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Business Responses to the Global Economic Crisis

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Thu, 18 Jan 2018

Global Economic crisis began in 2008 and has drawn a great amount of blood from the financial sector of both developed and developing economy. Under usual circumstances the fall of one will result in rise of another economy. But with GFC the mighty economies has fallen and the developing economies has reached stagnation stage in their growth. UK is one of the economies that are affected by the crisis above the moderate level but not as serious as USA. Economic recovery is taking place all around the world and UK is one among them.

Beginning of British economy slowdown was marked when the Northern Rock bank was forced to apply to the Bank of England for emergency financial support on 13thSeptember 2007. The British economy went to serious slowdown in 2008 3rd quarter (Authers, 2012). The economy temporarily exited it in the 4thquarter of 2009, only to enter a double dip recession in the first quarter of 2012 (Office for National Statistics, 2012). The present statement from Bank of England regarding the robust recovery is positive news for the market. The present president of bank Mr Mark Carney has devised a good plan to bring the economy out of recession. As a result of the concentrated efforts from Bank of England the growth has shown a steady rise. The present policies taken by the policy determining panel are being analysed through the viewpoint of the bank’s new “forward guidance” policy. This new policy has given the markets, business and individuals a control over the interest rates of coming months. The rate of interest is now kept at an all-time low in order to pump more money into the market. Another sign of recovery is the revival of housing industry, thanks to the “help to buy” policy of government. The increase found in number of mortgage approvals for house purchase is a testimony of this fact. Bank of England strongly believes that monetary stimulus is found to be considerable and the investors have started showing confidence in market and overall sentiment is confident and positive.

Growth will be stable and economy will be recovering just simply with this stimulus if the economy of Britain is an isolated one. But this is not so as the economy is linked with various economies of world. The stability of trading partners is an essential prerequisite for staging a sustained growth. The imbalance between export and domestic usage of production also point towards the greater risk of a double dip as similar to one that happened in 2009-10. The present growth rate of 3% is not a high figure under normal circumstances. But considering the slow growth of allied economies tis could be viewed as a robust growth

According to Mark Carney new policy unemployment reduction is target of the current policy. The interest rates will be kept low till the unemployment drops from 7.7 to 7%. The recovery of economy is greatly dependent on the financial stability of both workers and companies. HRM policies have a significant role to play in this resurrection of economy. Studies show that half of the working population are into the job not because they love doing the present job but because they do not have another job to pursue. Hence when the economy is recovering they will move out in search for better job. This leaves their primary employer stranded. Good HR Management strategy is to be kept in place to ensure that the best are retained and worst are laid off as the economy recovers. This is a critical role of HRM in recovery period of economy.

The productivity of employee determines the profitability of a company. The salary paid to an employee during recession time was above the contribution made by him in monetary terms. This could hamper the growth prospects of economy because with such a structure of pay he will be spending more than what he produce giving rise to economic instability. It is the function of HRM to bring out parity between the productivity and income so that growth of economy will not be affected. Similarly another factor that determines the production level of every employee is the motivation levels. Prior to recession time companies have spent well on employee engagement programme. During the recession time they had to cut down the cost and this was an area that became scapegoat of cut down. In the recovery period it is essential to keep employees from different cultures motivated. This can provide sufficient propulsion for growth programme.

HR team has to look for cost cutting but viable option like flexible working time for its employees so that operational cost can be brought down significantly. Research shows that during the recession time the stress level of employees were very high. The permanency of their job was a concern for all of them. The stress levels need to be brought down to normal level in order to get the best output from each of them. This will help a lot in improving recovery rate of economy. Another contribution needed from HR team for a recovering economy would be to manage the sudden demand from employees for salary hike. A company based out of UK will find it difficult to hike the salary of their employees in another country which is not it by recession as the parent company lies in a recession hit economy. The pay of many employees was frozen for a long period. The employees who shared the pain of recession expect that they will be rewarded for their sufferings with a serious hike. But the growth rate of 3 % is not that robust enough to facilitate a pay hike for all of them. This will result in elevated level of grievance. Negative sentiment created in the mind of work force can create reduction in productivity which ultimately affect growth rate. It is the role of IHRM team to contain the angst of these people, in UK and abroad, and make them realise the situation and bring them to the main stream of production without any angst. Skill shortage among employees is a serious area of concern in this period of economic recovery. But no significant investment is, made on training front as measure of cost cutting. The concentration on skill development needs to be improved to stage good performance in recover period.

