Channel: Economy

Wednesday, May 19, 2010
Impact of recession on UK economy
The UK and Indian economies bear striking resemblances as well as stark differences.
Tables & Graphs
 

The UK and Indian economies bear striking resemblances as well as stark differences. They are both highly reliant on the growth of the services sector but have varying degrees of resilience that get highlighted in periods of economic turbulence. In previous release we analyzed how the Indian economy fared over the 2008-09 global financial crises. In this article we look at UK’s performance over the same period.

 

During the recession there was much talk in the Asian region on how those economies would escape the brute force of the financial tsunami and that Europe is likely to be the worst impacted. The underlying factor that determines the likely level of impact is “degree of coupling”. UK is part of the European Union and a lot that happens in Europe does have an impact on the UK. For instance the ongoing financial crises in Greece created a massive ripple in not only the UK financial markets but also within the Treasury that came under intense pressure from other Euro-zone countries to shore up the Greek balance sheet. UK is also reliant heavily on the financial services industry that creates a strong coupling affect with what goes on at Wall Street across the Atlantic.

 

Indian growth on the other hand is largely dependent on the domestic consumption. Unlike the UK it is not part of any monetary union; its currency is not freely traded and has strict controls on capital inflows and outflows. This does have its limitation but also provides the much needed cushioning in volatile times.

 

We analyse a number of facts and figures below to assess impact of a global recession on the UK economy.

 

Foreign Trade
UK’s foreign trade during the period 2007-08 demonstrated remarkable strength. The country did not perform as badly as the environment suggested. Table 2 shows that the total trade decreased by only 1.3%. As a matter of fact the year 2008 witnessed 12% increase in trade. The important thing to note here is that both the exports and imports of services defied the downturn. This can be clearly as a result of the frantic cross-border activity at the times of financial volatility. The decline in trade was as a result of poor exports. But compared to other economic parameters, UK trade has shown considerable resistance to the Economic Recession.

 

Foreign Exchange Reserves
UK Forex reserve had been growing at double-digit rates until 2007 (Table 3), however 2008 and 2009 witnessed the negative growth. The Forex reserve in 2009 was even lower than the 2005 level and dropped 33% from previous year’s level of GBP 53 bn. So there was appreciable impact of recession on UK forex reserve. Given that the Pound Sterling is a freely tradable currency, the Forex reserves do not matter to the UK as much they would to India.

 

Foreign Direct Investment
FDI in UK has shown very inconsistent pattern over the years. The year 2004 and 2005 has shown a remarkable growth of around 200%, much higher than the normal average. The level of investment that the UK received in 2005 was repeated again in 2007, but there was bound to be a substantial drop in 2008 as the recession hit the UK. In that year it registered its lowest FDI in last 4 years, dropping to around GBP 49 bn from the peaks of 2005 when it received almost GBP 100 bn.

 

Unemployment
Unemployment still remains a concern for UK. The unemployment rate in Feb 2010 in UK was at around 8%, up 0.1% over the quarter and the highest rate since September 1996. Employment generally lags behind the normal output cycle and industry hasn’t really adopted the mantra of job-creation.

 

Public Sector Liability
A close look at the public sector liability table shows that it was increasing at alarming levels and so UK not far behind other peer nations impacted by recession and showing large public liability. This sharp increment was the result of lower tax receipts and higher spending on unemployment benefits as well as financial bailout of Northern Rock, RBS and other banks

 

GDP
The GDP clearly has bore the brunt of economic recession as it saw six consecutive quarters of negative growth. [A country is formally in recession if it experiences two consecutive quarters of negative growth]. All the other major developed economies emerged from recession fairly early and UK was the last of the lot. It took UK over a year to register the modest 0.44% positive growth.

 
 

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