How Has the 2008 Crisis Affected the Countrys Economic Outlook - Literature review Example

HOW HAS THE 2008 CRISIS AFFECTED THE COUNTRY’S ECONOMIC OUTLOOK? Introduction The economic crisis began in 2007 in the United s and later spread to other countries throughout the world. It caused extensive disruptions in the banking and financial systems. Following the crisis, the consumers lost confidence in the financial market and as a result the economic growth of the country was adversely affected. The crisis is regarded as the biggest recession since the Great depression and it negatively affected the economic performance, labor productivity and employment rates in all the countries around the globe. The global economy faced its most serious threat since the Great Depression in 2007. For many countries, the threat was larger than the one that took place eight years earlier. Fortunately, the contours of international economic and financial cooperation were better this time. Managers went through a serious crisis, but authorities around the world acted cooperatively and forcefully to address common problems. In the UK, the crisis affected many financial institutions such as the Northern Rock, the Bradford, and the Bingley Building Society. Following the crisis, the government nationalized some of the institutions while some of the banks were forced to raise additional capital by new share issues. In other countries, such as the U.S., Belgium, France, and Germany, banks were bailed out and new regulations were introduced to control the financial sector. This paper examines how the crisis impacted on the people, banks and the construction industry. Diary Entry 1 Date of Input February 8th, 2014 Reference of the source (Harvard style) Elliot, L. (2014). UK struggles to stay in global economy ‘premier’ league. Guardian, February 5th, 2014 Discussion The aftermath of the crisis is well captured in the article titled, UK struggles to stay in global economy ‘premier’ league. In this article which was published in the Guardian, Elliot (2014) points out that the UK economy is struggling. Elliot (2014) suggests that the country is fairing badly compared to Sweden, Switzerland and Singapore and can only be likened to the countries that were affected by the Eurozone sovereign debt. The banking system was heavily affected by the crisis and the country continues to score badly on indicators such as the cost of living, living standards and the budget deficit. Elliot (2014) further observes that the country is lagging behind its peers in terms of investment, education, trade and income inequality. In terms of the employment, the young low-skilled workers have highly been affected. The results of this article conclude that the UK no longer holds its place in the global pecking order. However, in 2014, the country has been experiencing some cyclical upturn, and this could be an indication of better things to come. Article review In this article, Elliot suggests that the 2008 crisis affected the country’s employment rates. His observation is supported by Brunnermejer (2009) who observes that during the economic recession the vacancy creation in the UK has been very weak. The rise in the unemployment rate in the country is attributed to the structural factors. At the same time, the crisis affected many retail players in the furnishing sectors. Some of the renowned brands such as MFI, Woolworths and Blacks were forced out of operation, and such events ultimately led to the increase in unemployment rates. The events in the UK are supported by the available empirical evidence. Just to illustrate, following the financial crises in East Asia and Mexico in 1990s, the aggregate employment reduced drastically. The effect of the financial turmoil on the labor market is experienced for an extended period of time. The situation is similar in the U.S., Ireland and Spain, where the unemployment rates have increased substantially. Researchers also concur that the recent crisis will lead to an extension of the gender inequality and poverty. Women in the developing countries are more likely to be affected that there counterparts in the developing countries. Young workers were and are still being affected by the ongoing crisis. Figures released by the IFS Research indicate that between 2008 and 2009, unemployment rates among those aged between 18 and 24 increased by 17% (Brunnermejer, 2009). Diary Entry 2 Date of Input February 9th, 2014 Reference of the source (Harvard style) Bingham, J. (2013). Britons happier than before financial crisis as contentment plummets in Europe- OECD. Telegraph, November 5th, 2013 Discussion While Elliot (2014) argues that UK is performing badly compared to other developed countries, John Bingham, a writer with the Telegraph, thinks otherwise. In this article, Bingham (2013) argues that despite the economic recession, the UK residents are a happy lot. Bingham (2013) further observes that the UK residents are happier compared to their counterparts in the developed world. The findings of this article are supported in a study by the organization for economic Cooperation and Development. In this study, the UK is ranked alongside Switzerland, and Scandinavian countries in the top tire of the OECD’s “how’s life” study. However, it seems that following the crisis, the UK residents have become more selfish. The article argues that the best way of measuring