Britain’s economy as well as world economy is on a recovery mode and the new policy implemented by new president of bank of England is taking the economy in the right direction. The HRM activities have a significant role to play in improving the economic conditions. The productivity is directly related to man power and their mind set. Keeping them ready and fit for growth is the task in the hands of HRM teams all around the globe. Reduction in human capital cost without compromising on motivation level would be the target of HRM teams all around the world.

Inflation and interest rates are closely related and determine the health of economy. Too high levels of both the factors portray the poor health of economy. Inflation always follows good economic growth. Theoretical speaking inflation is caused when too much money is chasing too few goods in market. The money inflow into the market takes place when the population of a country is paid well. Inflation rate will be low in an economy where employment levels are low.

The new policy of bank of England to keep a control over the hike of interest rates has shown good sentiments in market. The bank is planning to keep the interest rate on borrowings fixed at all-time low of 0.5 % till the level of unemployment fall to 7%. This ensures that sufficient money is available for entrepreneurs to invest and there by generating more employment. If things goes as expected more employment will produce more salaried person and hence more spending. This will set up the ideal stage for inflation to enter the economy. Under usual circumstances the enhanced money flow into the market will create a condition where domestic production is low but expenditure is high. All this boils down to too much money chasing few goods. The vicious circle of inflation is kicked off by these events. Increased money flow in the market will force the controlling financial institution to hike interest rate. The hike in interest rate will dampen economic growth .as the above mentioned events unfold the economy gets crippled and falls back to period of under growth.

The bank of England’s feels that the possibility of an inflation-induced, economy-crippling rise in interest rates over the next couple of years is not in line of sight. According to them there are plenty of gaps it the economy and this will prevent setting up of the vicious circle of inflation. By definition, output falls in a recession. At the same time, it is common for some people to lose their jobs or to reduce their hours of work. The path of labor productivity in a recession is determined by the relative sizes of the falls in output and total hours worked. The bank strongly believes that the productivity and efficiency of workers will improve and the extra demand for goods and services could be met by the same working population producing more in for same salary.

The data of Britain’s productivity do not justify bank of England’s claim. Off late in Q2 and Q3 0f 2013 productivity failed to touch 100%. This is a point of concern. Many reasons are there for the fall in productivity. Usually under periods of recession employees are supposed to work more in fear of termination. But the companies have preferred to hold on to nonperforming employees in order to avoid rehiring and retaining them once recession ends. This is presently creating a class of lazy work force. The real wages of employees are falling and this prompts the employer to move forward with more labor intensive methods of production and hence affecting the productivity.

Data from Office of National statistics reveals an alarming picture of Britain’s working population. It shows that British workers are less productive than before the recession. In 2012 the country’s output per worker was 19% below the average for the rest of the major industrialized economies, while output per hour was 16% lower. The present policy of increasing the rate of interest rate when unemployment falls under 7% needs to be scanned properly. If the percentage of unemployment is the driving force for deciding interest rates the there is a serious problem at hand. With the present system economy is relying on falling real wages rather than improved productivity. The percentage of unemployment is falling and this is not by virtue of growth of economy but due to falling real wages. The reduced cost of hiring has led the employers to hire more thereby reducing unemployment percentage.

According to above discussed data the number of employed person are increasing without productivity improvement. This will result in inflation as consumption is increased due to more umber of salaried person at the same time no improvement is achieved in the productivity. The reduced level of unemployment along with inflation will prompt bank to increase interest rate. Data shows that in 2013 the indebtness of British people is 140% of their salary and the debt is not distributed evenly among working population. Any hike in interest rate will result in many of the borrowers defaulting their payments on mortgages. Finally this will result in dampening of economic growth as the hike in interest rate is based out of unrealistic assumption of reduced unemployment.

The HRM has a great deal to do in order to direct the scenario to the one expected by Bank of England. The wages and productivity of working class are the contrasting factors that influence the inflation. More salary along with low productivity will result in supply demand imbalance and will trigger inflation. If the wages are at par with the productivity levels then the economy will be able to stage growth. Working class will not acknowledge the fact that economy is growing unless it reflects in their pay pack. So to create a sentiment of growth the pay package need to be improved. This improvement should be accompanied by parallel improvement in productivity standards. The HR system in any firm has to devise clear steps to facilitate tis symbiotic activities of rise in wages and improved productivity.

