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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 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?
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
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