UK economic indicators and recession risk in 2012

UK Economic Policy

An analysis of the latest figures for key economic indicators and the factors which have affected these indicators. This should include the figures for unemployment, inflation and economic growth

Unemployment

Unemployment is one of the key economic indicators in the UK as well as in all modern nations. Unemployment in the UK rose for the fourth consecutive quarter in Q3 2012 with an increase of one hundred thousand people which also represents the strongest quarterly growth rate since 2007 (Office for National Statistics, 2012). Although the unemployment rate is still above seven percent overall which is still high, it has made substantial gains since the recession. Much of the employment activity though seems to be driven by the public sector which is the fastest growing sector in the economy.

Figure 1 - Unemployment Rate (Office for National Statistics, 2012)

Economic Growth

The economy on the whole appeared to do better in 2011, but since that time there have been indicators that might point to the possibility of another recession. For example, production Furthermore, production on a seasonally adjusted basis rose by 0.3% between October 2012 and November 2012. A rise of 8.7% in mining & quarrying was partially offset by falls of 0.3% in manufacturing and 4.1% in energy supply (Office for National Statistics, 2013). Therefore the slow growth in GDP isn't being felt in all industries at the same time.

The recession officially ended in the second quarter of 2009. Since that time there has been modest economic recovery. One interesting part of the economy that is illustrated by the graph of employment and GDP growth listed below is the rise in part time employment since the recession. Firms have lowered their full-time employment positions and added part position instead so that they can save money in their payroll expenses. The part time employment positions still count as a person being employed however these individuals may be underemployed. This means that they would prefer full-time employment however part-time is all they could find. Thus the rise in part-time employment can also indicate a weakened economy.

Figure 2 - GDP and Employment (Office of National Statistics, 2011)

An explanation of fiscal and monetary policy with some examples of current policy

Fiscal policy consists of government spending. The government plays a large part in most advanced economies with spending in many areas. The government collects taxes to spend on things like roads and bridges, schools, and hospitals. When this money is spent it filters through the economy. Currently the government spending represents the largest growing sector in the economy given that the government has been using fiscal stimulus to try to stimulate the economy.

Monetary policy works by adjusting the money supply in circulation which also has broader implications for things like employment and inflation. The central bank has several tools that they have at their disposal to be able to control the money that's in circulation. One example is with government bonds. The government can buy and sell bonds based on their objectives. If they buy bonds then they can add money into total circulation while if they sell them they can take money out of the money supply. They can accomplish this by adjusting interest rates. Another option that the central bank has is that they can adjust the fractional reserve rate. This controls how the bank lends money to people by making the access to capital either easier or harder. However, it is more common for the banks to use bonds rather than adjusting the reserve rate.