the impact of the crisis, is to evaluate the changes in happiness and satisfaction levels. While the UK residents are still happy, their counterparts in Greece have become angrier. According to Bingham (2013) the crisis has eroded the trust in government and the national morale. While in Greece the number of unhappy residents has increased by a fifth, in the UK the number of satisfied citizens rose from 36% to 47%. Article review The article by Bingham seems to indicate that the government has a major role to play in lessening the impact of the crisis. This could explain why the UK citizens are happy because the government has taken considerable measures to reduce the effects of the crisis. The reasons why the UK residents are happy can be attributed to institutional resilience. During the crisis not all the people were affected by the crisis; majority of them kept their jobs and homes. In addition, the crisis did not lead to total collapse of the institutions and the national economy. Bingham’s findings are supported by Quinn (2012) who observes for most people, materials circumstances have not changed although their risk awareness may have increased. In addition, some of the families were able to respond adequately to the crisis, hence lessening its impact their income. For instance, some oft their families were forced to reduce their household expenditure find alternative employment opportunities and increase their working hours. In other words, Quinn (2012) seems to suggest that the UK residents were able to respond to the crisis positively, and so their happiness levels were not affected. Bingham’s findings that the UK residents are still very happy and are doing are challenged by Monaghan (2014). According to Monaghan, between 2013 and 2014 the household income was 6% below its pre-crisis peak (2014). Those from low-incoming families were more affected than their peers in middle and high-income earning families. At the same time, food and energy prices have increased dramatically since the crisis started, and leading to a subsequent increase average cost of living. Monaghan (2014) indicates that after the crisis the food prices increased by 20% while energy prices rose by 60%. The living standards squeeze is being felt across the entire income distribution and no one is spared. Monaghan (2014) further observes that compared to the U.S., Japan, Italy, Germany, France and Canada, UK has experienced a larger fall in real wage growth. These statistics indicate contrary to what people believe, the country has adversely been affected by the crisis. It is also clear that the economic recovery process will negatively be affected the rising energy and food prices. Diary Entry 3 Date of Input February 10th, 2014 Reference of the source (Harvard style) Dugan E. (2013). Poor hit hardest by financial crisis and welfare cuts make it worse. Independent, May 15th 2013 Discussion A number of articles have tried to capture the effects of the crisis on the job guarantee, employment levels, house prices, and family life. This informative article by Emily Dugan, an editor with The Independent, suggests that the adversely affected the low income earning families. According to Dugan (2013) between 2008 and 2010, income inequality increased drastically but the rates of poverty for children and the elderly did to change. At the same time, Dugan (2013) observes that the welfare system really helped those affected by the crisis and those from poor population groups. Currently, the country has the 7th largest income inequality gap of all 34 OECD counties. Article review In this article Dugan (2013) find that people’s lives have been destroyed by the recession and the recover may take more than 10 years. According to this article, household income has fallen and the situation can only be improved by strengthening the welfare system. Dugan’s (2013) findings are very right given that the welfare system plays an important role in the reduction of the poverty rate. The real impact of the crisis of the crisis on the national economy is well captured in an article titled; millions of British families will never see their finances recover from the economic downturn. In this article, Straus and Gye (2013) observe that economy is flattening and real earnings have reduced to 2003 levels. To illustrate the sorry state of the economy gives a good example. According to Straus and Gye (2013) someone who earned £22,000 a year in 2008, will have to wait for fifteen years to get back a similar standard of living. Male workers in the private sectors were the most affected by the crisis while 10 million have seen their spending power drop by £280 since the recession began. I addition,6 out of 10 persons in the middle and low-income earning groups to meet their basic needs and more than half of them do not have any savings. The article by Straus and Gye (2013) paints a picture of defeated families and suggests that the prospects of recovery are very slim. With no steady growth in earnings, the UK residents will continue to struggle and economic outlook will continue being dull. Diary Entry 4 Date of Input February 11th, 2014 Reference of the source (Harvard style) Elliot, L. and Monaghan, A. (2014). Interests rates on hold as bank says recovery unsustainable. Guardian, February 12th, 2014 Discussion In this article titled, interest on hold as bank says recovery ‘unsustainable’ and