This essay lays more focus on three variables of the GDP equation that is consumption expenditure, investment and net exports. The essay fails to discuss the fourth variable that is, impact of the Government expenditure on the GDP. GDP is the sum of all the four variables that is GDP= C+I+G+(X-M). The essay throws light on the recession effected UK with little hopes of a speedy recovery. The negative demand shock is one of the major factors which have created a vicious circle resulting in negative growth of GDP. The consumption expenditure has particularly reduced. The people are looking to pay off their high debts after decades of huge spending and unemployment has further reduced expenditure. Such a sluggish demand causes the inventory buildup. This takes away all incentives from the producers to increase their supply. The banks have lost faith on the businesses; even if there are green shoots for the businesses to invest, the credit is not available. Credit less recoveries are characterized by weak rebounds. Thus, the two factors needed for a significant rebound-spending and lending are still missing in UK.
This essay is a perfect example of paradox of thrift which states that is everyone saves more money in times of recession, then aggregate demand will fall which in turn, lower total investment in the population because of the decrease in consumption and economic growth. The rise in individual savings is seen as harmful to the economy. The rate of savings has increased as the Britons are paying back their debt.
The smaller firms and retails are feeling the pain. The big firms like the supermarket chains have managed to cut down their costs, increase their efficiency, cover their costs and even make profits.
The macroeconomic theory clearly prescribes the banks to increase their lending to boost the investment expenditure which can revive the economy. Also, the boost is needed for the consumer spending as well through incentives from the firms and the Government. The Government should increase its expenditure to push the demand. The strategy can be to reduce taxes which can elevate consumption expenditure or directly expand its expenditure even to the point of fiscal deficit. In short, the four variables affecting GDP should be targeted.
The net exports multiplier effect to the GDP is also gloomy. The exports of traded goods are falling. The depreciation of the UK’s currency (pound) has made UK’s exports more competitive, still, not enough to give a push to the economy and increase the exports. The condition around the world is not much different. No one even outside UK is actually buying. So, even the foreign sector fails to boost the domestic economy.
Even the most recent surge in numbers does reflect a positive but temporary phase. The companies’ confidence is down and out. The rise in demand is not seen as consistent and backed by temporary factors such as the warm weather.
However, the economists are of the view that the worst is over for UK. Comparing the numbers with the last downturn in the mid 1990s, current unemployment rates and interest rates show a better sign. The numbers also reflect that UK which went into this crisis before any other country in Europe also seems to be recovering faster.
The conclusion is that the banks still are not helping businesses invest and expand, and consumers still are not spending enough to foster economic growth. The net exports are not helping the GDP either. The article does not throw any light on the fourth variable that is the government expenditure.