Is the UK Economy out of Recession - Case Study Example

Is the UK economy out of recession? Introduction While growth pattern of UK economy has been under study with various economists, since many centuries, the quarterly economic figures were first recorded in the year 1955. Accordingly, it was observed that the economy has contracted for six consecutive quarters, before the year 2009, being the longest contraction since 1955,. However, records pertaining to the last three months of 2009 did show that it has grown by a weak 0.1%, instead of negative growth recorded, during earlier quarters. Hence, we can presume that UK economy has come out of recession during the last three months of 2009. (Source: http://news.bbc.co.uk/2/hi/8479639.stm ) The graph above clearly shows the weakness in economic growth, as it came out of recession, during last quarter of 2009. While Europe’s two strong economies, namely Germany and France came out of recession, during the mid of 2009 and Japan also was out of recession last year, UK economy remained last to exit from the global crisis. However, signs of recovery, although very weak, are visible from various data. This includes the rate of unemployment, which fell for the first time in 18 months, during the last week of 2009 and first week of 2010. Reflecting on the slow signs of growth, BBC chief economics correspondent Hugh Pym, has said that “Britain has just crossed the line in coming out of recession.”……(BBC News, Jan27, 2010) Recovery is very weak While the economic recession in UK began from April-June quarter of 2008, it was the longest recessionary period of almost 18 months that showed signs of its end in the last quarter of 2009. This also affected the performance of British Pound as it showed weakness against two major currencies of world, US dollar and Euro, in the money markets. However, the records for last quarter of 2009 have indicated weak recovery from recession, although these would need in-depth analysis for the next six to nine months, particularly for the data belonging to the performance of all economic sectors. This should also be seen in the view of the fact that these signs of recovery are based on the records available from manufacturing sector. Mr. Lee Hopley, chief economist at manufacturers’ organization EEF has rightly observed that while manufacturing sector data indicates that it is now out of recession, the health of wider economy still remains debatable…………(Frail recovery, BBC News, Jan27, 2010 ) Cautious views BBC economic news review has reported views of different responsible personalities on the signs of UK economy getting out of recession now. Accordingly, it reports Chancellor of the Exchequer Alistair Darling, as saying that while he is confident about Britain being on the path of recovery now, he would maintain caution at the same time. Similarly, Liberal Democrat Treasury spokesman, Vince Cable is reported to have said that growth had been remarkably slower than expected by markets. He is reported to have added that economy is just staggering back into positive growth, as the recovery is not at all ‘quick’. …(Staggering, BBC News, Jan27, 2010 ) GDP gap This being an important concept of macroeconomics, the GDP gap is also called the output gap. It is measured in terms of difference between the actual GDP and the Potential GDP, and this gap is expressed as a percentage of potential output or GDP. Negative gap This indicates that there is tremendous downward pressure on inflation. It happens when actual GDP is less than the potential GDP. The reason for such scenario would include factors like under utilization of available work force and economy being far more in bad shape than indicated by the unemployment figures. As excess labor becomes available due to increasing unemployment, there is a downward pressure on the real wage rates, which reduces the overall purchasing power as well….(Riley 2006) (Source: http://tutor2u.net/economics/revision-notes/as-macro-equilibrium.html ) The above is an indication of GDP gap for British economy from 1990 to 2006. However, compilation of all economic records would make it possible to estimate the output gap for the last 3-4 years, after same are available. Positive gap This indicates an upward pressure on the inflation, as actual GDP is higher than potential GDP. The main indication for such a scenario would be the over-utilization of labor force, which may be more in demand than what is available. Hence, this would mean working over-time and in shifts. This would result in putting upward pressure on real wages, while increasing the purchasing power of the wage earners. If we look at the economic cycles of UK, we can observe that last boom of 1980s brought with it the large positive gap in GDP, which resulted in high inflation. Therefore, measures were enforced which included increasing interest rates, to curb inflation. While this resulted in business squeeze and shaking consumer confidence, the inevitable recession of 1990s was evident. However, at the end of this recession in 1992, the GDP gap was again negative, which allowed the economy to grow without inflationary pressures. However, as can be observed in the above graph, the GDP gap has been close to zero, during last few years, which was due to interest rate strategy of Bank of England, to keep the aggregate demand in line with the UK economic productive potential. The recent crisis have certainly hit the GDP growth of UK economy, as investments kept falling and exports remained weak. ……….