The graph below show how inflation has risen over the last two years, with CPI inflation “2.5 per cent up in February 2008 from 2.2 per cent in January 2008”.
Exchange rates can also show if the UK is heading towards a recession. For example, if the Pound Sterling is stronger than the US dollar (as it as throughout 2007) then the US is less likely to import goods from the UK, yet the UK will still import goods from the US, but at a cheaper price. This will lead to a ‘leakage’ in the economy, which will eventually contribute to a recession in the UK
To see if a country is heading towards a recession, the economic growth of the country can be measured. Economic growth is when the level of income in the economy is rising. It is a “long-term expansion of the productive potential of the economy”. In the last few years, as the standard of living in the UK has risen, so too has consumer spending, with more people than ever buying materialistic goods on a level similar to that of 1920s America. Yet it is uncertain if a recession of such a scale will follow the current boom in the UK.
Though it may seem like a recession is inevitable in the next two or three years, the UK Government are attempting to prevent a recession from happening in the UK. This is clear from the 2008 Budget made by Alistar Darling earlier this month. Despite obvious signs suggesting that the economy is heading for a recession, he was “remarkably upbeat about the nation's economic prospects”. In the budget, it was stated that price for demerit goods such as alcohol and tobacco will increase. Despite prices for these goods increasing, they will still have a high demand from the consumer public, which means that the Government will be increasing the amount of tax it receives, which therefore means that it will have more capital to inject back into the economy, thus reducing the risk of a recession occurring in the UK.
Alistar Darling, as stated by The Guardian on Thursday 13th March 2008, expects “a sharp slowdown this year but believes that by next year the economy will be at near-normal speed”. This means that there might not be a recession at all, but that the economy will just slow down.
Additionally, the economy is not going into a recession as it has “less than 3% unemployed in 2007-2008”, which is close to full employment. As the level of unemployment is an economic indicator for recession, this shows that a recession is unlikely to occur as unemployment is currently low.
Furthermore, the economy is unlikely to suffer from a recession due to London hosting the 2012 Olympics. This means that over the next two-four years, the UK Government, along with other countries and companies, will be investing heavily into the economy. It also means that there will be more job opportunities, therefore reducing the level of unemployment.
To conclude this argument, although there are a number of indicators that suggests that a recession is likely to naturally occur in the next two to three years as it is part of the business cycle, the UK Government is introducing methods, such as higher levels of taxes, to prevent a recession from happening as it will mean that the UK economy will fall into a slump.
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A ‘Credit Crunch’ is a sudden reduction in the availability of loans or credit, or a sudden increase in the cost of obtaining a loan from the banks.
2www.statistics.gov.uk
