Disadvantages:
- Fifteen separate countries with widely differing economic performances and different languages have never before attempted to form a monetary union. It works in the United States because the labor market is mobile, helped by the common language and portability of pensions etc. across a large geographical area. Language in Europe is a huge barrier to labor force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work and areas where the economy flourishes and wages increase. While the cohesion funds attempt to address this, there are still great differences across the EU in economic performance.
- If governments were obliged through a stability pact, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance. They would be unable to devalue to boost exports, to borrow more to boost job creation or cut taxes when they see fit because of the public deficit criterion.
- All the EU countries have different cycles or are at different stages in their cycles. The UK is growing reasonably well, Germany is having problems. Since the war the UK economy has tended to have an economic cycle closer to the US than the EU. It has changed because interest rates are set in each country at the appropriate level for it. One central bank cannot set inflation at the appropriate level for each member state.
- Loss of national sovereignty is the most often mentioned disadvantage of monetary union. The transfer of money and fiscal competencies from national to community levels would mean economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation.
- The one off cost of introducing the single currency will be significant. The British Retailing Consortium estimates that British retailers will have to pay between £1.7 billion and £3.5 billion to make the changes necessary. Such changes include educating customers, changing labels, training staff, changing computer software, and adjusting tills.
- UK Economy – Developed or Developing
The term developed country, or advanced country, is used to categorize countries with developed economies in which the tertiary and quaternary sectors of industry dominate. Countries not fitting this definition may be referred to as developing countries.
- UK Economy – Per Capita Income
Per capita income means how much each individual receives, in monetary terms, of the yearly income generated in the country. This is what each citizen is to receive if the yearly national income is divided equally among everyone. Per capita income is usually reported in units of currency per year. When comparing nations per capita income reflects gross national product per capita income, but it is also used to compare municipalities within nations. When determining the per capita income of a community, the total personal income is divided by the population.
UK per Capita Income: United Kingdom $36,570 approximately
- UK – Rate of Economic Growth
The UK economy is being hit hard by the ongoing credit crunch with its sizable financial sector under strain and the UK housing market finally showing signs of the long anticipated downturn after one of the biggest Bull Run in history. These and much other bad news will undoubtedly hit the UK economy hard during 2008 and in advance of this the media has finally turned decidedly bearish with much speculation of a recession during 2008.
Key points which stand out from the GDP chart are:
1. That Britain has enjoyed a remarkably stable growth trend during the last 13 years, oscillating between +4% and +1.5% growth with-in a clearly defined channel and easily recognizable cycles.
2. That third quarter GDP failed to reach the upper boundary of the growth channel which implies weakness.
3. That the GDP growth cycle is clearly signaling a downtrend with previous downtrend cycles converging to a target low in the third or fourth quarter of 2008.
4. That the first half of the trend tends to be the severest, therefore expect a sharp drop in the GDP growth rate during 1st quarter of 2008 (4th quarter 2007 - Christmas boost), then subsequent quarters.
5. That GDP Trend is targeting a downtrend to between +1.3 and +1.6%
The risks to the trend picture is that there will be a breakout to the downside, and therefore develop a new much weaker trend pattern than the chart suggests. This is possible given the UK housing bear market and the credit crisis. However whilst implying weaker growth, it does not mean that the UK will go into recession.
Conclusion
The forecast for UK GDP growth by the end of 2008 is for a an annualized growth rate of between 1% and 1.3%. This is marginally below the original expectation of growth of 1.5%. But does confirm that despite much bad news on the economic front, the UK looks set to not only avoid a recession during 2008, but seems likely to grow at a comfortable rate given the recession expectation circumstances. Also that the first half of the year will be much tougher in growth terms then the second half, which now allows me to complete the next analysis with more confidence on the prospects for the UK stock market.
- UK Economy – Business Cycle
Business cycles relate to fluctuating growth in economies and are measured using the gross domestic product for respective countries. A business cycle has four phases, i.e. recession, slump, growth and peak.
The cycle normally follows a trough to peak pattern. The troughs/slumps are the lowest point of each recurring business cycle, for example, as seen in 1992 and 2002, the latter being the most recent low point seen in the UK economy. It is worth pointing out that a slump does not indicate negative growth.
Peak periods are the highest points of each cycle after periods of growth in the economy. For example, after the 1992 recession there followed a period of growth culminating in a peak in 1994.
Recent estimates suggest that the UK business cycle is closer to the Eurozone business cycle than it was in the early 1990s.
As per a Reuters article, the coincident index increased in March and employment continued to make the largest positive contribution to the index this month. The index increased 1.2 percent (a 2.4 percent annual rate) from September 2007 to March 2008, in line with its six-month growth rate in the second half of 2007. In addition, the strengths among the components have remained widespread in recent months.
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UK Chances of Long – Term Growth
- UK Unemployment Problems
There's a paradox in today's unemployment figures. On the one hand, the jobless number has risen appallingly. Between the March-May and June-August periods, unemployment rose by 164,000 to 1.79 million - the biggest three-monthly increase since the recession of 1991. But on the other hand, the number of redundancies looks much less alarming. Yes, they rose - to 147,000 in the latest quarter. But the redundancy rate is below the average for the last 10 years (figures only began in 1995), suggesting things aren't so terrible.
