A Contemporary Survey of Recession in The British Economy
On 23rd January 2009, the British Government officially declared that Britain had entered its worst recession since 1991, when figures from the Office for National Statistics confirmed that the British economy had shrunk a worse than expected 1.5% during the final quarter of 2008. This followed a contraction in Q3 of 2008 of 0.6%, resulting in the qualifying two successive quarters of negative growth therefore technically defining a recession. This report considers the features of the British economy and particularly those that have resulted in the present day economic climate.
The following demand and supply graph illustrates this decline.
In February 2007, 69,610 new cars were registered in the UK, compared to 54,359 February 2009. This is a 22% decrease. This decrease in demand has caused the demand curve to shift to the left mainly due to a decrease in consumer income.
Quantity (q1) = 69,610 new registrations v.s. Quantity (q2) = 54,359 new registrations.
(Data source: U.K. Auto Makers Seek Move From State as Sales Fall 22% in February
Wall Street Journal http://online.wsj.com/article/SB123624734335438471.html Accessed 8 March 2009).
6. The Role of the Government in the Current Economic Situation
The main role of the Government in any economic crisis is of course to lead the country out of the crisis and towards economic recovery. There are various ways this can be done, such as by use of the tools which can be used to control the many macroeconomic variables listed above such as inflation and interest rates. On 1st December 2008, the Government temporarily reduced the VAT rate from 17.5% to 15%, the lowest rate allowed by EU legislation as part of an emergency package aimed at kick-starting the economy. The idea was that the VAT reduction would make many products cheaper, thus increasing the disposable income of the average consumer, which the Government hope would be put back into the economy.
Most recently, the Government has announced on the 5th March in light of the latest interest rate cut that it will begin ‘quantitative easing’. This will involve injecting £75bn (possibly increasing to £150bn) to allow the Government to purchase gilts and commercial assets. ‘Quantitative easing is the process of increasing the amount of money in circulation in an attempt to revive the economy… the idea is that if the amount of money in the system is boosted, commercial banks will find it easier to lend’. (BBC News – Business – Bank to pump £75bn into economy – http://news.bbc.co.uk/1/hi/business/7927100.stm . Accessed 6 March 2009.).
7. Predictions and the Future of the British Economy
Gordon Brown and the labour Government in recent years have been made famous for claiming the ‘end of boom and bust’, stating that steady economic prosperity and continuous growth was the future of the British Economy. Recent events prove this to be incorrect. What, exactly will happen in the next few years is very unclear. Economist’s forecasts often contradict each others and have been known to be more often wrong than right. The Government hope that it’s recent measures (VAT reduction, interest rate cuts, quantitative easing, etc) will stimulate the economy, improve consumer confidence and encourage spending to result in a slow but steady economic growth towards the end of this year. But whether or not these actions will produce the required result is unsure – only time will tell. Some believe that we are heading for extreme depression. Quantitative easing can cause hyperinflation, which would be bad news for Britain. Whatever happens, changes will have to be made to ensure these events are not repeated. Boom and bust has always happened, recessions are nothing new. But this sudden recession after massive sustained growth is new. Financial lending will have to be more tightly regulated in the future, the global financial infrastructure and the way banks operate will have to be re-engineered to ensure a smooth flow of capital globally.
The above diagram shows the Business Cycle – a ‘slump’ in output leading to a ‘recession’, followed by an increase in output leading to ‘recovery’ and eventually back to a ‘boom’.
(The Business Cycle – http://tutor2u.net/economics/gcse/images/big_picture_business_cycle.gif. Tutor 2 U. Accessed 8th March 2009. )
8. Bibliography
Begg, D. & Ward, D. Economics for Business, 2nd Edition. McGraw-Hill Education, 2007.
McAleese, D. Economics for Business – Competition, Macro-stability and Globalisation, 2nd Edition. Prentice Hall / Financial Times, 2001.
Heilbroner, R. & Thurow, L. Economics explained: everything you need to know about how the economy works and where it’s going. 4th Edition. Simon & Schuster, 1998.
“UK economy: Britain’s fallen star.” Economist Intelligence Unit: Country ViewsWire (Feb 13, 2009): NA. Academic OneFile. Gale. York St John University. Accessed 1 Mar. 2009.
“Toyota plans to reduce work hours in Europe.” Auto Business News (ABN) (March 4, 2009): NA. Academic OneFile. Gale. York St John University. Accessed 8 Mar. 2009.
Broadsheet newspapers: The Economist, The Guardian, The Telegraph
Wall Street Journal – www.wsj.com
The Guardian Online – www.guardian.co.uk
Bank of England – www.bankofengland.co.uk
International Monetary Fund Home Page – www.imf.org
United Kingdom – National Statistics – www.statistics.gov.uk
Website of the UK Government – Directgov – www.direct.gov.uk
Tutor 2 U – www.tutor2u.net
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