The UK Double-Dip Recession: Causes and Recommendations

Double dip recession is a second wave of negative economic growth that many economies including the UK one are facing at the moment. The current double dip of the British economy is the first one since 1970s. The signals reported by various sources appear to be splitting and contradictory at some points. For example, in spite of good service and manufacturing growth and the price increase for GDP in some quarters of the year reported by social surveys, the Official Bureau for National Statistics published the UK statistics demonstrating that the recession is no myth. Some of the disturbing factors include GDP decrease by 0.2% in the first quarter of 2012, manufacturing decrease by 0.4% and 1.3% at the end of 2011 – beginning of 2012, construction sector decrease by 3% and lower volumes of GDP. Service industry seems to be untouched by the crisis – the changes are slight and insignificant (<0.1%) (Rowley, 2012). The construction rate appears to be the most dramatic and arises the most discussion in economists and statisticians.

Quantitative easing is one of the measures taken to balanced recent monetary expansion by the fiscal austerity. This resulted in harsher conditions for the investors as they have less protection for their means while the inflation still appears to be a danger. Moreover, if the figures from the UK are compared to the ones that relate to the Eurozone representatives, British data will seem surprisingly positive. The markets do not give up on British products, and it gives the country hope for getting out of recession with smaller efforts.

There is another benefit of being in recession though at first it sounds like a paradox. The government and authoritative policy makers are now more alert and try to pay attention to fundamental issues that directly relate to the state economy. The recession is not critical but is heavily discussed in the media and among scientists, so it is a great stimulation for further development and progress.

However, in spite of the negativism highlighted in the media and by a part of economic statisticians UK economy is not as fragile and vulnerable to this crisis as it may seem at first glance. That is why so much attention to this recession is dangerous as it may eliminate the remaining business optimism and confidence as well as customer loyalty, and all of those factors are critically important to overcoming this recession.

Judging the statistics and survey data acquired, it is essential to avoid misinterpretations and wrong measurements that lie in construction data problems. Official measurements of GDP do not provide as good of a picture as business surveys do. One of the possible causes behind current UK double-dip recession is the global European economic crisis and its direct consequences. This is the opinion that the National Treasury expresses. It suggests that the worsened economic situation all over Europe could have influenced British economy too and let to certain recession (Rowley, 2012).

Another potential cause is the current political course taken by the ruling party. Labour party members dislike the economic policies claiming that some of the measures taken are too fast and not reasonable while there is still a lot to do in terms of growth scale.

So, spending cuts along with lower salaries, unemployment and confidence decrease as consequences, lack of stability in housing market resulting in construction downfall, cost-push inflation changes, Eurozone cuts on investment and consumer spending, decreased volumes of export to Eurozone because of the crisis, and decline in real salaries step out as the key causes behind the recent UK double dip recession (Curtis, 2012). Some other minor causes include credit crunch that is documented in mortgage defaults and results in lost confidence and bad loans, balance sheet recession that is a consequence of unbalanced banking/housing industry, lending reluctance because of the deflationary interest policy, budget deficit, bad governmental loans, lower tax incomes, failure of fiscal motivation, putting cut-cost policies as a highest priority, tax increases, lost customer trust and confidence, EU debt crisis, lack of EU growth (due to mass cut-cost policies, monetary boosts, raising rates, high unemployment, stagnant growth, lack of flexibility), global recession, increase in commodity price levels, depression inside housing markets (both in UK and other Euro countries), and wrong governmental priorities (unresolved financial sector troubles, lack of mortgage regulation, lost opportunities to grow, trying to resolve long-term deficit problems with cut-cost policies instead of targeting growth) (Pettinger, 2011).

In spite of this, Eurozone crisis cannot be directly related to the drastic shifts in construction industry. The probable connections can be made on assumptions that people do not create build anymore because they are afraid of exports fall down or public sector job lost. Such relation is indirect and cannot be pointed out immediately (Curtis, 2012). As for GDP dropdowns, it is explained by the scepticism expressed by the Bank of England as well as by quarterly dynamics demonstrated by any world currency. No impulsive conclusions should be made basing upon sudden slight shifts in currency rates. Moreover, it is more reasonable to overview the average changes that take place every year as this information is more reliable and stable compared to quarterly results.

Before we start to revise possible solutions to the recession problems, it is essential to look at general economic conditions. The inflation remains at the very same level in spite of the governmental struggles. That is the reason why explicit and large-scale manoeuvres cannot take place. Lack of growth and unemployment should be eliminated, and it is under governmental control to some extent. The spending plans cannot be completed because of the budget gaps (Pettinger, 2011). Interest rates have already come to zero level. The quantitative easing program implemented by the Bank of England is one of the largest and most enhanced in the world. Further money creation will simply become unreasonable if the inflation rates stay at the same level.

One of the possible solutions is to switch on the austerity course of the government to a strategy that is more growth-oriented. The existing growth strategy is recommended to be revised and more balanced. The first step to take is to revise the fiscal austerity. Quantitative easing is not of great help for investors because of the changed bank positions throughout the world. However, the changes on policies should not be drastic because even if today’s or this quarter’s figures are not very impressive, the UK still benefitted from the lower GDP price and monetary policy controls of the quantitative easing (The Guardian, 2012).

If the expenses of the budget will be extended to re-generate growth, it is possible to cope with the problems in the construction sector that turns out to be the most disturbing one. Altering the existing fiscal austerity will change the way costs are treated will help a lot as the huge cuts in public spending affected building industry significantly. Public sector housing and non-housing needs will work for business expansion while construction industry will grow. The deficit reduction should become short-term but some serious long-term structural change should be implemented over time. Although tax reduction and small business support build confidence and trust inside British society, it will still do little for the fundamental issues.

Media representatives should be more careful with data, and more survey information should be involved before any conclusions are made because many times official figures contradict what the statistic reports say. Media can influence the opinion of customers or investors and therefore hurt business growth significantly.

Altering the current governmental approach to cutting costs will change the situation and provide space for development and growth. This idea will be widely supported by those who belong to the Labour party. One of the suggested actions would also be measures to cause a drop in inflation. Customer confidence is a factor that both small and large-scale businesses rely on, and lower prices will definitely attract clients to buy products and services. Confidence is an integral part that has recently been lost from British economy. The falls are not very significant but they should not disturb customers, investors or businessmen on their way to conduct usual operations because the state economy relies on their trust and approval heavily (The Guardian, 2012).

The fiscal and monetary policies are recommended to support aggression and action on the behalf of investors and recruiters. It should also stimulate consumer spending. Quantitative easing should not be neglected but the government may look for the ways to reduce it slightly and see how it affects the quarterly figures.

Anyway, the UK still has the hope of reducing the negative growth appearance by quantitative easing and the altered monetary policy (specifically – exchange rate terms). However, the consequences and side effects of these measures have to be studied more thoroughly to get prepared and face problems with proper empowerment. The UK is currently at a better position than the majority of European countries, so there is definitely no reason to panic or give up.