UK Economic Environment

Document Type:Thesis

Subject Area:Economics

Document 1

12 Boom 12 Recession 13 Slump/depression 13 Recovery 13 UK economy in relation to the business cycle 13 Alignment of the UK economy with the Business Cycle Stages 15 Conclusion 16 References 16 Abstract This paper provides an outlook for the UK economy in the light of the Brexit and other economic external factors. The UK economy has been observed to gradually improve over the years after the Great Depression that was witnessed in 2008/2009 (Hodgson, 2009). Moreover, it was even held up well in the six months after the EU referendum. However, due to a higher inflation bit into household spending power in 2017, a slow economic growth was experienced and this slowdown continued into early 2018. Later on during the second and the third quarters of 2018, a GDP growth picked up due to the recovery in consumer spending as the weather improved and the inflation eased.

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These factors will boost the UK inbound tourism and exports which offer support to the economy of the country (Clark, 2013). Problems Facing the UK Economy The performance of the economy of the UK is determined by many economic factors such as political stability, availability of advanced technology, availability of good infrastructure, and government policies which greatly affect economic activities. Current economic and political uncertainty resulting from the Brexit negotiations is dragging on business investment in the country and this is leading to the current slow average economic growth. The slow economic growth in the Eurozone is also having direct impact on the growth of the UK economy. The rising US interest and the increasing global trade tensions are also stalling the country’s economic growth.

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The county was ranked in the G7 at position 6 in terms of productivity growth since 2010. The country’s weak production growth combined with the negative results from Brexit has had detrimental effects on the economic growth of the country. The country is experiencing the weakest decade in terms of economic growth which risen at an average of less than 2% (Becker & Jäger, 2010). However, the 2018 1. 4% growth in GDP could be a good sign of the economic prowess in the country. The low growth has automatically led to a decrease in real wages. Low productivity translates to reduced wages to the employee which in turn lowers the living standard of the employees. The level of productivity in the UK economy has also gone down.

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In the period of post-war, the UK economy was accustomed to steady growth in productivity which has been the engine behind the increase in real GDP and consequent improvement in the living standards. However, this trend has changed since 2007 with the level of productivity decreasing dramatically and trying to catch up. This translates to a rough loss of 500,000 jobs. Data from the latest statistics shows that currently there are a total of 2. 1 million immigrants from the European nations that are working in the UK, which translates to 7% of UK workers in 2016 born in other EEA countries. This percentage may however, shrink due to the labour policies that are being instituted by the country with regards to the Brexit plans to pull out of the European Union.

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Vital sectors of the economy such engineering and IT industries suffer from the low skilled workforce in the UK. The UK can only solve the issue of employment by improving the health and life expectancy, which served to encourage individuals to prolong their working lives and seeking to move people off long term benefit such as helping individuals on disability allowance to find less taxing jobs besides planning tax rises that are appropriate to promote equality, efficiency and for incentives. Increased government borrowing. The increased ratio in government borrowing / GDP. Having a weak growth in the GDP of the economy makes it difficult for the government to lower government borrowing to GDP. Despite the measures in government to keep in check the amount of debt, the ratio of borrowing to GDP is predicted to keep on going up.

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Inflation The current average of UK inflation in 2018 is at 2. 7%, which has just picked up from 0. 7% on average in 2016. This high inflation has been attributed to the feed-through from a weaker pound into import prices. Additionally, the high inflation has also be attributed by the rise in global oil prices from their low during early 2016 to over $80 a barrel (Chowdhury, et al. The ratio of the prices of houses to income is rising. If the rates of interest go up from the current low rates, homeowners will be adversely affected by high cost or mortgage. Consumers have become used to historical lows and as such, increase in interest rates will result in increased loan defaults from borrowers. External Factors. The economy of the UK has greatly been affected by several external factors, such as geopolitical events such as Brexit, trade globalization, climatic changes, and technological innovations.

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This eventually translates to a higher production cost, which implies the prices of the finished products produced by the UK will be higher. This will mean that exports from the UK to the other European countries will be high due to high tariffs and increased cost of production. UK goods will therefore, not be able to compete well with exports that enjoy free trade within the EU (Nugent, 2017). This implies a negative impact on export businesses in the UK. According to statistics, the UK exported goods worth 133 billion pounds to the other European countries in 2015. Business cycle Definition and different stages of the business cycle. The business cycle also sometimes referred to as the economic cycle refers to the fluctuations in the performance of an economy.

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An economy experiences four stages of cycles namely: boom, slump, recovery or at other times it undergoes a recession. The main causes for these cycles are: I. Changes in the policies made by the government which can influence economic activities for example currency devaluation. There is increased confidence in business as companies enjoy massive profits thereby increasing investment back into the economy which translates to job creation hence reducing the rate of unemployment. Recession This is the opposite boom in an economy. There is a low demand for consumer products thus low consumer spending, which in turn translates to low levels of profit. Business confidence dwindles which discourage investment. Reduced investment results to rise in the level of unemployment. However, some businesses such as Dominion UK thrived where its profits and revenue sales achieved a double-digit in the last 5 years.

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There was also a boom in the cinema industry as well as increased sales in scrap to gold promotions. Other companies such as Thomas Cook suffered massive loss as their prices of the share dropped due to low bookings. The recent recession in the economy leads to increased levels of unemployment. This was triggered by the huge losses some companies were making and hence a consequent reduction in the level of investment. The inability to access cheaper loans lead to the following effect in the UK economy: 1) The collapse in the approval of mortgage loan which led to reduced demand for property and house prices. This was as a result of increased interest rate which discourages loan borrowing. 2) Most of the property owners faced a rise in mortgage rates which were on fixed terms.

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This affected the consumers’ disposable income. 3) The decline in household consumption due to reduced aggregate demand reduced consumer spending which was a key element in pushing the UK economy into recession. Conclusion From the economic trends that have been witnessed in UK, it can be concluded that the economic environment of UK may not break out of the sub-2% low growth rate in the near future due to several economic factors that continue to cause negative impacts on the positive growth of the economic. Even though the country’s productivity may improve due to its investment in technology, its GDP may only increase slightly due to the rapid increase in the country’s population. The country’s deliberation to break away from the European Union may result to rising protectionism and Geopolitical tensions, which may pose downside risk to UK economic growth.

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