Challenges faced by Uk economy

Erosion's growth forecast at 0. 8%, next year 1. 3% Global growth expected at 3. 3%, next year 3. 8%, both still termed too optimistic by MIFF, despite revising it the 2nd time this year Auk's expected growth rate 2. -3. 1%, revised from 3. 8%. 2013-14 growth was 1. 7exports. 6% growth, revision from 2. 2%. All above fgfiguresre for 2014-15 fiscal The dilemma Economy growing despite loans reducing. Shows bad state of manufacturing sector, not good in long run Key interest rates can't be increased as unemployment still hihighlandacan'te reduced as it will increase inflation Real Growth The nominal figures may fool many, so we show the growth in Real GDGAPince the start of 2013, the I-JKJconomy has experienced positive economic growth – one of the elelatedlyest performances in Europe.However, Real GDGAPs still fractionally below its pre-crisis peak of 2007. The recovery has been stronger in the service sector than manufacturing and industrial output. There are fears the I-JKJec overy is still unbalanced – relying on government spending, service sector and ultra-loose monetary policy. 0AAndhat it might worsen once the key interest rates are increased Real GDGAPs not yet back to the pre-crisis level. The fgfigureshown by us are as per the data currently available in the public domain.And so, it is worth bearing in mind that sometimes economic growth statistics get evbeviest a later stage. 0 Factors affecting growth Self-explanatory Challenges Unemployment Define and introduce the problem on your own. Explain the diagram Reasons Recession – causing cyclical, demand deficient unemployment. With falling real GDGAPfirms are producing less and therefore, there is less demand for workers. Also in a recession, some firms go out of business causing people to lose their Jobs. Structural factors. There is structural unemployment due to the fast changing nature of the economy.For example, manufacturing Jobs have been lost due to the economy becoming more service sector based. Some unemployed workers have found it difficult to get Jobs in new high tech industries because they lack the relevant skills. Problems Increases relative poverty in the UK. (Unemployment benefits are substantially lower than average wages). Unemployment is particularly stressful, causing alienation and reduced living standards. Budgetary cost. Persistently high unemployment adds to the budget deficit. The government have to spend more on benefits, and they receive lower taxes.If unemployment falls, it will be much easier to tackle the budget deficit. In August 2014, Public sector net debt (PSSANDx) was El ,432. biBillion77. 4% of GDGAPIn the short term, government debt is less pressing than the government have claimed. Since 2010, they have given indication that reducing debt levels are the most pressing economic problem. Because of debt, the government have pursued austerity leading to lower growth. I feel the government unnecessarily panicked over debt. Neve rtheless, long term spending commitments and long-term debt forecasts are a problem.With an ageing population and perhaps lower growth rates, it could be difficult to finance long-term spending commitments from current tax levels. Debt is a long-term problem rather than short-term. Reasons 2008-13 recession (lower tax receipts, higher spending on unemployment benefits). The recession particularly hit stamp duty (falling house prices) income tax and lower corporation tax. Financial bailout of Northern Rock, RBORBSLlLloydnd other banks. Interest Payments. The cost of paying interest on the government's debt is very high.In 2011 Debt interest payments were E4EYEillion a year (esest.3% of GDGAP Public sector debt interest payments will be the 4th highest department after social security, health and education. Debt interest payments could rise close to E7Beeniven the forecast rise in national debt. Higher Taxes / lower spending in the future. Crowding out of private sector investment / s pending. The structural deficit will only get worse as an ageing population places greater strain on the UKAuk'sension liabilities. (demographic time bomb) Potential negative impact on exchange rate.Potential of rising interest rates as markets become more reluctant to lend to the I-JKJovernment. Inflation CPICPnflation rate: 1. 5% (expected) Inflation is currently a relatively minor problem because it has fallen to be within the ovoverpayment'sarget. However, with rising energy prices, it could resume its upward trend in the coming months. This cost-push inflation is a problem because with low nominal wage growth, many could see a fall in living standards (causing an increase in fuel poverty). Also, savers may be adversely affected because interest rates are low.Reasons Rising energy prices Low real wages Fall in living standards Increased poverty Current Account Deficit The deterioration in the UK current account is a cause for some concern because it is occurring in a recession. Usually a recession leads to lower imports and an mpimprovementn the current account. This deterioration in the current account suggests the I-JKJould have declining international competitiveness, though it may also be a temporary situation related to EuRezonerisis. Reasons Overvalued exchange rates. Countries in the EuRezonehich became uncompetitive (e. . Greece, Portugal and Spain) experienced large current account deficits. This is imports are cheaper. This encourages domestic consumers to buy imports. It also makes it hard for exporters because they are relatively uncompetitive. High Consumer Spending. If there is rapid growth in consumer spending, then there tends to be an increase in imports causing a deterioration in the current account. For example, in the 19sassoom, we saw a fall in the savings rate and a rise in I-JKJonsumer spending; this caused a record current account deficit.The recession of 1991 caused an improvement in the current account as import spending fell. Unb alanced Economy. An economy focused on consumer spending rather than investment and exports will tend to have a bigger current account deficit. Competitiveness. Related to the exchange rate is the general competitiveness of irrimsIf there is a decline in relative competitiveness, e. g.GriRisingage costs, industrial unrest, poor quality goods – then it is harder to export causing a deterioration in the current account.Recommended Solutions Reduce consumer spending – through tight fiscal and tight monetary policy. E. g.GhiHigherncome tax will reduce disposable income and therefore reduce spending on imports (however, it will also lead to lower economic growth) Supply side policies to improve competitiveness Devaluation of the exchange rate. This makes exports cheaper and imports more expensive Poor lalaborroductivity LaLaborroductivity measures the output per worker in a period of time. LaLaborroductivity is an important factor in determining the productive potential of the economy.Reasons LaLaboroarding. (When firms hold onto workers). Unemployment has risen by a smaller amount in the '08-'12 recession – compared to previous recessions in 1981 and 1991, and now unemployment has fallen to 6. 2% . This could support the theory that firms are preferring to hang onto workers, despite lower demand. Firms may feel this prevents having to rehire and retrain workers after the recession ends. Though he length of this current recession makes this surprising, and it's uncertain why it's happening in 2008-12 more than previous recessions. Low levels of investment.The credit crunch has held back investment because firms struggle to gain finance or don't have the confidence to invest in new capital. This could hold back lalaborroductivity growth. Falling real wages. During the recession, the I-JKJas seen falls in real wage growth. If real wages are lower, firms may be more willing to employ lalaborather than capital. In other words low wage growth means lalabors relatively more attractive than usual. Therefore with lower lalaborosts, firms are willing to employ more workers and lalaborntensive production methods.Lower output Lower wages – With falling productivity, firms cannot afford wage increases. This is leading to depressed income tax receipts for the government. Lack of Infrastructure Investment The recession has seen a fall in public sector investment. This threatens long-term there are also concerns over other supply side problems, such as inflexible lalaborarkets and lack of vocational skills. External Factors Many of the I-JKJroblems are due to domestic factors: low spending, low investment, egactiveutput gap. However, because the I-JKJelies on trade with other countries, especially Europe, external factors are a potential problem.