Did the UK government’s austerity programme or natural business cycles explain the UK’s emergence from recession?
The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. A business cycle is identified as a sequence of four phases: (i) Contraction, a slowdown in the pace of economic activity; (ii) the lower turning point of a business cycle, where a contraction turns into an expansion; (iii) a speed up in the pace of economic activity and; (iv) a peak defined by the upper turning of a business cycle. For simplification, peaks and troughs are commonly used to define cycles. If we look at the causes of business cycles, we may relate them to the UK performance since the last trough in 2001 and be better able to answer the question. These are usually characterised by changes in interest rates, changes in house prices, consumer and business confidence, the multiplier effect (e.g. a change in government investment leading to weakened demand and the accelerator effect such as spending on investment due to the change in economic growth).
In 2003, the UK emerged from a short trough and experienced a period of economic growth until the financial crisis of 2008. This period saw the longest and most difficult economic decline globally. In 2010, a new UK government was formed, armed with a new set of initiatives to reduce borrowing and stimulate growth in the economy. Naturally, the economy at this time may have been expected to experience a natural trough, however, not to the scale as the one actually experienced culminating in double dip recessions. The adjustment process following the unprecedented economic shock (the financial crisis) has been a long and costly one with the UK now showing signs of recovery.
But, would the UK’s current economic position be the same had the austerity and the new set of economic measures not taken place or would the natural business cycle have been responsible for this? All euro area countries entered the financial crisis at the same time but took different measures to react to the changes. In the UK, many sceptics argued that the austerity measures were excessive and undertaken in haste. Further, others have argued that if the quantitative easing programme had not occurred, the UK may not be experiencing its emergence from recession and the return to seemingly respectable levels of growth.
In conclusion, in the wake of the financial crises, it was inevitable that measures had to be taken in some capacity and many countries undertook such measures. However, many argue that austerity measures only seek to create unemployment, a costly measure and a non contributor to growth. Further, many also argue that quantitative easing does not work and currently, further rounds of such measures are still necessary. It may thus be argued that the natural business cycle, not the government’s measures from which they take many plaudits, have been the main contributor to the current emergence out of recession and into growth.
Dr. Victor Chukwuemeka
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