Readers Question: In what way or how do the economic growth possible ? Currently technology and infrastructure are growing apart from Europe esp UK to Asia. Financial stability per family is also sinking ! right (esp to white people-majority ) Then where is growth of economy and how it drives UK to a new positive level of growth ? Now a days people forget to save money and remember how to spend the same? Where is the growth ?
The immediate problem facing the UK economy is a large output gap and decline in aggregate demand. To boost economic growth we need to increase aggregate demand. To increase demand the government and monetary authorities have tried.
- Cutting interest rates to 0.5%. Lower interest rates should make borrowing cheaper and increase the disposable income of homeowners with mortgages. This should increase consumer spending
- Cutting tax rates (expansionary fiscal policy) e.g. VAT to 15%. This should increase consumer spending as they have more disposable income and goods are cheaper.
- Quantitative easing. Increasing the money supply by the Bank of England buying assets from banks. In theory, this should improve bank balance sheets and increase bank lending which in turn will boost investment and spending.
- Also, the weak pound has helped boost exports
However, it is difficult to increase consumer spending because:
- After a decade of low savings and high borrowing, consumers have become more risk averse and consumers are now seeking to increase their savings rate. This will limit consumer spending and make growth more sluggish. (see: problem of saving)
- Also, banks are reluctant / unable to lend as they seek to improve their balance sheets. Thus, the low levels of bank lending is a limit to consumer spending and investment.
- Also, falling house prices have reduced consumer wealth and discouraged spending. – If house prices stabilise this may enable consumer spending to rise in the future.
- Also, the tax cuts are likely to expire as the government seeks to reduce the very large budget deficit. In fact, fiscal policy could soon be deflationary which will hold back growth.
In the long term, economic growth will depend on productivity growth and increases in aggregate supply. However, in the short / medium term, growth will be held back by the many factors limiting consumer spending.
I think the growth will come from a period of low-interest rates and a continued policy of quantitative easing.
For more detail see: Causes of economic growth