I’ll take a look at United Kingdom’s (UK) current macroeconomic situation, the main challenges that it is facing, anticipated future trends and the policies suitable to improve its present economic situation. You will find that the recession that affected nations globally, many sectors of UK’s were affected such as the employment rate that soared, a low pound prices, depressing interest rates and dilapidated output. We shall discover that even in the face of this trials winners emerged, such as individuals who owned tracker mortgages who had the advantage of a base that was not affected by inflation, people with considerably large debts are repaying at low interest rates as will be explained, and last but not least are the UK exporters who are realizing profits due to a low pound, hedging them against the recession. The loser on the other hand, are the unemployed where we will highlight some of the actions to take to curb it, savers because of low interest rate, the housing market and the government because of rise in spending.
The Dictionary of Economics defines macroeconomics as and I quote “The study of whole economic systems aggregating over the functioning of individual economic units. It is primarily concerned with variables which follow systematic and predictable paths of behavior and can be analyzed independently of the decisions of the many agents who determine their level. More specifically, it is a study of national economies and the determination of national income.” This is what enables governments to determine expenditure, for its military, as well as give priority to various expansion and infrastructure projects. This is what determines by how much an economy can expand or grow in a fiscal year (Michael, 2000). Moreover its inflation rates as well as a government’s monetary policies greatly determine if external investors will be attracted by terms as well policies depending on how favorable or unfavorable they will find the conditions. This is why the economy as well as financial policies of country is one of the critical pillars for any country to have both a meaningful growth in addition to development. economist have been able to determine that printing money is not equivalent to growth but what a country does with its limited resources both, natural and financial, to gain the best of what is available an more importantly put this to beneficial use for the whole nation. This is why many countries, mainly developing, can have economic growth with little or no development at all.
The United Kingdom like every other nation is in the global competition of scarce resources as well as competing for investors and investing opportunities. with its growing population and cut throat competition from China, America, Russia, India, South Africa, Brazil , just to mention a few, the united Kingdom is in no position to allow any errors, misappropriation of any kind or skyrocketing inflation rates to be part of its economy, since the competition is tough and so are the resources. It is still reeling from the effects of the economic melt down of 2008, which in some great way affected confidence of various investors. It has come with various policies as well as programs that will not only give early signals but also shield external investors from similar shocks. Hence as illustrated macro economics looks at not only an individual person, it’s collective and puts interests of not an the nation alone but also global interest because a nation can experience both growth and development depending on how well its able to invest in best opportunities but also attracting the best work force and investors (Karen, 2009).
UK’S Current Macroeconomic Situations and Future Economic Trends
The UK economy was in recession for a better period of 2009 due to the global financial crisis. The government recorded a decline of about4.8% in the county’s GDP. During the final quarter, the economy’s GDP increased by 0.4%. in the following year it rose to 0.2%,1.2%, falling slightly to 0.7% in the third quarter of 2010, and falling further to 0.5% by end of the fourth quarter. This was caused by bad weather that affected the construction and services industry. By the beginning of this year, in first quarter, GDP has risen by 0.5% to stand at 1.8%
In the final quarter of 2010, full output in production rose by 0.7% compared to third quarter’s 0.5%. Manufacturing industry’s output increased by by 1.1% in the final quarter making its overall index to rise by 4.4$. Currently in the first quarter of 2011, ouput in production industry has fallen to 0.2%. However production in the manufacturing sector has risen by 1.1%. the quarrying and mining overall has dropped by 1.4%. construction output on the hand, has fell by about 4.0%, service industry output is up by 0.9% due to transport, the finance and business sector increasing by 0.6%, and the government and other services sector increasing also by 0.6%. Expenditure for household has fallen to 0.3%, lower than the previous quarter, whereas final expenditure for the government is currently standing at 1.0%, a solid 1.0% higher than the first quarter of 2010. In the initial quarter of 2011 the trade deficit declined to £5.7 billion a fall from the previous quarter’s £11.5 billion. Exports have increased by 3.7% while the imports have fallen by2.3%. An obvious good sign is the rise of employees compensation prices by 1.3%, 1.9% higher than 2010’s first quarter.
The measure of CPI is used to compare inflation rates in the country. It covers items such as private households, households for institutions such as student hostels. The country’s current annual inflation is 4% from 3.7%, recorded last year. This, according to the Bank of England has occurred due to a low pound, a rise in VAT as well as increase in cost of commodities. As a reflection the budget deficit is at 7.5% but is expected to fall in the following years.
Although the UK’s economy may be experiencing difficulties, there are expectations of an upward turn in the future. The present government’s objective is to control the county’s heavy budget deficit caused by increasing interest payments. To achieve this they expect to reduce its debt because with no reduction, the deficit will continue expanding. A balanced budget therefore is expected to take form in the future. This is going to be achieved by reduced government spending, increased taxes so as to reduce the current deficit of £23 billion per year.
It is projected that future trends in the economy will include 2% growth in GDP, CPI will fall to about 1.9% from the current 4.5%.conumer spending will increase by 0.6%, public borrowing will increase to about 3.6% of GDP from around 2015-2016. Of course, the growth is expected to rise in a slow pace but it will grow in a faster rate in 2013 (Karen, 2009). Any growth over the next years will most likely come from net trade that will continue with upward trend, contributing about 1.4% increase in GDP. The overseas market will also play a major role in the growth given the weak pound, thus exports will increase by about 4.3% in 2012.
