Revision on the uk economy
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Revision on the UK Economy. AS and A2 Economics May 2009. Recession - causation. Global credit crisis Asset price deflation Rising food and oil prices Cuts in real disposable income Collapse of consumer and business sentiment De-globalisation Falling profits, investment Labour shedding

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Revision on the uk economy

Revision on the UK Economy

AS and A2 Economics

May 2009


Recession causation

Recession - causation

  • Global credit crisis

  • Asset price deflation

  • Rising food and oil prices

  • Cuts in real disposable income

  • Collapse of consumer and business sentiment

  • De-globalisation

  • Falling profits, investment

  • Labour shedding

  • Financial crisis has spread to the real economy


Recession fallout

Recession Fallout


Recession fallout key points

Recession Fallout – Key Points

  • Cyclical consequences

    • Unemployment

    • Rising budget deficit

    • Falling business investment

    • Inflationary pressures easing / wage cuts?

  • Possible semi-permanent effects

    • Rising structural unemployment

    • Other hysteresis effects including business failures

    • Changes to financial system – tougher regulation of banking and other financial services

    • Will the UK’s trend growth suffer? LRAS impact?


Policy responses

Policy Responses


Pulling every lever

Pulling every lever

  • Policy rates have moved to the floor (0.5%)

  • £75bn quantitative easing (March 2009)

  • 25% depreciation of sterling over last 12 months

  • Injection of capital into the banking system

  • Government borrowing of more than 12% of GDP (annual fiscal deficit > £175bn)

  • National debt that > 80% of GDP within 2 years


Bank of england from independence to impotence

Bank of England – From Independence to Impotence?

  • Nowhere to go on policy interest rates – liquidity trap reached?

  • Inflation target is being ignored for now (will there be a change?)

  • The key rate now is on government bonds - not the base rate

  • Government committed to HUGE borrowing £175bn in 2010

  • Will the Bank buy as many bonds as the government needs? Or will the bank say enough is enough?

  • For most people the base rate of interest is an irrelevance

    • Look at the cost of unsecured credit

    • Even if borrowing costs are low, can you actually get a loan?


Evaluation

Evaluation

  • Monetary and fiscal policy are now joined at the hip

  • Short term – appetite (demand) for bonds eases the problems of financing an eye-wateringly large fiscal deficit

  • Good fiscal stimuli are timely, targeted, and temporary

  • But there is no such thing as a free lunch

  • Fiscal policy will need to be tightened

  • There will be some crowding out of the private sector

  • We cannot ignore the risk of resurgent inflation in a recovery – whenever that comes

  • Weak sterling poses a major credit (solvency) risk for the UK government – even if we are not (quite) an Iceland


Revision on the uk economy

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