One possibility is that individual job losses have been too small to show up in the redundancy numbers; firms have shed labors by natural wastage or by letting individuals go, rather than by widespread redundancies. This is a natural first response to a downturn.
A second explanation is that it is the labour force that has grown, and not just jobs that have shrunk. There was a 42,000 rise in the labour force (the sum of workers and unemployed) in the quarter. This is surprising because the labour forces often shrinks in recession, as people don’t bother looking for work but rather take early retirement, become students, or look after the children.
To see the third explanation, we must abandon a common but mistaken way of thinking of unemployment - that is, to think of it as a pool. It's not. Unemployment is instead a quite fast-moving reservoir. Every day, new water joins it and other water leaves. Changes in unemployment occur not just because inflows change, but because outflows do. The change in unemployment depends upon the rate of job creation, as well as the rate of job destruction. And rates of both these are high even in times of "macroeconomic stability."
Unemployment might be rising not just because people are losing their jobs, but because they are finding it harder to find new ones.
- UK – Role and power of trade union
- UK – Unemployment Rate
October 15 2008 - The unemployment rate rose to 5.7% - up 0.5% over the quarter and 0.4% on last year. 29.4 million People were in work in the period June to August according to the labour force survey (LFS). The downturn in the economy is now having an impact on employment figures - down by 122,000 on the quarter, but up by 199,000 on the last year.
- UK – Inflation Problem
- UK – Inflation Rate
The UK's annual rate of inflation rose to 4.4% in July, its highest level since records began in 1997.
The 0.6% rise was also the biggest monthly change since records began and took the figure to more than twice the government's target.
The rise in the Consumer Prices Index (CPI) was more than expected, with food prices up a record 13.7% on the year.
Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - rose to 5% from 4.6%.
- UK - Infrastructure and its role in economic development
The World Bank (1994) focused that infrastructural development has a strong positive link with level of GDP and infrastructure stock per capita.
Infrastructure itself consists of different sectors and some of these sectors have direct impact on the workings of business enterprises and others ate important for the societal point of view. Therefore, it needs to be developed on a concurrent basis. The relationship between infrastructure and economic development may be analyzed by focusing on its impact on the basic determinants of development particularly through its link with capital formation and technological change. The close link of factors, which determining the supply of capital with various items of infrastructure, is quite obvious especially in the case of financial institutions. They are necessary both for mobilizing savings and providing capital for agriculture & industrial development. The most significant contributions of infrastructure towards economic development are its impact on the availability and supply elasticity of factors of production, size of the market and the level of urbanization in the economy (Pradhan 2005).
Multinationals have largely help build up the infrastructure stock of overseas assets in the UK. This makes an important contribution to the country's economy through a steady flow of net investment income. Similar, Blackwood (2006) argues that flexible labour markets and low business taxes amongst other factors has encouraged a huge inflow of inward investment, "this has boosted GDP, protected thousands of jobs and helped to finance our growing deficit on the current account of the balance of payments”
- UK – Social Welfare and industrial Policy
Social welfare or public charity, organized provision of educational, cultural, medical, and financial assistance to the needy. Modern social welfare measures may include any of the following: the care of destitute adults; the treatment of the mentally ill; the rehabilitation of criminals; the care of destitute, neglected, and delinquent children; the care and relief of the sick or handicapped; the care and relief of needy families; and supervisory, educational, and constructive activity, especially for the young.
TO BE CONTINUED…..
- UK – Fiscal Policy and monetary policy
Fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. It is important to realize that changes in fiscal policy affect both aggregate demand (AD) and aggregate supply (AS).
Monetary policy is the attempt to control macro economic variables in an economy (primarily inflation) through the use of interest rates. - Monetary Policy
Fiscal policy is the attempt to influence the level of economic activity through changing taxation and government spending - More on Fiscal Policy
The objectives of the government are:
- Low inflation CPI=2%
- Strong economic growth, but, not inflationary growth. Increasing long run trend rate of growth
- Reduce unemployment
- Avoid large deficit on current account balance of payments
In the UK, Monetary policy has been given to the Bank of England. Therefore, the Bank of England has independence in setting interest rates. The government only set the inflation target of 2% inflation.
If the MPC predict inflation will rise above the inflation target then they will increase interest rates. Higher interest rates reduce demand and prevent the economy expanding too fast.
If economic growth is sluggish, and then interest rates can be cut, lower interest rates boost economic growth and help to reduce inflation.
Fiscal policy is not used so much in modern economies, but, in theory can be used to prevent recessions or prevent inflation.
If inflation is a problem the government can increase tax rates and cut spending. These will reduce Aggregate demand, and therefore, reduce inflationary pressure.
In a recession, the government can increase AD, by increasing government spending and cutting taxes. Lower taxes increase disposable income. This helps increase economic growth and reduces unemployment.
That is not the only global challenge facing central banks. Many think the global credit crunch means interest rate decisions now take longer to affect economic activity. And uncertainty in financial markets is translating into currency volatility.
Some have called for the Government to change the way the Monetary Policy Committee sets interest rates.
But the global challenges we face today are no reason for changing the remit of the Bank of England. The objective, price stability, is the right one. The means of achieving it, by inflation targeting, is right too. What matters is that inflation expectations remain anchored.