Is UK Recovering from Recession - Case Study Example

Is UK Recovering from Recession? The recent financial crisis brought a wave of distress and wreaked havoc on global economies. All the major countries of the world suffered adversely from this financial shock and have been languishing in the dark for a long spell. Economies have been experiencing cost-push inflation, rising unemployment and dwindling output with figures getting worse over the span of time. More importantly, the process of recovering from this economic slump had been long and painful. United Kingdom (UK) has been a booming economy and it had remained buoyant for the past decade. The wealth of the households residing in UK had increased drastically mainly because of the housing bubble and an increase in stock market. Aggregate demand nurtured the level of employment with its major portion stemming from the public sector. However, the recent financial turmoil undermined the economy and it was forced to sink into a serious recession. The percentage increase in GDP of UK had been stable over the past decade. According to the data it has been observed that a recessionary phase has been experienced almost after 18 years; last time it was observed in 90’s which is evident from Figure 1. As we know that, recessions are marked by a percentage decrease in GDP generally over two to three quarters thus we can draw a valid inference from the figure that UK plunged into the recession in year 2008. Figure 1: Percentage growth in UK’s GDP (1955 to 2008) Source: http://postrecession.files.wordpress.com/2009/01/whitepaper6.pdf The crisis traces its root in the financial sector which is the flagship of the UK’s economy. Since the financial sector is closely interlinked to all the other sectors, it exerted a detrimental effect on the other parts of the economy. As we know that financial sector mainly assist individuals and businesses in borrowing and lending of funds therefore this crisis had its impact on the ability of households and businesses to finance their needs. Public finances were hit hard by this upheaval which limited the ability of UK’s government to use fiscal policy to monitor the situation. The current economic scenario is pointing an auspicious beginning for UK as the financial turbulence which swept across the world has subsided to a quite large extent. After six consecutive quarters of recession from April 2008 to September 2009, UK has finally unfettered from the recession since it has experienced a 0.1% growth in its GDP in the last quarter of the year (Figure 2) (Cook & Hayman, 2010). Technically, it is clear that UK has recovered from a recession. However, this financial turmoil has left a great deal of damage in its wake. Banks have become more reluctant to grant loans to small firms & businesses which have inhibited the growth in GDP of the major economies. Figure 2: GDP growth over the last two years Now let us analyze the growth in 1% GDP in terms of different sectors. The two fundamental sectors namely production and service sector each of them grew by 1% in the quarter. The launch of UK’s new scheme “Cash for bangers” in which older cars can be exchanged with the new ones for a adequate level of money has uplifted the intensity of manufacturing in the economy and has also been successful in strengthening the employment levels. According to Office of National Statistics, the production for motor vehicle has increased by 14.2 percent in the three months from July to September (Cohen 2009). In the month of June, the car output increased by 11 percent followed by an increase of 10.4 percent in the next month which suggests that the economy is getting some momentum and if continues on the same path for few more months, it will quickly revitalize the economy. The service sector has seen a slight upturn from motor trades and retail which has given assistance to distribution, hotels and restaurants with a rise of 0.4 percent in output in the quarter. In addition to that other services such as transport, warehousing and communications have also achieved a modest growth and grew by 0.7 percent while government services grew by 0.2 percent (Pimlott 2010). The only industry in service sector which has suffered a downturn is none other than the financial service industry. Business and financial services saw a decline of 0.8 percent which again confirms that credit borrowing and lending is getting tougher over the period of time and it will take a long time for this industry to be fully revived. Real estate market has also been bustling with flurry of activities. One of the prominent real estate organization, Countrywide estate agents which has more than a 1000 branches in the country claimed that they have seen an increase of 69 percent increase in real estate inquiries from the potential customers during the month of August compared with the same month of the last year. Moreover, the company has also seen a rise in sales by 53 percent (Fleming 2009). The increase in real estate activity may be attributed to the fact that consumers now perceive that house prices have passed their trough and economy is gaining momentum towards the new direction. There are several indicators which uphold that UK is recovering from recession. Global markets have climbed out of recession and the signs of growth are manifested in the global economy. UK being as one of the major trading nation is expecting that the global recovery will stimulate its growth since its performance is inextricably linked with the performance of other economies of world. As per the latest data, the Euro Area and United States of America which are the largest export markets for UK have returned to economic growth in their third quarters (Sentence 2009). In addition to that, growth in Asian economies has flared hope for UK since it is also a large importer of goods from UK. China and other Asian economies have achieved growth in their second and third quarters. The weakening of