Introduction
United Kingdom’s GDP fell in 2012and raised a fear of possible recession with regards to the data on economic performance. As a matter of fact, the pound which is the main exchange currency sank significantly. Besides, the British government bond prices rose significantly upon release.
The PMI suddenly fell from the previous figure of 50.5 to 47.9 within the twelve months of 2012 (Oxlade 2012). Thus, this reflective treatise attempts to explicitly review the background information on possible reasons for the recession, its effects to the economy, policies for reversing the recession, and effectiveness of these policies.
Reasons Why UK is Experiencing Recession
Despite a series of campaign by the authority to boost lending, approval of mortgages dragged. As indicated in the UK central bank data for the year 2012, “mortgage lending grew by 147 million pounds, the smallest increase since August, also less than forecast” (Oxlade 2012, p. 2).
Basically, the sudden plunge in the output of factories that contributes 10% of the total GDP could be another possible reason for the recession. This plunge contributed to a negative economic growth of 0.1%. The finance minister blamed the ‘Chinese New Year Holidays’ as a serious disruption that might have triggered trade delays in addition to decline in demand in the housing sector since the pound currency was very unstable.
As indicated in the above data, it is apparent that the UK’s economy is operating below the full employment. Unemployment level caused by recession creates disequilibrium in the market, that is, there is a surplus supply with a corresponding lowerdemand for commodities and factors of production. The disequilibrium state pushed the market rates down resulting in high cost of production and high cost of outputs.
This caused an increase in prices of goods and services. With increased prices of goods and services, consumers’ real wealth: in terms of purchasing power, decreased thus, decreasing the aggregate consumption in the UK economy. As consumer expenditure decreases, the level of aggregate demand also decreases until the full employment level of output is attained (Uwasu 2006). However, this was not possible in the economy of the UK.
How Recession Affected the Economy of UK
In the middle of the last decade, UK’s economy had the largest structural deficit as compared to other European economies. In 2012, the manufacturing industry that formed its backbone was hard hit since these industries are often very sensitive to business cycle changes.
The government of UK opted for heavy expenditure to support the 2012 Olympic Games. Unfortunately, this did not work and instead, the deficit of this country increased un-proportionally to the GDP (The World Bank Group, 2012). As opined by Neuhaus (2006) “strong capital accumulation has driven the growth process in the transition countries” (p. 8). However, this is not the case in the UK due to recession.
Rather, due to large public debt, the long term economic growth is likely to be compromised since the factors of products will eventually become very expensive and not competitive since this economy has to trade with competitors such as China that has relatively affordable factors of production (Mankiw, 2007).
As a matter of fact, “economic growth is primarily explained by the accumulation of physical capital and labor” (Neuhaus 2006, p. 23). This should be balanced with the current market requirements to meet the demand threshold. Thus, from the above reflection, technological process of the UK is likely to be compromised in the long run and demand and supply sides of the economy will operate at deficit parameters as factors of production such as labor, capital, and raw material of the manufacturing industry becomes very scarce (Sercu 2011).
In addition, the exogenous progress as a result of competitive advantage may seriously be compromised as investors will opt to move to more friendly economic zones away from the UK. Due to the retarded growth rate of the UK’s GDP as a result of the recession crisis, the quantity of the economy’s capital stock of physical nature and input of labor will cause decomposition of the residual growth characterized by unstable Total Factor Productivity.
In addition, UK’s performance of total employment units as a measure of economic will perform dismally in the long term since reduced capital will influenced reduction on ‘man hours’ of work and lowered income forlabor payment is often based on the units of labor provided as a factor of production (Neuhaus 2006).
Policy Recommendations
The government should incorporate Coincident indicators in the explicit review of the economy. They are expansive series that measure aggregate economic movement. This is because they change approximately concurrently as the whole economy. Some of coincident indicators are trade sales, production, employment, manufacturing, and personal income. Through tracking these changes, the government will be in a position to predict and create appropriate responses to swings in the economy.
