UK Business Cycle and Current Economy

According to the basic tenets of the business cycle theory or model of economic trends, periods of high growth in GDP and rising prices (and wages) are followed by drops in economic activity as consumers/workers grow wary and spend less, producers start cutting back on supply and labor, and thus unemployment rises and consumers are able to spend less. As prices drop low enough and employment stabilizes, spending begins to resume, production and employment levels increase followed by wages, and a period of high growth is entered into again. The current economy in the United Kingdom is indicative of a nation at the bottom of a trough in the economic cycle, as various elements of the economy are beginning to stabilize yet a return to growth remains uncertain and very slow if it is occurring (BBC, 2012). Producer prices rose very slightly, which could be a sign of the beginnings of a climb back up in the business cycle following the global recession of the past several years that followed a classic if extreme pattern of the business cycle: precipitated by issues and firm failures in the financial sector, consumer confidence and producer capacity both faltered, leading to high rates of unemployment and lower rates of consumption that caused economic stagnancy and shrinkage (BBC, 2012). Currently, however, the economic signs are mixed, with input prices falling and unemployment still higher than would be desired or expected in better economic times (BBC, 2012).

Governmental interventions in the economy are uncertain at best, but there are some actions that he UK government could take in an attempt to influence business. If the government were to hire more workers itself, this would increase the amount of spending and thus drive up production rates and wages (as well as prices), creating a higher level of economic activity, more jobs, etc. Issues of taxation, from whence the government would receive the funds for these workers, complicate this proposal, however. Offering subsidies or tax breaks to producers for hiring more workers and/or producing more at slightly cheaper rates might be a more cost-effective way to stimulate the economy.

Reference

BBC. (2012). UK producer prices rise 0.7% in April. Accessed 12 May 2012.

http://www.bbc.co.uk/news/business-18031202