Due to the slow recovery projected, public sector borrowing will fall to around 3.6% of GDP in 2015-2016 compared to 1.5% insinuated by Office of Budget Responsibility. The government is not expected therefore, to adhere to its target by balancing current budget by 2015-2016. House prices are expected to fall by at least 1.5% every year for the next four years as cost of borrowing rises. To accomplish this, loan to income ratios are expected to be reduced so as to also stimulate growth with expected increase house building (Solomos, 1996).
Due to the current economic crisis, a good economic policy has been created to realize economic recovery for UK. Normally this is done by the Monetary Policy Committee and Bank of England. To accomplish this, the two parties have to put strict measures to ensure that the economic downturn can be handled effectively. These measures are put in such a manner to address both short term and long term issues. Some of the expected evolutions in the future are increase in GDP, a decrease in the UK’s large trade deficit, more people owning homes and a strong pound and increase in businesses. One of the measures to accomplish these short term issues is the recent decrease in interest rates to make finances more available to the public. Also the VAT has been reduced by15% which will enable the public to consume and enhance the country’s economic growth (Dick, 2010).
Following current UK’s economic trend such as high inflation, larger trade deficits and decreasing level of GDP, stringent measures have to be put in place to ensure long term growth of the economy (Mike, 1981). This includes stable prices high rate of employment as well as low levels of inflation. To realize these macroeconomic goals, a realistic fiscal policy should be put in place to offer clear and concise guidelines to support economic recovery. Some of the measures currently undertaken as part of fiscal policy are reduction in public expenditures. The coalition government in particular has undertaken this move as part of the discretionary fiscal policy. With so doing we expect competition for funds to reduce in the private sector hence enhancing growth job creation. Also as part of reducing the large deficits, the government will increase long-term interest rates as reduces the pressure on public spending.
Main Challenges Facing UK’S Economy and Policy Recommendations
The main challenges facing UK’s economy include a fragile policy, financial global disparity, and slow domestic command in regard to the fiscal contraction, big budget deficit, creating employment, high taxes and reduced government spending. The question therefore is how it is going to finance its growth amidst such challenges (Angus, 1995). With cuts in spending introduced, we expect a less stict monetary policy with heightened business confidence while the increase in VAT will ensure inflation is subdued. Exports will improve and the countries domestic demand reduced. Beside these challenges, UK’S economy also has some strength that enables it to stay afloat despite the challenges. UK’s economy strength internally has to be its manufacturing industry since almost half of UK businesses are innovators who produce new products and services technologically. This enables it to compete to effectively in the global market and contribute to its economy by creating employment and increasing levels of GDP. Other strengths include its open economy encouraging trade and investments from overseas, high ranks for foreign direct investments, provides pathway for international connections, supple labor markets, a steady regulatory framework, a world leading economy and stable public sectors.
Some policy recommendations to control the business cycle include reduction in government tax on businesses that are profit oriented, deregulation to assist small businesses, a competitive tax structure favorable for international companies, increase in research and development an important driver for the economy (Graham, 2003). It is also in the process of reducing the budget deficit by introducing a five year plan to ensure public debt is in tandem with national income. It has also reduced the budget of various ministries to reduce on public spending giving priority to instead science, education as well as health
United Kingdom’s demographics include economic status, education, status, ethnicity, population density and other factors of the population. United Kingdoms population is comprised of one of the best skilled and highly educated in the world; this puts it in a unique position to pursue many ground breaking research as well as rich economic knowledge. In fact it has a literacy rate of 99% thanks to its universal public education that has been there since the late 1800’s. it has a mainly White British population with other ethnic communities as well as races forming a small fraction of the population(Sandy, 2006). It population density is one of the highest in the world hence resulting to majority of the population to live in urban enters , an example being that London the capital city has approximately 10 -12 million residents out of a population of about 63 million , according to 2007 estimates.
Considering its composition and literacy levels, The United Kingdom enjoys an unrivalled advantage, considering that 66 percent of the population is the working population of between 15-64 years. However, recent surveys suggest that its aging population will be its Achilles heel. With increasing aging population and very birth rates, the population is headed towards the aging population (Dick, 2010). This will have adverse effect on the planning of the whole economy as most of its expenditure as well as production will be geared to taking care of the aging population. This is because The United Kingdom has a very comprehensive as well as quality health system. This has resulted in increased life expectancy of the whole population with many being able to push past 65 year retirement limit. However with a very competitive economy coupled with very scarce resources and employment opportunities, it has made many youth, both male and female, to concentrate on what now is crucial for anyones survival, making money.
The fertility rate of the United Kingdom is approximately at around 2 per woman but more and more women are not willing to be housewives as the situations are either not favorable or just by choice. So what implications will this have on the economy? Currently a sizeable proportion of its economy was being used to finance its young population’s education. This was very costly but what one should consider is that most of this population would later on work for the country in various capacities in or outside the country and not only return the cost but make far much more hence the economy continuing to grow and develop as well. But when the population changes, as it is headed to the old population, the money will literally get lost without returns. The bulk of the economy’s expenditure will go to an old population that will not work in any way to return in the money. The economy will reallocate to producing more to cater for the aging population in terms of Medicare, transport among other old population necessities. in essence the bulk of the economy’s money will go in to a ‘Black hole’. Moreover, the work force will be reducing as since the rate at which people are getting old is more than the rate at which are being born.
The economy of any country is critical to its growth as well as development and it is crucial to try and put it ahead using all means in terms of technology and manpower. The UK’s economy is just a proof of what it takes to be among the best as well as the ingredients of being among the best.