Thursday, May 31, 2012

UK in recession, again.

UK's Economy Shrinks Further

UK’s economy has actually shrunk by 0.3% in the first quarter of 2012, as opposed to 0.2% announced by Office of National Statistics (ONS) earlier this year. The primary reason behind the revision is the bigger reduction in construction output by 4.8%.

In the last quarter of 2011 the economy shrank by 0.3%, it has now shrunk in two consecutive quarters, in other words UK is officially in recession. The economy could potentially go into another recession in the second quarter of 2012 and the Queen’s golden jubilee celebrations scheduled in this period can potentially make matters worse.

Interestingly, many economies of the Eurozone, which is currently going through a debt crisis and a looming fear of Greece’s exit from the single currency, are not going through any recession but UK, which is not a part of the Eurozone, has gone back into recession again.

What now?

The government can further increase its spending. It has already increased its expenditure by 1.6% on health and defense.

The Monetary Policy Committee of the Bank of England can sanction Quantitative Easing (QE), i.e. inject cash into the economy. It has given £325bn under the QE program and more are expected. International financial institutions such as IMF have also advised the government to give the economy another boost through QE.

The interest rate has been lowered to a record 0.5% but IMF has suggested further reduction in rates.
Continue with the austerity program --- get rid of the budget deficit. This is very tricky because austerity can lead to further recessions. There have been growing calls from leading economists around the world calling on governments to focus on growth when most European nations are driving towards reducing their expenditures.   

Your comments and feedback are highly appreciated
Sarfaraz A.K.
Half Bridge Business News