UK enters recession
Jan 23rd, 2009 by Jamie Bradley
The UK has officially entered recession today, following six months of negative economic growth.
Economists and politicians had earlier tried to encourage a spout of consumer spending in the run up to Christmas, but with that failing to come to fruition, it seems like the inevitable has done so instead.
So what has caused this decline in economic growth? Essentially, economic growth is measured in terms of inflation of goods and services at retail price. In other words, if we as a nation decide to spend less money when we go shopping, then there will be less demand for products and, as a result, their value decreases as companies need to offload surplus stock, despite it being at reduced prices.
But how is it measured? Economic growth is calculated by GDP, or Gross Domestic Product. This is the overall value of goods and services, throughout the country, totalled up per annum and compared to the previous year’s GDP. If the ‘overall value’ is higher than the previous year, then it is considered that there has been an economic growth.
However, as inflation plays a part on the valuation of goods and services, the ‘overall value’ is measured against the ‘base year’ and corrected due to inflation. That year is currently 2003 and therefore, all GDP is adjusted and made equivalent to 2003 inflation levels.
Although it may sound complicated, the facts are very much black and white; the country is suffering from economic depression, caused by a lack of money.
The mismanagement of UK banks has resulted in vast amounts of money being extracted from the economy, which is essentially why the government has been encouraging us, as consumers, to spend, spend, spend; to help replace the lost funds.
Wait a minute, so what’s happened to all this money, surely it just can’t have disappeared?
Well, in fact, yes it can. With banks offering illustrious loans and credit card overdrafts to people who simply cannot afford to make the repayments, any owed money is wiped out when the borrower declares themself bankrupt.
So with banks losing out on much needed income, interest rates increase as they look to recoup these losses, making it more difficult for both consumers and companies to take out a loan which they can afford to pay back.
People become reluctant to make adventurous purchases as they would have done in previous years, with companies needing to increase business to keep up with loan repayments; hence the massive price cutbacks, store closures and the necessity for VAT reductions to help shops offer more attractive discounts to consumers.
Furthermore, as well as the country going into recession, the UK is also staring deflation in the face. If food and energy prices continue to fall in line with most other products, then inflation rates will begin to fall dramatically until the Consumer Price Index (CPI) measure enters negative figures.
It currently sits at 3.1%; a massive drop from September’s 5.2% following the introduction of the VAT cutbacks. CPI takes account for the rate by which the valuation of retail goods and services has risen or fallen over the past month.
Although this may sound like good news to you and I, deflation is by no means positive news for the economy. We may welcome the idea of lower prices, as it means that we save money, but past experience has shown that consumers become even more reluctant to spend, in the knowledge that products will be even cheaper in the future.
Consequently, we are stuck in a viscous circle where companies are struggling to make a profit so they continue to cut prices until they are forced to follow the same fate befallen by the likes of Woolworths and MFI; oblivion.
Not only is this bad news for the industries, but it is potentially disastrous for employment figures. Unemployment has now reached 1.92 million; the worst figures recorded since 1997. With more people now without a primary source of income, the optimism that we as a nation will spend more in 2009 is looking increasingly bleak.
It may sound all doom and gloom and for the moment it probably is. Economists are predicting that the recession will probably continue right the way through 2009 and into the new century. But it has to end at some point.
By Jamie Bradley