The government of the UK should adopt an expansionary production economy model in the major industries in the UK. As a result, the delicate exposure of the UK’s economy to competitive trade with neighboring countries will increase its entities by hundreds of billions of pounds in the long run.
Due to increased entities, the GDP will substantially increase as factors of production, productivity and competitive advantage in trade will increase massively. Same as the views of Mankiw (2007), economic growth is mainly defined by the national GDP which comprises of the balance sheet of factors of production against returns.
At the present, UK’s factors of production such as labor, capital and raw material have become unstable due to the recession as a result of uncontrolled public debt, currency instability, and discretionary economic policies. In the long run, these factors are likely to lead to hyper-inflation, serious unemployment and lowered productivity. Through expansionary production economy model, the UK government will salvage the economy from further plunge into recession cycle (The Telegraph 2013).
Often, stimulating the economy requires combined use of both monetary and fiscal policies. The UK government should stimulate this economy by using fiscal policies. Fiscal policy entails the use of taxes and government spending to stimulate the economy. To increase consumer spending in the economy, the government should put in place tax cuts.
Reduction of tax increases consumers’ disposal income thus increasing spending. An increase in consumer spending increases demand for goods and services (Mankiw 2007). This creates an upward pressure on the supply. It in turn leads to expansion of production thus, creating employment opportunities.
As an austerity measure, the government of the UK should respond to the recession crisis through cutting the public expenditures in the economy. Decreasing government spending decreases the purchasing power in the economy in the long run. This leads to an increase in aggregate demand in the economy. An increase in aggregate demand causes expansion of production lines, thus opening the economy to expansionary growth.
Policy Effectiveness in the UK Economy
Reflectively, demand and supply are the fundamentals of economic growth analysis as the interaction of the market to economic swings such as the UK recession may lead to stagnant growth in the GDP. The law of demand and supply works in opposite ways in the sense that, when the prices of commodities changes, demand and supply also change in opposite direction holding other factors constant (The World Bank Group 2012).
The magnitude of change of demand and supply depends on the economic climate besides the nature of the industry and the dynamics of the market. Tax cuts and reduced public expenditure will stimulate the economy since an increase in aggregate demand causes expansion of production lines, thus opening the economy to expansionary growth (Albert 2009).
Expansionary production economy model policies result in improved investments in the economy. As the capital stock appreciates due to increased investments since the cost of factors of production are made affordable, this economy is likely to gain a long term boom due to massive appreciation that can offset the balance between investments and returns. Besides, the marginal product of capital in this economy will increase above the current negative GDP growth (International Monetary Fund 2008).
Moreover, due to increase in labor as a result of increase in the capital stock, the income of this economy is likely to increase tremendously as output per production factor is positively influenced by expansionary investment (Siddidui 2005). The expanding labor force will ultimately increase labor efficiency at macro level of the UK economy in the long run.
Reference List
Albert, R. 2009, The Conference Board: Business Cycle Indicators Handbook. Web.
International Monetary Fund 2008, World Economic Outlook: Advanced Structural Reforms, IMF, Washington.
Mankiw, N. 2007, Principles of Economics, Thomson Higher Education, Mason.
Neuhaus, M. 2006, The Impact of FDI on Economic Growth: An Analysis for the Transition Countries of Central and Eastern Europe, Springer, Cambridge.
Oxlade, A. 2012, Economy watch: What caused the return to recession and how long will it last? Web.
Sercu, P. 2011, International Finance: Theory into Practice, Princeton University Press, New Jersey.
Siddiqui, S. 2005, Managerial economics and financial analysis, New age international (P) Limited, New Delhi.
The Telegraph 2013, GDP figures: UK economy shrinks – as it happened. Web.
The World Bank Group 2012, The World Bank Data. Web.
Uwasu, M. 2006, The Solow Growth Model. Web.