pounds against the international currencies during recession has also raised a beacon of hope as many trading businesses believe that this will spur the demand of British goods & services as they become relatively economical abroad. Consumers will be easily induced to buy competitive UK goods rather than carrying more expensive imports. Hence, it is obvious that the chances of recovery are quite high in UK. Consumer spending has boosted which reveals that consumers are exuding confidence on the economy. The CBI’s Distributive Trades Survey indicated a growth in the retail sector in the month of September and October. This has further been confirmed by the British Retail Consortium’s sales monitor for the month of October which showed that it was the strongest retail sales growth in the past seven years (Sentance 2009). The level of unemployment in UK also gives a hint that the economy is bouncing back to growth. Unemployment levels have fallen down for first time in the last 18 months. Increases in unemployment level became apparent at the mid of year 2008 and they have eased down dramatically in the last few months. The increase in the unemployment was just 30,000 in the third quarter of year 2009 whereas the rise in unemployment was 200,000 in the same quarter of the previous year (Sentence 2009). This confirms that there has been a remarkable improvement in the economy in the recent periods. Figure 2: Unemployment Level over the last two years Many of the analysts believe that government intervention has played a vital role in reviving the economy towards growth. Chris Leslie who is the director at think-tank the New Local Government Network stated that fiscal stimulus has contributed greatly to get rid of this steep recession. He further added that local council’s initiative to provide loans and support to small firms has been successful. Regional Development Agencies also played a critical role by providing investment in infrastructure such as roads, derelict land clearance for land development and regeneration activities. In addition to that, some analysts predicted that there will be 3.5 million unemployed people by the end of 2009 whereas the actual figures are placed at 2.5 million which suggest that government intervention through fiscal policy has worked to a certain extent (Cook & Hayman, 2010). The second indispensable tool for government, monetary policy, has also been deployed to monitor the economy. The key objective of the monetary policy is to control the stability of prices and in the case of UK it was set a target of 2%. Few year before this target was a formidable challenge for the government in the backdrop of global volatility. However, the latest reports show that CPI would remain as low as 1 % in the period of recession. It implies that interest rates will also be hovering on the lower side which is encouraging news for the consumers. During the last year of October, Monetary Policy Committee cut the discount rates by four and half percentage points and injected £175 billion into the economy. This quantitative easing has helped in stimulating the aggregate demand and is also an important element for UK to recover from the recession. However, the full impact of this monetary relaxation will not be evident within a short period as certain lags are bound to occur. We have analyzed a wide range of indicators which emphasize that UK is recovering from recession; however, there are other indicators which indicate that recession could be protracted and long. At the current moment, UK is at very early stages of a resumption of growth. Many of the businesses are yet faltering and they will further see a decline of activity in their sectors. Economists have noted that the output of the industries producing capital goods which are generally purchased by firms have dwindled rapidly while those residing in consumer durable and non-durable goods have seen a less severe fall in their outputs. During these incessant 18 months of recession, public borrowing increased by £178 billion and the output diminished by 6% (BBC News, 2010). This implies that the expected growth will be hit hard as consumer spending will be cut back as households have to repay their loans back with interest in the upcoming periods. As savings will decline in the economy, the level of investment will also fall which will cause the GDP to shrink. Finally, government will be forced to lower the tax rates which will curb the level of government expenditures in the economy. We can infer from the overall analysis that the economy is heading towards recovery but it will not fully revive in a short span of time. It is a lackluster recovery and will take a lot of time to recover by leaps & bounds. Growth is about to happen but will come in fits & starts as dearth of credit persists in UK. The state of economy purely hinges on the financial sector and its recovery depends on how well the financial industry itself recovers. References BBC News 2010, UK economy emerges from recession. Available from site: http://news.bbc.co.uk/2/hi/8479639.stm Cohen, N.2009, Industrial output suggests UK recession over. FT.com. London Fleming, S. 2009, FTSE continues to ride high above 5,000 mark as investors revel in recovery forecast. Available from site: http://www.dailymail.co.uk/news/article-1211999/Recession-ended-May-says-forecaster-UK-economy-records-quarterly-growth-year.html Hayman, A. & Cook, B. 2010, Uk recession over, but growth less than forecast. Regeneration & Renewal: London: p. 12-13 Killick, R. 2008, UK economy after the recession. Available from site: http://postrecession.files.wordpress.com/2009/01/whitepaper6.pdf Pimlott, D. 2010, UK economy limps out of recession. Available from site: http://www.cnn.com/2010/BUSINESS/01/26/uk.recession.ft/index.html Sentence, a. 2009, Prospects for the british economy after the financial storm. Available from site: http://www.bankofengland.co.uk/publications/speeches/2009/speech411.pdf Read More