Readers Question: Whose is to blame for the continued UK recession?
With the banking crisis and economic recession, politics seems to be currently dominated by a ‘blame’ game – trying to work out whose fault it is. Unsurprisingly, the coalition have tried to shift blame on to Euro crisis and banks. Others have blamed the governments own spending cuts.
Possible Suspects for continued recession
- Euro-crisis – uncertainty and recession in Eurozone affecting UK exports and investment levels in UK
- Bank Lending – Banks reluctance to lend to firms is stifling investment and economic recovery.
- Government spending cuts – Cuts in government spending have led to a fall in demand and also a subsequent fall in consumer spending.
- Global downturn. The UK is being affected by global economic slowdown. (though other parts of the world are still posting positive economic growth)
- Reduced real wages. Combination of real wage cuts and higher commodity inflation has squeezed disposable incomes in past few years.
- Weakness of housing market
- low levels of UK consumer spending
- Government spending under Labour
The chancellor, George Osborne has sought to put considerable blame on the Euro crisis for holding back UK recovery. Osborne recenlty said:
“Our recovery – already facing powerful headwinds from high oil prices and the debt burden left behind by the boom years – is being killed off by the crisis on our doorstep,” Eurozone crisis killing off recovery
If we look at exports to the Eurzone, there is some evidence of a recent decline in 2012. Though there has always been an element of volatility in the past two years, there is no clear downward pattern. The economic slowdown is most pronounced in peripheral countries, such as Spain and Italy. Others like Germany and France have been able to post positive economic growth.
The Eurozone is definitely important for exports and wider UK economic confidence. However, looking at the trend in exports to Europe, there is no clear pattern that falling exports to our main trading partner is leading factor in causing a recession.
The Business secretary, Vince Cable, recently argued that banks reluctance to lend was a big factor in holding back the UK economy. Cable said:
“The banking culture is anti-business, it doesn’t focus on the long term. It is throttling the recovery of British industry because companies cannot get loans to expand their business.” (Cable, Banks throttling recovery)
Cable suggests the lack of competition and short-termism leads to a reluctance to lend long term. Since the credit crunch, bank lending has fallen significantly and now many banks are increasing their cash reserves, trying to improve their liquidity. This fall in bank lending back in 2008, was a cause of the initial slide into recession. This lack of bank lending has partly been addressed by the most recent form of Quantitative Easing which also sought to encourage more direct bank lending rather than just buy government bonds.
It is true bank lending is low. However, the continued low levels of bank lending may be a reflection of the fundamental lack of demand in the economy. With poor growth prospects, firms are not looking to expand and invest. Making banks lend more, will not necessarily change this fundamental lack of demand in the economy.
Government Spending Cuts
Government spending cuts in 2011 and 2012 have played a significant role in reducing aggregate demand. Bank of England member Adam Posen has recently said that government spending cuts have had a big multiplier effect in reducing consumer spending further than might be expected. Adam Posen on spending cuts
Source ONS | NTV
This graph shows extent of government spending cuts on key public sector net investment. At a time of rising savings and falling private sector spending, this has had a been a big drag on economic growth.
Consumer confidence has fallen to a record low in recent months. This is a reflection of many factors. – falling real wages, negative outlook from Europe, fears over house prices, uncertainty over unemployment, high inflation. There is no single factor leading to a decline in consumer confidence, but clearly this has had a major impact on holding back economic recovery.
Real wages in the UK have been sluggish since the start of the credit crisis. The fall in real wages has continued into 2012.
UK house prices stabilised after the initial 2008/09 fall. However, although house prices have been broadly flat, there are still reasonable fears over further falls in UK house prices. This leads to a negative wealth effect and reduces consumer confidence even further.
It’s not surprising to hear the coalition blaming external factors, such as the Eurozone and also blaming bank lending. It is equally unsurprising to hear Labour reject these excuses, pointing to the government’s own austerity measures.
In practice, the continued double dip recession is a combination of factors, which have all contributed to disappointing economic growth. However, of all the factors mentioned above, cuts in government spending are one of the most significant factors. Real spending cuts of £6.5bn have led to lower demand and lower employment. They have also played an important role in depressing consumer confidence as the public expect more cuts to come. Some argue spending cuts have been relatively minor. But, compared to past trends of rising real government spending, this cut in spending at this particular economic situation have definitely held back economic growth.