The HRM system has a significant role to play in economic growth of Britain. The trend of hiring while the real wage falls is giving a wrong feedback to policy makers. The unemployment falls without contributing to productivity. This result in the chain reaction of increased inflation which further leads to increase in interest rate that ultimately result in weakening of economic growth. The focus of HRM should be reducing unemployment at the same time improving productivity proportionately with the increase given in wages.

Economic growth could be defined as an increase in value of goods and services provided or produced by a country over a period of time. Long term expansion of productive potential of an economy results in economic growth. It is measured using GDP and per capita income. Growth of an economy will not happen in isolation. As the economy is globalized events happening in one country will have detrimental effect on growth prospects of another country. For e.g. ban on import of agricultural product into a developed country will have serious impact on economy of developing country whose main source of income would be the agricultural exports.

The drivers of economic growth of any economy whether developed or developing are the same. The contribution of each driver may differ depending on the type of country at hand. The drivers could be listed as a) Growth in physical capital stock b) growth in size of labor population c) Growth in quality of human d) technological growth that improves productivity e) Institutions of state f) Demand for goods and services (both domestic and eternal trade). Growth is in brief adding more value to your activities. Off late developed countries have moved out of concept of growth and started to focus on sustainability and stability. Developing countries are still after growth as small investment in capital could produce greater returns. This is in line with the “neo classical” theory of growth.

For developed countries like UK major driver of growth is growth in quality of labor population and technological growth that improves productivity. The level of capital stock of developed country is high and has reached a stagnation state. The source of improvement for these countries comes from the technology development and improved quality of labor population. Technology improvement will demand for employees with enhanced skill. The employment level in a developed country will research a saturation level and the number of opportunities could not be further improved. There is a limit to how far the employment rate can be improved in the long term in developed countries.in such economy the growth for long term is driven primarily by productivity. Further the two improved productivity the growth will be pushed by increased employee participation and engagement in the business. Employee engagement is a critical part of growth and productivity in developed economy. The employee is less motivated by the monetary benefit and looks for motivation in the role they handle. The involvement of the employee to the job makes him to deliver more which in turn results in improved productivity. In UK Tesco has realized this and incorporated employee engagement as a part of their HRM strategy.

The GDP of developed countries rose during early periods as the demand existed for consumable products. With improved productivity of these products the growth rate was high. But once the product demand reached stagnation further improvement in productivity will not add to GDP. Hence new product segments need to be identified. For UK the prospects will thus be stronger in more knowledge-intensive manufacturing and services. The UK’s relative specialization in Publishing, Finance, Business Services, Communications, and Computer and Information Services is likely to persist for some time, supported by the increasing exportability of services and increasing demand for services as global incomes continue to rise. However, these are likely to continue to become more specialized, with some lower value added activities outsourced or offshored. Hence HR should focus on improving specialized kills and Innovative mindset of their work force.

In developing countries focus is more on improving the quantity of employable population. The set of skilled labor is very low and hence the primary target of HRM system was to improve the number of employable population. Many IT companies in India have hired people with basic qualification and imparted training to them in order to induct them to their work force. This improved the human resource base of the firm and helped them in executing big foreign orders. These activities eventually pumped n more of foreign currency into Indian market and hence aided ion economic growth. The opening yup of Indian economy to the world in 1992 forced many of the companies to change the way they managed their human resources. HR functionality in developing countries like China and India is still evolving. Till a few years back the HR function was just limited to administrative functionalities like recruiting and dismissal, paying taxes and benefits. Talent acquisition, training, skill improvement were new concepts. . They had to make a way around the redundant work culture that prevailed in the country. Focus had to be shifted to more productivity than more employment.

Another major HR intervention required in developing economy is regarding the wage and incentive. It includes remuneration system and also the system of appraisal, promotion and career advancement. The incentive factor implemented as part of the new system motivated employee to produce more resulting in improved productivity. The implementation of incentive system on base of quantity propelled the production and hence improved the GDP of these economies. The quality was compromised in this policy and China and India succeeded in capturing the price conscious market around the world. Sustainability of this mode of growth is being questioned and the concept of quality has to be introduced to the scheme. There is a need for a paradigm shift in mind set of working population for this transition. The HRM system in these developing countries has to come forward and contribute in this front to facilitate easy transition.

The growth of every economy is determined by the influence of various driving forces in the economy. Human capital is a significant part in it no matter it is a developed or developing economy. The role of HR function is to improve the quality of human capital. Method deployed for this is different in these two types of economy. In the developed economy more focus is given to enhanced kill development and employee engagement where as in developing economy the focus is on production based incentives and expanding the employable population base.


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