The recession in Britain and across the world was a direct result of the credit crunch that began in August 2007 and which worsened dramatically into a global financial crisis in the autumn of 2008 due to the collapse of US investment bank Lehman Brothers after the US government refused to bail it out. (Source: Romesh Vaitilingam article)
Writing in January 2009, Andrew Oswald suggested that most of the businesses that are expected to be affected from the recession are those correlated to the four key drivers of the recession:
The drop in the housing market that is a problem for estate agents, retailers and producers;
The increase in the oil prices in 2008 which affect the activities that are carried out in the car businesses and air travel as an example;
Tightening and contraction in the banking sector;
The loss of confidence in the financial institutions where as some firms disappear from the industry other firms will take advantage of that and gain more benefits. (Source: Romesh Vaitilingam article)
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Looking closely at the British economy in the current recession, the British Government ability and flexibility to handle any economic problems happened in the past and to respond effectively when times get tough, raised many questions nowadays and made people wonder of why Germany, France, and Japan emerged from the current recession before the UK? (Source: BBC website A)
This paper aims to answer the question above through drawing the scope on the different nasty cocktail of factors that UK seems to suffer from. Also, it questions how the governments went on spending the money to react to this crisis and the different strategies each country adopted. Going in more depth, the paper will look at the most fundamental problem in the UK comparing to the other countries. This will help in providing a comprehensive understanding of what are expected to happen now and in the future.
Comparing UK to Japan, France, and Germany many factors can be obtained.
Financial and service sectors
Comparing the UK financial sector to that of the rest of Europe (especially France, Germany) and Japan, the financial sector in UK is much larger. Although the latter countries experienced problems in their banking sectors, however, the effect was more on the British banking sectors where the government interference was much higher. (Source: BBC website A)
In addition, the global economic slowdown may have hit France, Germany and Japan less hard than the UK because the former countries' financial sector, which were at the heart of the crisis, account for smaller proportion of their economy.
Recent records show that UK economy unexpectedly contracted by 0.4% between July and September, shown in figure 1, unlike France which reported a GDP of nearly 0.7% growing in the third quarter which is the fastest rate for more than a year (Source: FT website D), GDP growth of 0.3% for Germany where Japan recorded a 0.9% economical growth. (Source: FT website A)
Figure 1: six successive quarterly falls in GDP in 2008/2009
(Source: BBC website B)
Figure 2 shows the GDP growth in Japan is at its highest comparing to Germany which is moving in a positive territory ahead of UK. However, in general, this is not enough to reflect a convincing picture of an economy heading towards sustainable recovery. (Source: FT website B), for example in UK, The Office for National Statistics expected a quarterly growth of 0.2% in the total amount of goods and services produced by UK using GDP measures; however the recent figures
Figure 2: GDP Growth
show no growth in retail sales in September, and a 2.5% decline in industrial output in August. (Source: BBC website C)
Hence, the reason why UK still in recession is because UK economy's reliance on the service, distribution, catering, and hotels in general and financial sector in particular are performing particularly badly where the other countries exited the recession in the second quarter of this year. (Source: BBC website C)
As a result, this may force the Bank of England to consider expanding its policy of 'quantitative easing' through printing more money in order to buy bonds from banks and companies to assist fuel the UK economy. On the negative side, this policy may result in an out of control inflation taking place in the future.
Manufacturing sector: Comparing UK to Germany
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The other critical factor is manufacturing sector. Germany, relying on exports to fuel the economic growth, is the manufacturing heart of Europe. During the recession, the significant problem Germany faced was in the huge fall of global commerce which led to sharp contraction in its growth. Hence, at the beginning of the recession, the fall in the output in Germany was much greater than that in the UK. However, as the global economy started to recover, German manufacturing firms re-started growing their production lines and rebuild the stock levels, in order to respond quickly to the domestic demand.
The key thing contributed to their growth is settled in the German automakers who avoided mass redundant, while UK's manufacturing sector in terms of job losses, suffered the most in the first quarter of this year. This is because a lot of UK employees, working at foreign auto manufacturers, lost their jobs or laid off due to not having any programs similar to the German government, such as a program called 'Kurzarbeit', or short work that funds a number of workers whose hours have been cut, for a period of time. (Source: BBC website A)
However, the negative side of such a program is that German government will have to look for alternatives in the future to keep the unemployment level low before the present program run out at the end of this year.
