Unit 2 Macro: Cyclical and Structural Economic Issues Facing the UK

Our focus in an AS macro revision session was on the difference between cyclical issues and events and the wider / deeper structural problems and issues facing the UK economy at this fascinating time. Key macro policy decisions affect the path of an economy out of recession, but are these the same policies that will address the supply-side constraints and weaknesses that hold back growth, development and contribute to growing inequality?

Cyclical issues:

* Deep recession and a slow, weak, fragile recovery - UK GDP remains well below the peak at the end of the last cycle
* Falling real incomes and low consumer confidence
* Weak capital investment - the share of investment as a % of GDP has fallen steeply, low business animal spirits
* High cyclical unemployment as national output remains well below potential
* Cyclical fall in labour productivity (output per person employed) in part because of the weakness of demand
* Slower than expected expansion of UK exports - despite a competitive exchange rate - weakness in demand in our key export markets
* Cyclical fall in tax revenues and a rise in government transfer payments contributing to sizeable rise in size of fiscal deficit
* Rising household savings ratio, cyclical fall in property prices - both negative for consumer spending

Key issue here is why has recovery been so weak thus far (growth of less than 1% in 2011 and 2012 (forecast))?
Has monetary policy lost the power to stimulate demand, output and jobs?
Will Osborne’s Plan A of fiscal austerity make things worse - what will come under Plan B?

Structural issues

These focus mainly on the supply-side but keep in mind that an economy in semi-permanent recession with deficient aggregate demand for goods and services is likely to find that existing supply-side problems will deepen and become even harder to tackle

* An unbalanced economy - too dependent on financial services and housing, need to re-balance e.g. towards high value manufacturing, creative sectors
* Huge level of household debt - one of the highest among any advanced rich nation
* Structural weaknesses in the banking system - squeezing the supply and raising the cost of credit for businesses
* Long term low level of research and development as a share of national income
* Immobilities, disincentives, skills gaps in the labour market - resulting in high rates of structural unemployment
* Huge levels of youth unemployment
* Long term rise in economic inactivity, growing signs of people leaving the active labour market or having to settle for part time work
* Persistent productivity gap with many other countries
* Structural budget deficit is high - a key aim of the Coalition is to reduce this over the lifetime of this Parliament
* Structural changes in the balance of world economic power and influence - growing competitive threats from emerging countries (BRICs et al)
* UK economy falling back in international league tables for competitiveness
* Creaking infrastructure - telecoms, transportation, increasing pressure on public services such as education and health
* Structural rise in inequality / widening divide in income and wealth, deep regional disparities

These structural weaknesses mean that economic growth will be slower and unemployment higher in the years to come. The fall out from the global financial crisis is likely to have generational effects on employment and living standards especially for the younger generations. Do the current generation of politicians and policy-makers have the creativity, imagination and strength to develop policy ideas that will energise emerging industries and provide a platform for stronger growth in the years ahead? If not, the “new normal” will not be a good place to be