Introduction
In recent years, the United Kingdom has endured a turbulent economic journey, contending with a variety of difficulties that have contributed to an ongoing economic crisis. The UK economy has been tested on numerous fronts, from the effects of the 2008 recession to the complications of Brexit and the impact of the Russia-Ukraine war. This article dives into the issues that precipitated the economic crisis as well as the actions being taken to chart a course to recovery.
What caused the economic crisis?
1. The 2008 Recession and its effect on the UK:
Mortgage-backed securities were among the most alluring investments to US investors around the 2000s since they seemed to be expanding swiftly and were safe at the same time. But soon, due to lenient loaning policies and low interest rates, the value of properties started increasing. As a result, when borrowers defaulted on loan payments, the bank was unable to sell the property since there were no buyers willing to pay the high prices, and thus the value of mortgage-backed securities dropped quickly in a spree of panicked selling. This damaged the housing market and created a global recession.
The UK, a country where roughly 50% of the wealth was within the housing market, was badly affected. They recorded a 6% shrink in the GDP for the year 2008, and it took 5 years to recover. As a quick remedial measure, the UK government immediately reduced the interest rate on housing loans (quantitative easing) so that the general public had more liquid assets and the market could be simulated through transactions. Even though this was supposed to be a temporary measure, the interest rate remained unchanged even after the recession. When, due to COVID, the government could no longer control the interest rate in 2020, the interest rate spiked from 1.20% to 5.42%.
2. Brexit:
Things took a turn for the worse as the UK began withdrawing from the EU in 2020. By severing relations with the European Union, the United Kingdom lost seamless access to the EU Single Market and Customs Union, as well as all of the other international benefits it enjoyed with many other countries. As a result of the widespread scarcity of supply in relation to demand, the country's inflation rate steadily began to grow (from 0.4% to 11.1%). Since EU citizens could no longer freely travel to the UK, a labour shortage was observed throughout the country, most notably among truckers. As a result, the country's supply chain was deteriorating.
3. Russia – Ukraine War:
Since the Russia-Ukraine war started in February, the UK’s commitments to NATO meant that they had to stop importing petroleum products from Russia and implement a number of sanctions on Russia. This has negatively affected the UK's manufacturing sector which had nearly $1.5 billion worth of exports to Russia. The war has further exacerbated geopolitical tensions and uncertainties, impacting global markets and hindering economic recovery efforts.
Recovery
To rebuild the economy and regain stability, the government and various stakeholders are implementing a range of measures aimed at stimulating growth, creating jobs, and fostering resilience. Here are some significant tactics being used to steer the economy back on track:
1. Fiscal Stimulus and Investment:
The UK government has implemented an expansionary fiscal strategy in order to stimulate economic growth. Stimulus packages, such as increased government spending on infrastructure projects, have been implemented in order to create jobs, raise productivity, and stimulate demand. Transportation, renewable energy, and digital infrastructure investments not only stimulate current economic activity but also lay the groundwork for long-term growth and competitiveness.
2. Diversifying Trade Relationships:
The UK government is actively pursuing new trade agreements with countries beyond the EU, seeking to capitalize on emerging markets and diversify the UK's export base. Strengthening trade ties with countries in Asia, Africa, and the Americas provides opportunities for businesses to access new markets, increase exports, and attract foreign investment.
3. Addressing Housing and Affordability Issues:
Addressing housing affordability, ensuring access to affordable housing for all, and promoting sustainable urban development are critical considerations. The government is looking into options such as boosting the supply of affordable housing, enacting rental reform, and supporting efforts that make homeownership more accessible, particularly to first-time purchasers.
Summary
Overall, the UK's economic crisis was triggered by a combination of factors, including the 2008 recession's impact on the housing market, the challenges posed by Brexit, and the consequences of the Russia-Ukraine war. These events collectively contributed to a decline in GDP, inflationary pressures, labour shortages, and disruptions to trade, as a result, the country was driven into a double deficit, meaning that it had to borrow money from other nations in order to purchase commodities from other nations. The cost of living in the country has increased a lot and is predicted to increase even more. Due to these economic liabilities, investors lost faith in the pound and started selling it. This led to the pound's value falling to $1.06, its lowest level in 50 years, necessitating significant measures to address and mitigate the crisis.
By implementing fiscal stimulus measures, supporting businesses, creating jobs, fostering innovation, diversifying trade relationships, and embracing sustainability, the UK is working towards rebuilding its economy in the wake of the economic crisis. With concerted efforts from the government, businesses, and society at large, the UK can emerge stronger, more resilient, and better positioned for sustained economic growth in the years to come.