Monaghan (2014) point out that the UK economy has become smaller compared to the pre-crisis period. In addition, Elliot and Monaghan (2014) believe that the emerging economies are also a huge threat to the UK economy now and in future. On appositive note, banks expect that the wage growth will surpass the inflations sometimes in 2014, easing the squeeze on the household budget. One of the concerns that have been raised in this paper is the low level of productivity in the country. It seems that the economy is under performing compared to the pre-crisis period and the ordinary people are still facing the cost-of-living crisis. In addition, with a below inflation wage growth, the UK citizens will continue struggling and the economic recovery is likely to be sluggish. Article review The article, by Elliot and Monaghan (2014) well captures the reality on the ground as people are still suffering and it seems the economic is yet to recover form the crisis. The article also helps us to visualize on how the crisis affected the inflation rates and the standards of living in the country. The ongoing poor performance in the UK’s economy can be attributed to a number of factors. Firstly, the local residents have lost confidence in the banking system and as such the economic activity in the country has been low. It seems that residents have not forgotten the event that took place during the crisis. The collapse of major banks such as the Northern Rock and Icelandic banking system threatened their savings. Lack of stability in the banking sector ultimately impacted negatively on the households. Secondly, poor performance of the investments has reduced the relative wealth of the savers. Pension funds have been performing badly, interests rates have impacted negatively on the financial wealth of the investors, property values have reduced, and access to mortgages has become tight. All these factors have adversely affected the people’s ability to contribute to the economic growth. The third factor that has led to the decline of the UK’s economy is lack employment opportunities. Following the crisis, small and medium-sized business can hardly be able to access credit, hence slowing growth. In some instances, some of them have been forced downsize their operation hence leading to job losses. Due to the uncertain economic conditions some of the employers have even been forced to reduce the scope of occupational protection. Diary Entry 5 Date of Input February 12th, 2014 Reference of the source (Harvard style) Monaghan, A. (2014). UK sales at highest since onset of financial crisis. Guardian, 7th January, 2014 Discussion Although some the economy is yet to recover from the 2008 financial crisis, the future outlook as positive as Monaghan (2014) suggests. In this article, Monaghan (2014) looks at some of the indicators which suggest that the economy is recovering albeit slowly. According to Monaghan (2014) the number of the cars sold in 2013 increased by 11%, the highest level since the onset of the crisis. Customers who cannot pay for the cars, can access financing options from care dealers. It seems that the UK citizens have more confidence in the economic growth. Some of the best cars in 2013 were Ford Focus, Vauxhall Corsa and Volkswagen Golf. The article further finds that consumers’ appetite for small cars is growing. This new trend is attributed to the increase in the energy prices and the need to reduce household expenditure. The UK is performing better than German, France and Italy where care sales have been dropping since the onset of the crisis. Article review The automotive industry contributes immensely to the national economy. In 2007, the industry employed almost 200,000 workers and generated more than £10.2bn. In total, the sector provides 10% of the total UK employment. However, after the industry was affected by the economic crisis leading. A reduction in the vehicle production saw some of the workers loose their jobs. However, in the article by Monaghan (2014) it seems the bad times are over. Consumers are willing to but new cars and their market confidence is back to the pre-crisis levels. Although the automotive industry is on its way to recovery it seems that the others sector of the economy are still performing poorly, and a perfect example is the construction industry. For long the construction industry has been the largest sectors in the UK economy. According to Kollewe (2012) the sector contributes substantial economic benefits such as job creation and revenue generation. However since the 2008 financial crisis, the demand for the private houses, private commercial buildings and public non-residential buildings have been on the decline. The growth of the construction industry is also being affected by the rising prices of the raw materials, lack of credit, government spending cuts and falling consumer spending. Consumer uncertainty, restricted credit conditions and new regulations are expected to continue affecting the industry. Indeed, the consumer demand for the construction products has reduced drastically, and it seems this problem will not go away, until consumers’ purchasing power bounces back to pre-crisis level. The economic impact of the crisis is discussed by Kollewe (2012). In 2012, the construction industry faced huge hurdles, forcing many firm in the industry to lay off some workers. According to Kollewe (2012) companies