisis the situation was in reversal where women had a higher unemployment rate. The young workers were also affected by the increasing rate of unemployment more than the middle-aged or older workers. In the first phase of the crisis, young workers faced more than 6% increase in unemployment rate (Addo, 2010, p. 44). In terms of qualification, the workers with low qualifications were hit by the unemployment harder than the ones with good qualification levels. Also, foreigners were more affected than nationals. Thus, the financial crisis of 2007-2008 was the worst crisis that UK has ever experienced. The banks were hit hard with affects on loans, mortgages, and other factors. The consumer behaviors were also greatly affected which overturned the retail market and the unemployment rates rose dramatically creating problems for many of the citizens. The impacts of the financial crisis are still seen and observed in the business operations today but the overall market has greatly recovered after the crisis. References Addo, A. 2010. The 2008 Financial Crisis: The Death of an Ideology. New York: Dorrance Publishing Davies, H. 2010. The Financial Crisis: Who is to Blame. London: Polity Elpidorou, P. 2013. The Financial Crisis and its Effect to Royal Bank of Scotland. London: Academia.edu Rayner, G. 2008. UK facing worst financial crisis ‘in decades’. London: The Telegraph Read More