Recession Britain: It’s Official

Britain has officially entered recession for the first time since 1991, after the economy shrank at the fastest pace for nearly 30 years in the fourth quarter.

The UK economy contracted by a worse-than-expected 1.5% between October and December from the previous three months, beating the declines seen during the 1990s recession, figures from the Office for National Statistics showed today. This followed a 0.6% slump in the third quarter. Two or more consecutive quarters of contraction are regarded as a recession.

The fall in gross domestic product (GDP) was the biggest since the second quarter of 1980, the year of the Bristol riots, the Iranian embassy siege and British Leyland’s launch of the Metro.

Alistair Darling (British Chancellor of the Exchequer) said: “In the last few weeks there has been a substantial downturn. It is undoubtedly sharper than many people believed, mainly because you’ve seen industrial production go down because the export markets have been badly affected.” The Chancellor added that the Government would take all necessary steps to help the economy recover and stressed the need for international cooperation.

The pound hit a 23-year low of $1.3500 after the GDP figures were released. Against the yen, sterling fell to an all-time low of ¥119.25. The data fuelled expectations that interest rates, currently at 1.5%, will fall close to zero. Bank of England governor Mervyn King has also hinted that the central bank could take more unconventional measures to stimulate the economy by increasing the supply of money.

The City had expected the economy to shrink by 1.2% in the fourth quarter. Over the whole of last year, the economy expanded by just 0.7% – the weakest since 1992. The Chancellor’s forecasts now look wildly optimistic. In November’s pre-budget report, he predicted that the economy would shrink by between 0.75% and 1.25% this year and return to growth of 1.5% to 2% next year.

The downturn has rapidly spread across the economy, from the stricken financial industry to the high street and manufacturers. Car production has dived and the housing market has ground to a halt. Unemployment has shot up close to 2 million, with the rate at 6.1%.

Manufacturing output is the biggest drag on the economy, plummeting by 4.6% in the fourth quarter. The service sector slumped by 1%, driven by a 2.4% drop at hotels and restaurants. Financial and business services dropped by 0.5%. Even the government sector – until recently the only sector that was still growing and hiring people – shrank by 0.5%.

“Most recessions are painful,” said RBS economist Ross Walker. “There’s no sign of an imminent upturn in any of these measures. We’re looking at five consecutive quarters of contraction and unemployment hitting 10%-plus.”

By Julia Kollewe,

Guardian.co.uk, 23 January 2009

The Role of the Government in the Economy of the uk

Like many modern developed countries, the United Kingdom has a mixed economy. This means that some sectors of the economy are operated by the Government and some are operated by private businesses. Since World War II (1939-1945), Britain has worked to balance the mix of private and public enterprises in order to maximize the country’s economy and ensure the economic well-being of its citizens. Historically, Britain’s Conservative Party has sought a stronger private component in the mix while the Labour Party has sought to strengthen the public component. Both parties are committed to a healthy mix of both elements, however.

The public component consists of the welfare system, which includes socialized medicine, known as the National Health Service, plus government controls over business, banking, and the money supply. The welfare system provides support from before birth to the grave. The government is a major employer: Public officials, the judiciary, the military, police departments, fire departments, educators, and health professionals are, for the most part, employed by the state. The government is also a major purchaser of goods, particularly military equipment.

After World War II the Government nationalized, or took over, a number of large and troubled industries. These included coal, electricity, transport, gas, oil, steel, certain car and truck manufacturing, shipbuilding, and aircraft building. Since the 1950s, the Government has privatized a number of these industries, selling them to private firms. The first sales were the steel and road transportation industries. The Conservative Governments between 1979 and 1996 denationalized oil companies, telecommunications, car and truck production, gas, airlines and aircraft building, electricity, water, railways, and nuclear power. By privatizing these industries, the Government hoped they would become more efficient, due to pressure by stockholders demanding profits. Nevertheless, the Government continues to regulate these newly privatized industries by controlling prices and monitoring performance. The Government also seeks to encourage competition in the economy and increase productivity by sponsoring and subsidizing training and educational programs.

As in many modern states, the British Government seeks to fine-tune the economy in order to keep economic booms from becoming too inflationary and recessions from becoming too deep. In carrying out fine-tuning, the Government uses a combination of monetary policies and fiscal policies. Monetary policies involve the attempt to control the supply and demand for money through the Treasury and the central bank, the Bank of England. Fiscal policy is concerned with the level and distribution of government spending and taxation. The Government often opts to manage demand, intervening when demand for goods and services is high enough to threaten inflation. In such cases the Government tries to reduce demand by raising interest rates and taxes. In economic emergencies the Government can control prices and incomes to a considerable extent, but this is only done in extreme circumstances, such as in times of war or runaway inflation.

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