The United Kingdom is one of the most developed capitalist economies in the world. It is the sixth largest word’s economy in terms of nominal Gross Domestic Product and the seventh largest economy in terms of purchasing power. In terms of nominal Gross Domestic Product, it is the third largest economy in the European Union. Its per capita income is the 18th highest in the world. The United Kingdom is a registered member of the G8 countries that controls the economy of the world. Industrialization started in the United Kingdom. By 1980, most of the nationalized government owned enterprises were privatized. The economy of the United Kingdom grew steadily into an economic boom in 1980s. This era was the longest period of sustained economic growth of the United Kingdom’s economy. By 1992, it had the highest rate of economic growth in the world. However this continued up to 2008 when the world’s economies went into recession as a result of the global financial crisis (Elliott & Larry 2008).
The financial sector and the money markets were the most affected sectors. Banks were in a financial turmoil and hence they started to collapse. The government moved in to nationalize the falling banks such as the Royal bank of Scotland group, which was one of the leading banks in the United Kingdom and one of the largest in the world by market capitalization. The United Kingdom government has supported the banking system to a tune of 1.4 trillion pounds and is expected to rise further as building societies start to experience the financial crisis. Despite the looming global financial crisis, the UK economy remains one of the strongest in terms of controlling inflation, unemployment and high interest rates (Fratianni, & Marchionne 2009).
The United Kingdom government however has been able to raise its Gross Domestic Product per capita and its purchasing power. This however has been necessitated by equitable distribution of income among its citizens. Despite this fact, the level of income inequality remains high than many of the European countries. The policy makers attributed the falling of the United Kingdom economy to the global financial depression and the ever rising costs of commodities. This problem was fuelled by the fact that the United Kingdom revenue comes from export of financial services and usually records deficit in finished commodities (Norris & Floyd 2007).
Decrease in government revenue results to decrease in government spending which in turns lower the amount of money in circulation in the economy. Low circulation of money results to decrease in aggregate demand for goods and services and hence deficient demand. With the on going global financial crisis, the United Kingdom current account deficit is on the rise even with significant oil revenues. On May 2008, the International Monetary Fund advised the UK policy makers to widen their fiscal policy to attract favorable balance of payment. This has to be achieved through increasing labor productivity per person employed. Recent studies show that the annual United Kingdom Gross Domestic Product growth rate decreased by 1.9 percent for the first quarter of year 2009. The growth rate however was anticipated to grow by 3.1 percent in 2007 and 2.3 per cent in 2008. This continued fall in the Gross domestic Product of the United Kingdom’s economy placed the country in the last position in the G7 of the worlds leading economies. To bail itself out of the current financial crisis the government to heavily borrowed externally and internally resulting to acute structural deficit. The government must enhance both fiscal and monetary policies through structural adjustment programmes to lessen the effect of these deficits in the economy (Yeandle, et al 2009).
Without these measures the United Kingdom economies will always register unfavorable balance of payments. The financial crisis has also affected the mortgage sector. The government has offered assurance to mortgage backed bonds by spending close to 50 billion pounds in bail out from collapsing banks. However this amount is not enough and the government have to add more. However the government is committed to its 5% growth rate per year by injecting 526.5 billion pounds of asset insurance, 250 billion pounds for bank lending and further 154 billion pounds to cover the liabilities of collapsed banks that are under receivership. The government through the bank of England is using 185 billion pounds to cater for a special liquidity program for banks. The government has started a special program where by the central bank can purchase about 150billion pounds of assets to lower borrowing cost through quantitative easing. The government have so far taken four banks, insured their assets and cleared their loans in an effort to boost its economy. This is also aimed at assisting banks increase their leading to the public to spur the money markets. All this policies are aimed at strengthening their financial institutions and putting economic growth on track (Soros & George 2008).
Soros & George “The worst market crisis in 60 years”, Financial Times (London, UK), Web.
Yeandle, et al (PDF), Global Financial Centres Index 5, City of London Corporation, Web.
Norris & Floyd “A New Kind of Bank Run Tests Old Safeguards”, The New York Times, 2007.
Elliott & Larry “Credit crisis – how it all began”, The Guardian, 2009.
Fratianni, & Marchionne, The Role of Banks in the Subprime Financial Crisis. 2009. Web.