Facts (Macro) Flashcards
Describe the pattern of UK economic growth over the last 25 years
The UK economy has been growing at a rate of around 2.5% per year. However over the time period there have been two periods of recession. The first was in 2008, where the economy shrank to a peak of 8%, over four quarters. There was also a recession in 2020, which peaked in the first quarter, at 21%. This recession lasted for four quarters, then the economy bounced back, with growth of 17% in the first quarter of 2021. Since 2022, growth has been around 0.3% per quarter.
What factors lead to the recession in 1991-92, and what helped with recovery?
Following the Lawson Boom:
Inflation has getting out of control so govt joined Exchange Rate Mechanism
The value of the pound was kept within certain boundaries against the Deutsch Mark
Inflation meant that the value of the £ was falling, so interest were kept high- 15%
This lead to home repossession and falling house prices (negative wealth effect) and consumer spending, leading the recession
Govt valued exchange rate over economic growth, so kept interest rates high. Eventually left ERM in 1992 and interest rates cut leading to growth
What was the Lawson Boom?
During the 1980s, the govt allowed the economy to grow at a rate that was significantly higher than its long-run trend rate. They felt that supply side policies had enabled to economy to grow faster than before
Govt kept interest rates low and cut income tax, especially for high earners.
Lead to a large increase in consumer spending and boom in the housing market. There was a big increase in consumer confidence.
‘Supply side miracle’ did not really happen
The effect of growth above the long run trend rate was to cause inflation and a widening current account deficit- by 1990 inflation had reached 9.5%
1990s recession key facts
Unemployment rose from 7% in 1990 to 10.3% in 1993
In 1990, house prices were falling by 10% as home repossessions rose
2008 recession key facts
Real GDP fell below the trend rate, but lost output was not recovered (like in most recessions)
B of E cut base from 5% to 0.5% but consumer spending did not rise due to low confidence
Double-dip recession, as economy stalled in 2011, due to austerity undermining confidence
Unemployment peeked at 8% but not until 2011
What is Uk household debt as a proportion of GDP?
Around 85%
Recent inflation facts
Peaked in 2022 at 11%
Causes include:
Rising price of gas due to global supply side shock from sanction imposed on Russia
Strong global demand for consumer goods, mostly following pandemic and associated lockdowns
Related supply chain disruption
As UK is a net importer of goods (including energy) these factors affected consumer prices in the UK
Examples to support Fisher equation
In 2020 the US federal reserve used QE in an attempt to stimulate growth in the US economy.
However 12 months later the economy experienced rising inflation, with the increase in money supply thought to be a contributing factor.
Velocity of circulation is often changing, eg in a recession it normally slows as confidence falls, this is why QE by Bank of England in 2009 did not cause rising inflation
Hartz reforms in Germany
Unemployed would see benefits cut of up 30% of they refused to take up a reasonable offer of work
The creation of part-time job opportunities with a low threshold and minimum salary ‘mini-jobs’
Lead to fall in unemployment from 11.3% in 2005 to 5.5% in 2012, despite global financial crisis
Increase in earnings inequality
Germany has the largest low-wage sector in the EU (after Baltic states, Poland and Romania)
Structural unemployment example
The collapse in car manufacturing in the US city of Detroit, due to international competition led to unemployment there rising to 29% in 2009, compared to a national average of 9.8%
unemployment/employment rate Uk
unemployment- 4.2%
employment rate 76%
