Economic Recession in the UK: Causes, Impact, Government’s Response

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A recession is defined as a period when the economic growth is negative for two economic quarters consecutively. UK economy has had continuous economic growth and booms. Since 1992, the economy has experienced the longest period of growth that is uninterrupted. This recession is the worst after the 1930’s depression. The gross domestic product of UK shrank in the third quarter of 2008 by 0.6% and, 1.5% in the following quarter. According to the National Statistics Office, this was due to the weaker output of products and services industries. Overall, UK’s economy is now at the level it was in 2005 and this implies that growth of four years has been wiped out.

This recession could have been caused by various reasons. To begin with, the UK economy depends mostly on the housing market. Since most people own houses, the percentage of borrowing costs is high. The increased interest rates lead to increases mortgage costs thus, resulting in a fall in demand and consequently consumer spending. Secondly, increased interest rates are likely to affect consumer borrowing. Thirdly, the manufacturing sector of the UK has declined compared to the rest of the world. This has caused the unemployment rate to rise above 5%. Therefore, the government increases taxes to meet its shortfalls, and this greatly affects consumer spending. Due to the global downturn, the demand for British exports declines and the economic confidence reduces. The rising prices of oil have also caused the recession, continued rise will trigger inflation, and to counter this, the government will increase interest rates causing a decline in aggregate demand (Richard 2009, Par. 2-9).

The recession has greatly affected the UK’s companies, households, organizations, and government bodies. British companies are struggling to keep pace with the economic conditions. The state of companies has worsened over this period. Companies are preparing for longer periods of suffering in the credit markets with cash preservation and cost cuts in the forefront. The companies are contemplating drastic options like dividend cuts and off-shoring a reflection of the slowdown in growth.

The unemployment rate has risen and it is predicted that by the end of the year, two million people are likely to be unemployed. Many companies are cutting their employment rate and most of them are reducing their workforce. These are like GSK, which has reduced its workforce by 400, ITV by 1000, HSCB by 1100, and some have collapsed like Lehman Brothers. The forecasts released by the Office for National Statistics show that the unemployment rate is likely to increase by one million.

The homeowners are facing repossessions since most of them are lagging behind their mortgage repayments. The number of court orders on mortgage repossessions according to the Ministry of Justice rose to Twenty-nine thousand by the end of June. More people are falling into negative equity thus, they are unable to meet their mortgage repayments and unless the Government acts, it could result in mass repossessions like the ones that occurred in the last Tory recession. The mortgage lending decreased by 95% in the previous month and, net lending was at the lowest level since 1993 when the records began. In August, the houses being sold fell to the level where it was in 1959, because of the tightened lending conditions (Kathryn 2008, par. 7-10).

Building societies and banks are cutting down their level of consumer credit. A credit survey by the Bank of India reported that a new low has been hit by the unsecured loans available to households. In the third quarter, the unsecured loans offered were at the lowest level since the series began. The impact of the crisis on credit on the economy will still be present even if the problems in the financial markets are solved. In addition, those with personal pension and contribution schemes will experience a sharp fall in their savings value (Kathryn 2008, par. 11).

The economic recession is taking a central place in UK political discussions in most policy areas. Policymakers are looking for ways on how to deliver public goods and services at reduced costs. They are also coming up with ways on how to counter the recession to reduce the impact on social institutions (Nick 2009, par. 1). The government has decided to make its industrial policies strong and, support future growth and economic renewal. These policies will ensure that not only the recession damages are corrected, but also place them in a better position to take advantage of the arising opportunities when the economy recovers. Industries need to see their competitive strength and industrial policy in a wider way. The government wants to invent new ideologies or revive old theories in managing the economy. This will ensure that the government matches with the strategic needs of businesses and not overriding market forces (HM Government 2009, pp. 7-8).

Many UK cities have responded to the rising unemployment rates and have taken innovation as a drive to recover. They have aimed at improving the credit access of businesses through supporting the credit unions’ expansion, lending to local firms, and prompt payment of invoices. Also by reducing the costs of businesses by cutting down service charges and rent payable to local authorities and campaigns on take-up of small business rate relief. The government is also working with employers to come up with working schemes that are short-term and renewable and, lobbying for better deals. Apprenticeship schemes are being expanded targeting school leavers and graduates to tackle the problem of unemployment. Emphasis is being put on investing in skills and advising local residents on how to tackle debts. The government has also responded to the decline in the housing market and retaining the quality of place. This is done by making use of the empty shops, improved access to housing facilities and, addressing the decline in reputation. By boost of the third sector, they are able to cope with the increasing demand of their goods and services (Neil, Katy & Alexandra 2009, pp.4-6).

The local authorities are using the crisis to prepare for an upturn. They are campaigning for foreign firms, venture capitalists and tourism. In addition, they have ensured that citizens are kept close to labour markets so that incase opportunities arise, they can take advantage. Continued investments in local infrastructures have been made in preparation for the opportunities that will arise after the upturn.

The G20 meeting was held in order to come up with a solution to the global recession. G20 was a group of the most advanced and economic powerful countries, who held an emergency meeting in London to look on the world economy. The World Bank had its doubts whether the G20 will come up with a concrete solution since; G20 adopted restrictive measures on trade because each government wants to assist its own struggling industries. They came up with agreements to tighten the financial regulations of the world and boost key financial institutions funding (Chris & Andrew 2009, par. 2-5).

The local and national policy makers’ should allow partnerships of sub-regions and local authorities, so that funding could have a greater flexibility and response to local circumstances is simplified. Treasury should allow local authorities to balance their books for a period of three years. They should also prioritize integration of investment on skills and employment at a local level through Skills and Employment Boards. They should balance the short-term investments such as investment in infrastructure, with long-term priorities like skills investment (Neil, Katy & Alexandra 2009, pp.8).

The IMF has warned that the UK economy might continue shrinking even after its leading competitors have recovered. It predicts that UK economy will shrink by a further 0.2% in 2010. The policy makers in the UK will have to come up with policies that can enable the economy remain stable even in times of great crisis. However, they have tried to counter the recession so that it will not reach the level of the 1930’s depression. Thus, the government has a task to ensure that its population is not pushed too far by the recession. They should have strategies such that after the recession, the economic recovery will be fast.

Reference

Chris, C. & Andrew, M 2009, G20 Summit: will it find a cure for the global recession, Web.

HM Government 2009, New industry, new jobs, Web.

Kathryn, H 2008, Signs of recession: the impact on Britain’s real economy. Web.

Neil L, Katy M & Alexandria J 2009, Recession and Recover: How UK Cities can respond and drive the recovery, The Work Foundation, London.

Nick, B 2009, Attacking the recession: How innovation can fight the downturn, Web.

Richard, P 2009, Will the UK enter into a recession, Web.

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Economic Recession in the UK: Causes, Impact, Government’s Response

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