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The UK Economy: Macroeconomics
Since the financial crisis in 2008, the global economic dynamics have attracted more attention from the public. The public have gradually realised that the varied kinds of economic indicators are relevant to people’s daily life through the crisis. This essay will evaluate three basic economic variables in the United Kingdom during the last decade, including unemployment, private and public debt as well as explain the significant role of private and public debt played in the financial crisis. The situation of these variables after 2009 will also be analysed before the conclusion is made.
Unemployment rate is one of the most reflective indicators of economic situation. Tackling unemployment is a crucial objective of any government as the costs of unemployment are not only to the unemployed themselves but also to the society at large (Lec 2). The following graph (Graph 1) shows the unemployment rates in the UK from 2002 to 2013.
According to the Graph 1 above, the unemployment in the UK has a general rising trend from 2004 to 2013. Before 2008, the unemployment is relative stable and fluctuates at a normal range due to varied causes, mainly including cyclical unemployment, structural unemployment, frictional unemployment and seasonal unemployment (politics.co.uk, no date). However, the unemployment increased dramatically since the financial crisis in 2008 and reached the highest position in late 2011. Moreover, Bell and Blanchflower’s paper (2011) pointed out that the unemployment increases had been particularly concentrated on young people in the UK, so this indicated that the youth unemployment is an extremely outstanding issue in the UK’s labour market. From early 2012, the unemployment started to slightly fall and this may owe to the slow recovery of the world economy.
Private debt refers to the debt from a loan by a private entity (OECD, 2001). The graph 2 below demonstrates the debt to private sector as a percentage of GDP in the UK from 2002 to 2012.
As graph 2 shows, the private debt in the UK increased continuously from 2002 to 2008 and reached its peak, which was over twice than the GDP level, in 2009 due to the economic recession. After 2009, the ratio slowly recovered but it was still at around 200 percent high ratio. There are many influential factors of private debt. For instance, very low interest rates encouraged the purchasing of houses and consumer goods because of cheap credit, contributing to sustained increase in house prices in the UK (Yilmaz, 2014). Consequently, the total indebtedness of the private sector is greater, especially households, and this is indicated by graph 3 above.
The finance in public sector may have a more serious situation than the private sector in the UK. The following figure (graph 4) presents the public finance situation in the UK over the last decade.
It is suggested by graph 4 that the British public debt to GDP ratio increased significantly from some 40 percent to 100 percent during 2007 to 2011 owing to the crisis. During the crisis, research showed that the biggest driver of UK public debt is the loss of output (Weldon, 2011). Moreover, the massive deficit that caused by deindustrialization also contributed to government debt (Lec 17 27/03). With the of loss of output and deindustrialization, the unemployment and national average wages might fall, which also can leaded to private debt issue.
Generally, both private and public debt played important roles in 2008 financial crisis. In terms of private debt, it had the possibility of triggering the financial crisis. To some extent, when the prices of houses increased, households responded to the increases of their leverage (total asset/equity) to borrow from their banks and this was a vicious circle. With the collapse of the real estate bubble, the banking crisis occurred. Under such circumstance, the mortgage-backed securities reached a stupendous level and the credit crush finally leaded to the financial crisis (Lec 16). As for public debt, it is both a reason and a result of the financial crisis (The Economist, 2013). In this situation, some people blame for the profligacy of government which resulted to the financial crisis. Meanwhile, creditors, involving banks, stopped lending during the crisis, which influenced the rest of the economy as well. Therefore, deep recessions and fiscal policies then deepened the problem on government debt, so banking crisis then quickly turned into a sovereign debt crisis (Jordà, Schularick, and Taylor, 2014).
After 2009, although government adopted a series of monetary and fiscal policies, the aftermath of financial crisis still had impact on the economy. For example, the Bank of England introduced quantitative easing, which purchased 200 billion pound worth of asset in 2009 (Bank of England, no date). However, as the above figures (graph 1, 2, 4) suggested, unemployment rate and public debt still kept increasing and reached their highest records in recent years, while only private debt tended to fluctuate down a small percentage in the UK. Moreover, many countries suffered other crisis, such as unemployment crisis and fiscal crisis. In such situation, Romer (2012) argued that changes in fiscal policy only have effects in short term and long-term budget deficit will finally collapse the economy. After the lessons in crisis, the economy is now gradually recovering as well as these economic variables, but the significant number of public and private debt may be the obstacle of economic recovery.
In conclusion, the economic situation is strongly related to these variables which include unemployment rate, private and public debt. Meanwhile, both private and public debt played significant roles during the crisis. The unaffordable private debt of private entities might be one of the reasons of triggering financial crisis. Additionally, public debt could be regarded as both the reason and consequence of the crisis. Although many countries adopted varied monetary and fiscal policies, these variables were still influenced by the aftermath of the crisis after 2009. Presently, even though the economy is slowly recovering, further steps are needed to be taken by governments.
Bank of England, (2011). Quantitative Easing Explained. [online] Available at:
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Bell, D.N.F and Blanchflower, D.G (2010) ‘UK unemployment in the great recession’, National Institute Economic Review, pp. 1-2, [Online]. Avaiable at: http://www.dartmouth.edu/~blnchflr/papers/Bell-Blanchflower.pdf [Accessed 27 March 2014].
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Jordà, Ò, Schularick, M and Taylor, A.M (2014) ‘Private Credit and Public Debt in Financial Crises’, FRBSF Economic Letter, [Online]. Available at: http://www.frbsf.org/economic-research/publications/economic-letter/2014/march/private-credit-public-debt-financial-crisis/el2014-07.pdf [Accessed 27 March 2014].
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Politics. co. uk. (no date). Unemployment. [online] Available at: http://www.politics.co.uk/reference/unemployment [Accessed: 27 March 2014].
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Weldon, D. (2011) The IMF on What Caused the UK’s Debt. Touch Stone. Weblog [online] 7th October. Available from: http://touchstoneblog.org.uk/2011/10/19040 [Accessed 27/03/14].
Yilmaz, S (2014). Credit Crunch, from ECON 10082 The UK Economy: Macroeconomics. University of Manchester, University Place Theatre B. Available from: Blackboard. [Accessed 27/03/14].
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Yilmaz, S (2014). Credit Crunch: Monetary and Fiscal Policy, from ECON 10082 The UK Economy: Macroeconomics. University of Manchester, University Place Theatre B. Available from: Blackboard. [Accessed 27/03/14].
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