UK’s Weak Economic Growth
Macroeconomics is a branch of economics that evaluates the market and system of an overall economy. In this subject area, different economy related issues can be well discussed which comprises of inflation, economic downturn, unemployment, gross domestic product and so on. In UK, during and after the pandemic of coronavirus, the macroeconomic situation has faced a significant damage. Negative aggregate supply and demand has also affected the UK economy as a whole and it has been also expected that this pandemic will have significant impact on growth opportunity. Further, during and prior to the pandemic, the economic growth in UK has been significantly affected which has massively affected the current economic condition of the country (Kubota 2021). UK economy has also issues related to the supply chain, increasing inflation rate and further issues related to the unemployment. The current economic situation in UK is positive and it is recovering from the previous crisis. This essay tends to explain the key macroeconomic issue impacting UK business and government policies as well as will shed light on the covid 19 and its effect on the UK economy as a whole.
Key macroeconomic issue impacting UK business
In the current time, one of the most persistent issues in the UK economy is weak economic growth. The following graph denotes the current economic situation of UK in relation to its GDP growth.
Figure 1: Real GDP growth UK
Source: (Baker etal 2020)
From the above, the real time GDP growth of UK can be perceived. The actual rate of growth in UK is way to lower than the actual growth hence it can be noted that the economic growth in UK is very weak. Further, it has been also found that the productivity growth and demand has been also reduced in the year 2019 and in 2020 due to the significant impact of covid 19 on the economy (imf.org 2022).
Lower economic growth has reduced the overall income level of UK as well as has increased the GDP rate. The government has made significant changes to policies to reduce the pressure of government debt to GDP. Capital spending in UK has been also reduced 15% in the year 2021 and despite of several infrastructure related plans of the government, there has been lag in starting up these projects. Further, it has been also found that in UK, the unemployment rate has been significantly reduced however, youth employment still remained on the higher side (Baker etal 2020).
In addition to this, there has been a steep decline in the manufacturing sector in UK that has noted that the investment, production and employment sector can be massively affected. Despite, of the decline in the manufacturing sector, it was quite evident that UK has been very reliant on the financial services of the country.
As per the recent reports, significant trade deficits were also found which can impact on the export rate of the country. Further, there has been lack of competition in many markets due to the monopoly powers. The under supply of the housing market is additionally a barrier to the labor mobility in the market and due to the same, analysts have argued that extra funding service would be required in order to address the existing needs of the economy. Additional funding along with policy changes will allow the country to solve its existing macroeconomic issues significantly.
Unemployment in the UK
Unemployment still remains one of the key issues in the economy. It has been perceived that the unemployment rate of the country has been highest in 2021 indicating on how significantly covid 19 pandemic affected the economy (Keogh-Brown etal 2020). Further, the asset market of UK is massively distorted which has made the rapid fall in income. The government control over the asset market has also obstruct the ability of lower- and middle-class income group of people to use these as savings instruments.
Prior shocks have also affected the banking system’s ability to have a negative impact on the trade as well as has been found to impact the liquidity and demand for domestic deposits in the country. If a sudden cessation in capital flows causes many non-tradable goods manufacturers to go bankrupt due to large price fluctuations, this might trigger financial upheaval as loans emerge as nonperforming, extending the shockwave throughout the financial sector of UK.
Government policies to address covid 19 shocks
As per the results found from imf.org, it is evident that government of United Kingdom has taken various initiatives to address the shocks created by the Covid 19 pandemic. These initiatives are denoted below:
- On May 10 2020, the government of UK set out a roadmap to each the lockdown and recover the economy. This allowed reopening of restaurants, educational institutions as well as other sectors (manufacturing, construction).
- As of June 3, 2021, the government has initiated tax and spending measures to address as well as support households and families during the pandemic. The government has provided funding towards the families as well as initiated measures to support businesses and other most affected sectors.
- The government continues to launch loan schemes to support the small and medium enterprises. The government has deferred VAT payments for the year 2020 and has denoted that the payment scheme for the loan has been extended. Further government also allowed 70 percent coverage of wages and to support the firm’s driving innovation and development, it has provided £1 billion package via loans and grants (Brewer and Tasseva 2021). Further, to support for the international response, the government has also made IMF catastrophe Containment and Relief Trust to provide £150 million. The government of UK has also contributed £2 billion to the IMF Poverty Reduction and Growth Trust (PRGT) in order to assist lower- and middle-class countries during the covid 19.
- To address unemployment, the government has adopted a package which ensured to protect existing jobs and create new jobs within the country. The initiative includes £ package per employee. The government has also increased their existing resources in order to improve skills as well as facilitate reinsertion of the job market. Low-income families during the pandemic will get £130 per week and if there are any business that requires shut down during the pandemic, that respective business will get £1500 every three weeks.
- Government has also extended the self-employment income support scheme to support the businesses during the pandemic with a coverage of 20 percent for three months from November 2020 to January 2020. To support all OECD countries, the government has introduced measures to support subnational finance (Hick and Murphy 2021). This includes both revenue side as well as expenditure side measures including measures related to the use of both long term as well as short term debts. UK has also announced continued support packages in the year 2021 to assist businesses and community further post the crisis.
Following the rapid spike in the covid 19, UK government has been massively affected which might have affected the economic situation of the country. In order to evaluate the economic impact of covid 19, other variable must be understood and considered including the changes in customer sentiment and so forth.
Initial research reveals that negative economic repercussions have already been feel at the moment of publishing (Keogh-Brown etal 2020). This comprises a drop in retail traffic and disruptions in the lodging industry. The IHS Markit purchasing managers’ index, a frequently followed industry survey, revealed a sharp reduction in household expenditure on services.
