Recent Economic Issue of the United Kingdom

Original Article: http://www.khaleejtimes.com/DisplayArticle11.asp?xfile=data/business/2012/March/business_March569.xml&section=business

The Office for National Statistics in the United Kingdom announced that the GDP contracted by a worse-than-expected 0.3 percent in the fourth quarter of 2011, owing to a decline in the service sector and household spending. As a result, the prospect of another recession is raised for the United Kingdom.

Given that GDP is composed of household consumption, investment, government spending and net export, a decline in household spending will lower the GDP through the consumption sector. A decline in the service sector will bring a decrease in household consumption and export of services to foreign countries, which brings down the GDP again. Rising oil prices also put cost pressure on producers, who respond by decreasing supply, shifting the market supply to the left. The decline in production leads to a decrease in quantity and an increase in prices. Additionally, the poor economic performance in the Euro zone also influences the UK negatively, since the UK relies heavily on the neighboring countries for its trade. Therefore, net export declines, putting downward pressure on the GDP again.

One resolution to the problem would be to increase the supply of money in the market to boost household consumption. Thus, the consumption sector in the GDP will rise. However, this will lead to a negative by-product of inflation, which is already no small issue in the UK. Another possible policy will be to decrease the interest rates, which encourages firms to borrow money and increase their investments. Meanwhile, a lower interest rate will also give consumers the incentive to spend rather than to save. Additionally, the government can increase government expenditure by expanding infrastructure, which will lead to an increase in government spending as well as provide employment and reduce unemployment rate.