Extract 1

Extract 1

1. Economic growth

   • Growth in manufacturing, construction and agriculture as well as the service industry
   • Output just under 2013 peak-recovery is merely restoring economy to pre recession
   • services make up 80% of UK GDP
     • over dependent on services, need more growth in manufacturing sector
       • In the past manufacturing was great, some people argue it is essential for job creation, productivity gains, and exports and imports.

2. Unemployment

   • Unemployment has fallen- but only by a small amount
     • Could be as a result of seasonal changes, i.e. more jobs in spring/summer
   • Long term unemployment has risen
     • definition
     • Consequences
       • e.g. Hysterisis
       • opportunity cost in lost production, economy is operating inside PPC curve
       • adds to government deficit and national debt - unemployment benefits
     • Despite of the recovery the long term unemployed are being left behind - jobs are going to new entrants into the job market
   • Employment rate has fallen
     • The percentage of the working age population who are employed
     • could be as a result of the long term unemployed no longer putting themselves forward for work
       • Hysterisis
         • leads to a loss of skills and human capital, workers could become used to being unemployed and living on a lower wage and so would be less motivated. This could result in a permanently lower labour supply even after demand returns to normal. So unemployment may not return to pre-recession levels
   • Professor van Reenan conclusion: The extent of long term unemployment, and large scale non-employment could harm potential future growth of the economy - by curbing AS and AD

3. Fig.1.1

   • Doesn't believe growth is sustainable- components of AD are not high enough
   • Net business lending is falling - not enough people are borrowing to finance consumption and not enough firms are borrowing to finance investment in extra capacity or more productive technology
   • Growth is low compared with Canada and USA
   • Some part of growth is because of the 2012 Olympics - investment in infrastructure, increased consumer spending and spending by overseas visitors (invisible exports). This would have had a multiplier effect however most of the boost would have been temporary and if without the games the UK growth is even more disappointing
   • Blames austerity- tax rises and government spending cuts decreases consumer and investment spending and so AD.
     • 'talking down the economy' would decrease confidence and become a self-fulfilling prophecy
   • Raised concerns about another recession - did not come true - UK economy grew 0.8% Q1 + Q2 2014, in Q2 2014 GDP was 0.2% ore recession peak in 2008

4. Fig.1.2

   • Real wages continue to fall as price rises outstrip wage rises - reduction in spending power
     • With lower real incomes, consumer spending will be restricted
   • GDP per head is 7% below 2007 peak - but part may be because of population growth
   • no movement from consumption towards investment and exports (to boost productive potential and improve the balance of payments)
     • manufacturing sector hasn't increased - deemed crucial by some in terms of productivity gains, growth potential, employment and improving net trade
   • Exports have fallen despite a 20% depreciation in the exchange rate
     • should have made exports more price competitive, so exports would have increased and imports decreased
       • high exports and low imports hinders growth, worsens BOP and leads to job insecurity
   • exports and imports can act as a drag on growth - it will reduce AD and worsen the BOP, this can result in more borrowing and so increase the interest burden on the UK economy

5. Conclusion

   • The growth that has occurred since the data was collected suggest the performance has been better than the pessimists feared
     • However the weaknesses identified still need to be addressed
   • evaluation conclusion: note the progress made but stress the weaknesses in the economy: high long term unemployment, growth remains comparatively low, external trade remains disappointing, government debt is still high, and living standards have not returned to pre-recession levels