(Riley 2006) Accordingly, we can fairly assume that with recent recession, which has not ended yet completely, the unemployment figures have risen alarmingly in the past several months. This certainly has put pressure on the GDP gap, putting downward pressure on inflation. UK’s economic liabilities Various studies show that the liabilities would grow from Pound Sterling 1.7 billion at the end of 2007 to 3.9 trillion pounds by the end of the year 2010. The major portion of this would be around 2 trillion Pounds that has resulted from the figures available from bankrupt banking sector. This would be in addition to the public sector deficit spending of around 600 billion pounds, which is also liable to interest payments. This may result in a chain of debt spiral, which, if not properly handled, can go out of control. The following graph shows annual budget deficit forecasts for UK for years, 2009 to 2013. (Source: http://www.marketoracle.co.uk/Article11247.html ) Double dip recession While in the past total GDP contraction has been noticed to stand around minus 4% on quarterly basis, it is strongly felt that this contraction in GDP is slowly moderating, as indicated by the data pertaining from 2nd to last quarter of 2009. This certainly indicates a strong economic bounce back for UK in the following quarters. However to sustain the recovery in the following years, it is highly recommended that the debt financing is managed efficiently. Other wise the recovery may crumble under the weight of debt burden The following graph gives an estimate of double dip recession, while showing GDP forecast for UK economy for 2009-2010. This also shows the GDP contraction, which is less than the forecasted figure pf minus 6.3%, giving an indication of stronger growth in the year 2010 for British economy. (Source: http://www.marketoracle.co.uk/Article11247.html ) While the solution to debt crisis lies in privatization of large unproductive entities like NHS, this requires political will and majority in the parliament to pass such legislation. Until that happens, it remains doubtful, if British economy can escape the debt crisis on long-term basis……..(Walayat, 2009) UK’s real inflation With the fast contraction in GDP for British economy, the real rate of inflation is falling at a faster pace, as it tended to remain around 3% above the CPI inflation rate. This trend is disturbing in itself as it indicates lack of sustained inflationary pressures, which are required for positive investment atmosphere. UK would need to tackle this situation, while trying to become an attractive investment destination of the world. Although money supply in UK economy has risen sharply from mid 2008, the overall economic scene, accompanied by the financial crisis has resulted in the credit squeeze. Therefore, it is now in the real monetary deflation state that can go up to minus 5%.. However, with November and December rate cuts of 1.5% and 1% respectively, the future growth of money supply might come out of the extreme deflationary trend. In addition, the deflationary trends are currently visible in housing market also, among other sectors……..(Walayat 2008) Unemployment and recession Rosa Prince, the political correspondent of Telegraph UK, (Prince, 2008) reported on 9th Oct 2008 that unemployment would rise in the coming months, followed by an admission from a senior government minister that the country would face recession in the coming months. Rest of it is history, as all of us have witnessed the severity of financial crisis. In line with this, the Confederation of British Industry also forecasted, then, that the figure for jobless persons would rise above 2 million mark, in the following year. Accordingly, James Purnell, the Work and Pensions Secretary of UK disclosed the contingency plans for tackling unemployment……(Prince, 2008) However, Telegraph UK published an economic report on18th Mar 2009, which forecasted the unemployment rate at 10 percent, rising to 3 million, during the year 2010. This was based on the statement of The Bank of England's David Blanchflower, in Feb 2009, as he had, rightly, warned much earlier about the coming recession. (Telegraph, Mar 18, 2009) In any case, the UK government statistical records inform that unemployment rate stood at 7.8% during the last quarter of 2009, which relates to the expansion of GDP and economy for the first time since consecutive quarters of economic contraction, beginning mid 2008. However, the comparison of unemployment rate during 2008-09 recession with that of earlier recessions, during 1980s and 1990s, shows that the unemployment rate has remained lower for the current crisis, while it has been 9.9% and 9.7% during the earlier recessions, respectively…………(GDP and Unemployment, 26th Feb 2010). The following graph shows the relation of GDP and unemployment over the years, as released by the UK governmental sources: (Source: http://www.statistics.gov.uk/cci/nugget.asp?ID=2294 ) Conclusion While politics plays a vital part in the recessionary periods, it is confirmed that UK economy is getting out of recession. Although the indications came during the last quarter of 2009, the available data certainly suggests that the recovery is too slow to sustain. Hence, we may still call the recovery as very fragile. However, with other major global economies turning around, as they have performed like wise much earlier than British economy, the chances for major recovery are brighter, which could be verified by the actual data relating to all inputs, in the coming quarters of the year 2010. In-text citation references and list of sources used BBC News, Jan 27 2010,”UK Economy Emerges from Recession”, available at: http://news.bbc.co.uk/2/hi/8479639.stm (accessed on 23rd Mar 2010) Frail recovery, BBC News, Jan 27 2010,”UK Economy Emerges from Recession”, available at: http://news.bbc.co.uk/2/hi/8479639.stm (accessed on 23rd Mar 2010) GDP and Unemployment, 26th Feb 2010, available at: http://www.statistics.gov.uk/cci/nugget.asp?ID=2294..(accessed on 24th Mar 2010) Prince Rosa, Oct 2008, “Financial crisis: Rising unemployment on the way as recession looms”, available at: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3166706/Financial-crisis-Rising-unemployment-on-the-way-as-recession-looms.html (accessed on 23rd Mar 2010) Riley Geoff, Eton College, 2006, “Macroeconomic Equilibrium”, available at: http://tutor2u.net/economics/revision-notes/as-macro-equilibrium.html (accessed on 23rd Mar 2010) Telegraph, March 18, 2009, “UK unemployment jumps at fastest pace on record”, available at: http://www.telegraph.co.uk/finance/financetopics/recession/5010083/UK-unemployment-jumps-at-fastest-pace-on-record.html (accessed on 23rd Mar 2010) Walayat Nadeem, 2009, “Bankrupt Britain's Public Sector Double Dip Debt Recession on Deep Spending Cuts”, available at: http://www.marketoracle.co.uk/Article11247.html (accessed on 24th Mar 2010) Walayat Nadeem, 2008, “UK CPI Inflation, RPI Deflation Forecast 2009”, available at: http://www.marketoracle.co.uk/Article8004.html (accessed on 24th Mar 2010) Read More