Exports and import sector / Unbalanced Economy
The main issue UK is facing since the financial crisis began, that is pushing inflation upwards, is centered at the 20% devaluation of sterling. (Source: BBC website D)
This resulted in making the exports cheaper for the other countries (UK products are cheaper abroad) while raising the prices of imported goods and products sold in the UK. For example, in Germany, imports had declined far more sharply than exports which have a positive effect on GDP growth. Also, figure 3 shows that in Japan "â€¦the net exports offered a 1.6 percentage point boost to the GDP growth", where growth of exports and fall in imports is taking place. These examples clearly show how UK was/still struggling in growing its weak economy which is preventing many firms from raising their prices among foreign companies. (Source: BBC website B)
Figure 3: GDP and trade growth in Japan (Source: FT website C)
On the other hand, the Business Secretary Lord Mandelson pointed out that the key point in UK, Europe and Japan economies is that they all rely on each other. Therefore, when these countries show a degree of recovery is a good symptom for UK manufacturers and exports, since 55% to 56% of UK trade is with Europe. (Source: BBC website B)
However, it can be argued that on one side, the weak sterling shouldn't be seen as an economic problem for now in UK, on the contrary, this may help to rebalance the UK economy and decrease trade deficit. On the other side, if the sterling didn't gain back its value and continues to weaken over the long period, this may impact the imports to become more expensive, hence badly affecting the British people living standards.
Governments spending and strategies adopted
Although, the data shows some signs of little improvement in the second and third quarter this year, however it is unlikely for any sustainable recovery to take place until banks, households and government rebuild their balance sheets. This is supported by the disappointing recent figures that shows a contraction in GDP which make it clear that UK is still in the longest and deepest recession on record. As a result, banks are not expected to carry on large-scale lending for some years ahead because it appears that the massive structural problem UK economy is facing based particularly in the UK banking sector. (Source: BBC website D)
It seems that UK has spent far more than Germany, France, Japan and all other G20 countries on bailing out its banks as an estimated total of more than £1 trillion, in addition to its £175bn injection of money into the economy, its car scrappage scheme and actions that can be of assistance to the housing market. (Source: The Independent website A) All these investments and still stable recovery and growth would need some more time to take place.
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Comparing UK fiscal measures with that of Germany, France and Japan, the figures show that, the British economy had enjoyed an early fiscal boost due to the VAT cut, which made it similar to that of Germany; however this will not continue into 2010, unlike the other countries, because the VAT cut will disappear by the end of this year. This contradicts to what Germany and France adopted, (Source: BBC website A) and that is because the European social security system is more kind and provides more support to consumers than the UK. Hence, Germany and France didn't have to follow the same UK measures to fuel their economies, and that is probably referred to the different strategies the countries decided to implement which may have affected UK economy to grow slower than Europe and Japan as well.
In fact, this results in a more fundamental problem in UK where research shows that UK consumers are more in debt than those of Europe. Hence, Germany and France may see a return on some domestic demand, while UK consumers will be struggling their way to simply get out of the hard time and recession. Unlikely, deflation in the Japanese economy may appear a good thing for consumers because it strengths the Japanese currency and allow them to buy more goods and services with the same amount of money thus contributing to positive Japanese economical growth now and in the future.
So, briefly, what the future holds for UK, Germany, France, and Japanese economy?
Most analysts, writers, and people in general would be in a much better economical situation if there are straight forward answers to this question. However, it can be predicted that although, UK GDP has contracted for six consecutive quarters, UK economy is starting to slightly show some economic recovery; it is still fragile and some more time needed before it totally recovers from the effects of the financial crisis where inflation might only take place in early 2010, but again many may argue differently.
On the other hand, many downside risks can be identified such as the increase number in unemployment in the future in case the demand doesn't recover adequately with respect to the pace of recovery that will take place. If this is the case, then UK, as well as Germany where one of the reports says that 'unemployment will hit nearly 10.8% in 2010', will face a shrink in its productive capacity resulted from some firms' hesitation to employ new staff or even some firms end up shutting down their factories in case they weren't able to cope with such bad economic situation. (Source: BBC website E)
However, it's concluded that if France and Germany gathered their pace and showed a good recovery signs in the quarters ahead, this would be good news for UK economy due to the significant relations between the countries which give not only UK people, but also European people, more opportunities to go out and get employed and raise their living standards.
In respect to Japan that is the world's second biggest economy, forecasts show that although the country has been hit badly by the downturn because the 'worldwide demand has collapsed for its cars and electronics', the Japanese government is showing a small improvements resulted in its economical growth and the massive fiscal spending which might include an optimistic end result in sustaining a GDP growth in the future. (Source: BBC website F)
To conclude, it is very difficult to even forecast what is going to happen in the future with regards to the global economy. Depending on analysts and reporters, where some are pessimistic about the future economy while others are optimistic, all what can be said is that for the economy to grow back may take many years of high savings for firms, banks and governments in order to raise people's living standards and fix their balance sheets. Also, governments should be more careful and flexible in spending and in reacting to any economical problems, and while the output might be growing again, many of us will still feel the effects that are caused by this recession in the months if not years to come. Therefore, most of us may compromise about how the recovery will take place in the future. A slow economical growth may already returned to France, Germany and Japan for now with expectations of future UK growth in the next quarter however, this growth, not only in UK but pretty much everywhere, will not be a great one and yet, won't bring much of a "feel good" factor.