in this sector are faced with many problems including a reduction in public spending, extended weak economy, the struggling housing sector and lack of funding for large scale projects. The construction firms are also faced with rising fuel and energy prices, hence being forced to reduce their workforce. In sum, both the commercial and housing sectors are performing badly and it will be important for the government to intervene. Diary Entry 6 Date of Input February 13th,2014 Reference of the source (Harvard style) Quinn, J. (2012). British banks face new crisis as a result of accounting rules. Telegraph, November 3rd, 2012. Discussion In this article, Quinn (2012) discusses some of the challenges the banking institutions after the 2008 financial crises. Following the crises, the government was forced to come up with measures to discourage un-ethical behaviors in the banking industry. The new rules require the banking institutions to acquire new capital in order to comply with these regulations. Banks are being forced to raise more capital from the investors, but this move is likely to backfire due to reputation problems. According to Quinn (2012) the new rules will cripple the lending capacity of the banking institutions and ultimately, the national economy will adversely be affected. As mentioned earlier, the construction industry cannot access credit facilities, and if the problem becomes widespread the employment levels will continue reducing. Article review It well acknowledged that the UK banking industry suffered immensely from the 2008 financial turmoil. As a result of the crisis, banks’ ability to lend reduced substantially, hence affecting the general economy growth. The government was forced to intervene and some of the banks that were bailed out include RBS and Lloyds. However, the government’s involvement in the banks’ affairs means that they could not longer operate optimally due to interference. Already banks are being forced to provide small and medium-sized business with competitive lending rates and help customers struggling with mortgage payment. In some instances, banks such as RBs are being forced to divest from foreign countries, to the detriment of the shareholders. Ultimately, the restrictions imposed by the government, affect the investors’ returns, share price and reduces the banks’ ability to attract more capital. Overall, the crisis has affected the market confidence, increased the unemployment rates and reduced the consumption of credit products. The impact of the crisis to the banking industry can be examined further using a real example. It is widely acknowledged that prior to the 2008 crisis, the management invested heavily in high-risk areas. One such bank is the RBS whose management was further criticized for using too much money for executive compensation. Following these revelations, the consumers’ lost confidence in the banking industry and the share price reduced significantly. As result of the crisis, the RBS will be forced the pension entitlements, and many people will definitely loose out. It also worth noting that following the crisis, the government established some regulations which banking institutions are required to comply with. Under the new regulations, banking institutions are required to reform their structures and those who fail to comply will either have to merge or taken over by other firms. Already, in order to decrease the operating costs and improve their cost income ration, some of the banks have been to lay off some workers. The picture is the same countries where some of the financial institutions have collapsed, hence adversely affecting the national economy. Conclusion It seems that the 2008 financial crisis has really reduced the disposable income, and as a result the economic growth has been affected. People no longer save, and wage growth is low compared to the inflation rate. The construction industry is being affected the reduction in public spending, extended weak economy, the struggling housing sector and lack of funding for large scale projects while banking institutions are grappling with the new regulations and reputation problems. Overall, the economic outlook is not good, as the country is faced with many challenges including the increased competition from the emerging countries and the shrinking domestic market. Reference List Brunnermejer M. (2009). Deciphering the Liquidity and Credit Crunch 2007-2008. Journal of Economic Perspectives, 23, 1, 77-100. Kollewe, J. (2012). Construction industry woes lead to job losses. Guardian, November 2nd, 2012 Straus, R. and Gye, S. (2013). Millions of British families will never see their finance recover. Dailymail, February 13th, 2013 Quinn, J. (2012). British banks face new crisis as a result of accounting rules. Telegraph, November 3rd, 2012. Monaghan, A. (2014). UK sales at highest since onset of financial crisis. Guardian, 7th January, 2014 Elliot, L. and Monaghan, A. (2014). Interests rates on hold as bank says recovery unsustainable. Guardian, February 12th, 2014 Dugan E. (2013). Poor hit hardest by financial crisis and welfare cuts make it worse. Independent, May 15th 2013 Bingham, J. (2013). Britons happier than before financial crisis as contentment plummets in Europe- OECD. Telegraph, November 5th, 2013 Elliot, L. (2014). UK struggles to stay in global economy ‘premier’ league. Guardian, February 5th, 2014 Read More