The research, which took place in December, also revealed that private industry growth estimates for the future year had dropped to their lowest level since October 2020. Omicron will also significantly affect the economy and the impact of omicron has resulted in lower GDP of forecast within the economy. It also increased interest rates from 0.1 percent to 0.25 percent in November 2021, in response to yearly consumer price inflation reaching 5.1 percent. With respect to the increase in price inflation rate, the GDP rate has been also increased in the year 2021 November and this severe downturn has been found to happen in the history of UK. With the effect of the pandemic, the GDP growth rate has been significantly affected for which GDP fell by 9.7% in 2020, the biggest reduction since recorded history in 1948 and on unconfirmed estimates, similar to the fall in 1921.
the UK’s GDP was 25% weaker in April 2020 in the initial lockdown than it had been just two month priorly. The economic reopening can be also perceived due to the increase in economic activity. This was accompanied by increases of Covid-19 instances and more lockdowns in the autumn besides winter, which has resulted in a drop in economic output. Consumers and companies had acclimated during the previous year; thus, the drop was far less significant than within the first shutdown. Whilst growth has slowed in the summertime of 2021, a vigorous recovery in spring 2021 resulted in a comeback in GDP. GDP was still 0.5 percent inferior in October 2021 than it was before the outbreak (De Lyon and Dhingra 2021).
Decline in the Manufacturing Sector
Numerous financial sectors have been affected to varied degrees by the epidemic. Hospitality and entertainment industries, which rely on social contact, have been hit particularly hard. The banking industry, for example, has performed better than some others. As of December, the median expert forecast for 2021 GDP growth was 7.0 percent. GDP growth estimates for 2022 are about 5%, although already before the Omicron wave commenced, they were lowered. In October 2021, the Office for Budget Responsibility forecasted 6.5 percent GDP growth in 2021 and 6.0 percent growth in 2022. Even if the pandemic’s short term financial shock subsides, the issue might cause long-term damage to the UK economy, or “scarring.”
Construction was the sector of the economy that was most impacted by the coronavirus (COVID-19) epidemic at first, before rebounding rapidly. Despite falling over the last three months, construction continues to exceed the Index of Services as well as the Index of Production FY 2020. From May to June 2021, the monthly production of services climbed by 1.5 percent. This is mostly due to development in three main sectors, with human healthcare and community work activities accounting for the majority of the increase in GDP (Figure 2). Despite the month-on-month rise, services production in June 2021 was still 2.1 percent lower than in February 2020. From May to June 2021, wholesale and retail commerce, as well as motor vehicle maintenance, decreased by 2.3 percent, putting production 0.5 percent below February 2020 levels (ons.gov.uk 2021).
Between May and June 2021, production output fell by 0.7 percent, owing mostly to rapid negative growth in mineral extraction. In June 2021, production was 3.2 percent lower than in February 2020. The collection of crude petroleum as well as natural gas, which decreased 15.8%, was the sector within the mining & construction sector that provided the most (0.8 percentage points) to the drop in production. The decrease in growth was due to planned maintenance shutoffs, as well as productivity was 37.8% lower in February 2020 than it was in January 1997, the slowest growth since started tracking in January 1997. The production of most other businesses remained reasonably stable, while coal mining, which may be erratic due to the limited number of coal mines in the UK, suffered a significant drop.
Conclusion
On a concluding note, it is evident that during and prior to the covid 19 pandemic, there were various macroeconomic issues that affected the UK economy negatively. It has been also found from the study that covid 19 has weakened the employment, GDP, inflation rate as well as affected manufacturing sector as a whole. To address the issue, the government has initiated various support schemes to support the low-income people and startup businesses. Further, the government has adopted measures to protect existing jobs and create new jobs within the economy. Private-sector growth forecasts for the coming year have fallen to their lowest point since October 2020. There is still a lot of uncertainty regarding the Omicron wave’s path and, as a result, its economic effect. The Bank of England has cut its GDP prediction for the next months due to the effect of the Omicron type. In the spring and summer of 2020, economic activity rose, signaling that the economy is reopening. While growth slowed in the summer of 2021, a strong recovery in the spring of 2021 resulted in a GDP rebound.
References
Baker, S.R., Bloom, N., Davis, S.J. and Terry, S.J., 2020. Covid-induced economic uncertainty (No. w26983). National Bureau of Economic Research.
Brewer, M. and Tasseva, I.V., 2021. Did the UK policy response to Covid-19 protect household incomes?. The Journal of Economic Inequality, 19(3), pp.433-458.
Coronavirus and the impact on output in the UK economy – Office for National Statistics (2022). Available at: https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/coronavirusandtheimpactonoutputintheukeconomy/june2021 (Accessed: 6 March 2022).
De Lyon, J. and Dhingra, S., 2021. The impacts of Covid-19 and Brexit on the UK economy: early evidence in 2021. London: Centre for Economic Performance, London School of Economics and Political Science.
Hick, R. and Murphy, M.P., 2021. Common shock, different paths? Comparing social policy responses to COVID?19 in the UK and Ireland. Social Policy & Administration, 55(2), pp.312-325.
imf.org, 2022. [online] Available at: <https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19> [Accessed 6 March 2022].
Keogh-Brown, M.R., Jensen, H.T., Edmunds, W.J. and Smith, R.D., 2020. The impact of Covid-19, associated behaviours and policies on the UK economy: A computable general equilibrium model. SSM-population health, 12, p.100651.
Keogh-Brown, M.R., Jensen, H.T., Edmunds, W.J. and Smith, R.D., 2020. The impact of Covid-19, associated behaviours and policies on the UK economy: A computable general equilibrium model. SSM-population health, 12, p.100651.
Kubota, S., 2021. The macroeconomics of COVID-19 exit strategy: The case of Japan. The Japanese Economic Review, 72(4), pp.651-682.
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