The current economic crisis facing many countries in the world is sort of unavoidable. The US has already fallen victim to this predicament. Other countries that form the G8 are speculated to follow suite. This crisis is just about everything. Falling banks, the drying up of credit, crashing house prices, rising unemployment, weakening growth and a ballooning budget deficit, (Elliot, 2008). This economic turmoil has not left the UK out either. The impact of the economic crisis is already being felt in the UK in different ways.
Economists believe that the rain will however not stop soon and the UK market will be affected for quite a while before normalcy resumes. Economic organizations have predicted that a severe economic downturn will be faced in the UK in 2009. One such organization, (The Organisation for Economic Co-operation and Development) has predicted that economic output in the UK will fall by 1. 1% in the year 2009. It is important to note that, this percentage will be more than any other major G8 country.
This is sure to be detrimental, considering that the UK has been post high annual economic growth rates annually since 1992. In ten years from the second quarter of 1992, the UK posted a real annual growth rate of 2. 9% (Brittan, 2003). For a developed country, this growth rate is quite impressive. With the economic crisis, it is expected that the growth rate will fall to 1. 25% in 2009. However, the UK is better placed to cope with the drop compared to many other European countries. As mentioned earlier, the economic output of the UK will fall by 1. 1% according to OECD.
This will be as a result of low production levels by industries, major companies and firms. The objective of any firm is maximizing profits and minimize on the costs. Owing to this factor, it is expected that one of the ways in which firms in the UK will minimize on costs will be done by lying off people. Unemployment in the UK is predicted to rise to 8% by the end of 2009 from 5. 5% that was experienced in 2008. This will be the highest unemployment level experienced in the UK in decades. Unemployment has already risen to 980,900 an increase by 36,500.
Economists predict a hit of 2. 5 million in 2010, (Webb, 2008). A decrease in the employment level will result to lower living standards experienced by the people. This will definitely result to an increase in the crime rate in the UK. The ever strong British pound is bound to weaken in the near future as a result of the weakening world economy. We have seen that due to this weakening of the world economy, UK’s economic growth rate and economic output are expected to decline. Weakening economies, lead to weak currencies.
The pound will weaken because the government has become weak (Brown, 2008). Today, the British gilts are considered to be twice as risky as the German bunds. Trade between the UK and other countries is also expected to decline. Since it is expected that world trade growth will slow sharply from 4. 8% this year to 1. 9% in 2009, it is expected that the UK will follow the same trend. However, this recession in trade will mainly affect developing countries. (Kjell A. E. 1998) Banks in the UK will also take measures to reduce on inflation on prevent a further economic recession.
Banks will therefore lower the interest rates to cope with the economic situation. It is expected that the interest rates will be cut to a record low of 1% in 2009. Official bank rates have never gone below 2% since 1964. These measures will be taken to prevent a deepening recession from pushing the UK economy into deflation. (Mike, W. 2008). What is the impact of the decline of the pound to the euro now and in the future? It is worth noting that the pound has for a long time been recognized for its strong and consistent base against other currencies and for purposes of this section the Euro.
This in my view has been occasioned by UK’s isolation from the European community due to the incompatible cultural practices and economic policies from the states that form the European Community; which as a result has enabled it to maintain its currency’s stature without any compromise. It is however important to acknowledge the opinion promulgated by the Institute of Economic Co-operation and Development in the first paragraph-of the3 decline of the strength of the pound which is an affirmation and translation of the the same to its vulnerability against the Euro.
(Jeff, M. 2006) The Euro was launched with immense anticipation with its sole purpose being the realization of a single market that links all the European member states as well as facilitating the realization of political integration. Only with one common currency, can a single economy come into existence and only with a single economy can a single political entity come into existence, (Aldridge, 2008). In reality the problem with trying to impose a single currency, with a single exchange rate on diverse economies is that it is bound to fail.
However for purposes of this section the existence of the Euro will come in handy in instances of solving the diverse economies first because of the decline of the pound and secondly because of the diverse housing market practices that are performed by different house owners in the UK. This therefore put UK in the same level with other European member states that have made their policies to be congruent to the policies of the European Community, (Brown, 2008). Also the dwindling manufacturing market in UK accelerates its vulnerability to the euro.
It is worth noting that the manufacturing market constitutes the benchmark of the financial sector which forms the engine that promulgates the economy of UK. As a result the pound experiences different pressure as it conduct global trade of which the euro is not an exception,(Aldridge;2008). With the decline of the pound to that of euro, UK is in a position to benefit from trade with and within the European community because the integration of states results in reduction of transaction cost for businesses that are conducted within the European states.
Trading within the community also ensures that costs of goods are conducted transparently since they are compared with other currencies thus ensuring some uniformity. This will also lead to the influence of policies that relate to housing, pricing of goods and employment across the community just to mention but a few. (Kjell A. E. 1998) It can therefore be concluded that the weakening of the sterling pound would not experience adverse effects to the citizens of the UK since they form part of the members of the European community. However, the UK should be ready to compromise its convergence to achieve this.
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