Gross Domestic Product- Measure of the market value of goods and services produced by a country.
Real income- Income of individuals or the nation which is adjusted for inflation.
Aggregate Demand-Total amount of goods and services in the economy at a given overall price level and in a given period.
Inflation-The rise in the general prices of goods and services in an economy within a given period of time.
Budget deficit- The Excess expenditure of the government over its disposable income.
Stock market index- a measure of the performance of the stock market.
Corporation tax- The tax levied on the profit of companies.
RECESSION IN THE UK ECONOMY
Recession refers to the decline in the gross domestic product for two consecutive quarters. This means a drop in the country’s output for a period of six months. Carlos has defined recession to refer to:
“A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”(2007: 57)
A recession usually results to different impacts to the manufacturers, industries, consumers, borrowers, small businesses and also the government.
Some of the most significant signals of a recession include decline in the levels of employment, lower incomes, lower inflation, higher government borrowing, and a fall in sale of houses, fall in business and consumer confidence. At the wake of a recession the companies will experience depressed sales and profit margins. The output eventually falls as the cost of production increases. Most companies result to lack of hiring labor and offering voluntary retirement programs in order to reduce the labor and cut the expenses. The prices of the essential commodities shoot up. The consumers start using their savings to cater for the daily expenses. Reduced savings also gives rise to use of credit card giving an indication that the consumers do not have liquid cash to spend. Borrowers on the other hand are unable to honor their payments and these results to reduced financial facilities by the lenders. The prices of the property and the stock market also come down as a result of the reduced economic activity(Sawyer .2005:11).
The UK has previously faced two periods of recession. The first recession was in 1981 which was caused by the rise in price of exports which made the exports very expensive. This resulted in fall of the aggregate demand for the export goods. This greatly affected the British manufactured goods. During this period, the government increased the interest rates as a measure to reduce the inflation. They thus maintained a tight monetary policy resulting into reduced spending rates, low investment and output. It also maintained a tight fiscal policy in bid to reduce the rate of government borrowing and expenditure. These measures together were the major causes of the recession that was experienced in 1981.The second period of recession was experienced in1991 as a result of the measures that were taken to reduce the high rates of inflation. The government also increased the interest rates with an intention of maintaining a high value of the pound but this resulted to a fall in the aggregate demand.
Currently, the UK is feared to go into a recession owing to its current credit crises. There is a fall in the price of houses resulting from the shortage of mortgages and shortage of finance. The country is also experiencing cost push type of inflation thus resulting to less income and consequently low disposable income. There is reduced confidence of the finance sector and also in the real economy. The government is currently operating a tight monetary system to reduce inflation but this is likely to cost their economy a recession(Carlos.2007: 56). The current policies have triggered high interest rates and thus giving rise to high cost of food, energy, health care and also tuition. The output in the major manufacturing factories has declined and there is proven statistics of recorded losses. Most sectors of the economy are fast declining in terms of their performance. The banks and investment funds have reduced their levels of lending due to lack of confidence that the borrowers will be able to honor their payments. The current budget deficit is also getting worse. The government’s expenditure is expected to increase but its income is not adequate to finance the budget. The stock market indexes have also fallen due to the expected low performance of the economy. The investor’s expectation of the future of the economy makes them shy away from investing. Some of the firms such as the Housebuilder, Persimmon have revealed that they have laid off 2000 jobs owing to the market situation. People are unable to raise cash to own homes and this led to the decline in the number of mortgages.
Currently, it is expected that the prices of property will continue falling over four consecutive months, followed by very stunted growth of house prices until 2012. The economic growth has been declining as indicated by diagram 1 in the appendix. The UK economy has been characterized by booms and busts economic cycles. Since 1992, it experienced a long period of economic growth. The down ward trend in the economic performance converged to 2008. This has given the economists a good reason to predict the recession due to occur in UK between this year and 2009. Commercial property continues to decline and it is expected that there will be a 25% fall leading to adoption of tough measures by the investment funds to prevent investors from selling their assets(Carlos.2007: 60). UK has also experienced weakness in the corporation tax thus reduced receipts in public finance. The oil prices continue to rise and this has a great impact on the manufacturing and production costs which in turn is passed to the consumers through inflated prices. This leads to reduced spending by the consumers especially on the leisure goods. The efforts by the Bank of England to cut the exchange rates have only resulted to inflationary effects. By cutting the rate, it would mean the reduction of the value of the pound to the dollar. This would increase the value of the commodities in real terms. The job levels have remained stagnant while the employment expectations have gone down as firms try to cut down their cost. This has been well demonstrated by diagram 2 in the appendix. All this factors have led to the declined output of the economy as indicated by the declining GDP. The economists have predicted a rise in the personal dept that will increase the rates of drug abuse and family break ups and also failed education besides economic dependency.
The government can implement monetary policies or fiscal policies to deal with a recession period (Khomeini.2004:24). In consideration of monetary policies, the government puts forward an expansionary monetary system that will enable the injection of currency into the economy. The government increases the money supply in the economy using three major instruments. These are the open market operations, reserve requirements and finally the discount window. Open market operations refer to the buying and selling of government bonds by the central bank, in times of recession the central bank may result to buying of the government bonds in the market in order to increase the money supply. An increase in the money supply within the economy will lead to lowering the interest rates. Low interest rates will enable investors to access funds for investment at a cheaper cost. This will also lead to lower cost of production and thus increase the level of employment. It will also lead to lower prices of commodities and thus consumers will increase the expenditure on commodities thus output for the firms will also increase. The other measure is reducing the reserve requirements for the commercial banks. This will result to increase in the money supply since it requires a smaller percentage of the commercial banks deposits that are held by the central bank. A lower reserve requirement translates to lower lending interest rates thus increasing money circulation within the economy (Tool.2003:36). The final monetary measure is the reduction of the discount window. This refers to the reduction in borrowing rates of commercial banks from the central bank. A reduction in this rate enables the commercial banks to borrow more money from the central bank. This on the other hand means that the commercial banks will be able to lend money to the individuals at a cheaper rate thus increasing money supply within the economy.
Another measure that the government can take to deal with effects of a recession is the application of fiscal polices (Holden.1995:74). These are the policies that deal with the governments borrowing and expenditure and also taxation. During a recession the government applies expansionary fiscal policy. This would mean an increase in the government’s expenditure especially on public goods. The government may also reduce the tax to enable the manufacturing and production firms cut cost and also increase the disposable income for the consumers. The impact of this is to increase the demand that will eventually trigger an increase in the output.
It is worth noting that the measures to deal with a recession may produce worse effects than remedies in the economy. Expansionary monetary measures for example result to a reduction in the interest rates. This can result to increase in the inflationary pressures. On the other hand expansionary fiscal policy may affect the savings rate in the long run. This is because total saving in the country are comprised of the private savings, and government savings. If the government applies expansionary fiscal policy it will result in the reduction of its savings and thus reduced investment in the long run. An expansionary fiscal policy also means a future burden to the tax payer (Buxsssssssston.1998: 75)
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Francis Green.(1989).The Restructuring of the UK Economy. UK,Harvester Wheatsheaf,23-90
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Malcolm Sawyer .(2005) The UK Economy: A Manual of Applied Economics. UK, Oxford University Press,10-76
Marc R. Tool, Paul Dale Bush.( 2003). Institutional Analysis and Economic Policy. UK,Springer,34-97
Tony Buxton et al.(1998). Britain’s Economic Performance.UK,Routledge,65-116