Economic Growth – UK Economy Under Labour

Economic Growth is the change in the total output of the economy, from all sources. It is measured by the growth or reduction in GDP and is a good representation of how well the economy is performing.

The government objective is to create stable economic growth, with the country’s GDP increasing at a sustainable rate over a long period. Economic growth is often tied into many other factors in the economy, including Consumer Spending and employment, and so is a major factor in the economy’s performance.

Having stable, positive growth should allow business and individuals to feel confident in the future, knowing that their jobs are secure and meaning businesses can invest in new technologies and machinery and consumer confidence with a feeling of wealth can generate demand and spending. By increasing investment, more jobs are created and hopefully the output of the economy increases, as does its productive potential. Our goods may be exported abroad, improving the UK’s Balance of Payments, however in a global economy it is now more likely that there is instead a rise in imports as more products are demanded.

While beneficial, growth can get out of control, with unsustainable growth as a result of too much spending leading to demand pull inflation. Intervention may then be required, for example, rising interest rates to slow spending and growth. If an economy is rapidly overheating, the slowing effect may have to be sudden and large, and this is what creates the recession problems of the cycle. This cycle is what the Labour government decided to alleviate.

Demand Pull Inflation

DIAGRAM 2: Demand Pull Inflation
When the demand nears the Full Capacity Output of the economy all resources are already being fully utilised. There is excess demand and the price rises (see P1 to P2) without the corresponding increase in output. This is inflationary.

Growth by Aggregate Demand is largely what has fuelled the UK’s economic growth through the time of the Labour government. Increased spending, from cheap credit, has driven Aggregate Demand, however this has not been inflationary as our available Aggregate Supply has increased from greater foreign imports.

This supply side expansion is necessary to prevent excess demand and to meet the requirements of Aggregate Demand without being inflationary. When the economy grows its Supply, it increases the economic potential it can produce, done through investing in technology, machinery, and in some ways, human capital through education.

Supply Side Expansion

DIAGRAM 3: Supply Side Expansion

Successfulness

As a key indicator of economic stability and prosperity, economic growth has been an important factor for the government to maintain.

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Source: http://www.tutor2u.net/economics/presentations/ukeconomyunderlabour/default.html
GRAPH 3: UK Economic Growth, showing no recession since Labour came to power

From Graph 3 above, it is clear that this government has prevailed over a period when economic growth has remained stable, sustainable and positive. The recession of the early 1990’s is shown on the left side of the graph, with the growth falling below the red line – negative economic growth. Since Labour’s election win in 1997, growth has only fluctuated slightly by around 3% between the 1.5% and 4.5% boundaries.

This is a clear success of the economic objective, with the UK now in its 14, consecutive year of economic growth – the longest period of sustained growth in UK history.

Not only this, but the growth rate has also remained within the sustainable and stable boundaries of about 3% ± 1.5% either way. This has meant that the economy has been one of the least volatile of all developed nations.

International Comparisons

To truly see how well the government have managed the UK economy, comparisons must be made with other world nations which are our competitors in this global marketplace.

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Source: http://www.tutor2u.net/economics/presentations/ukeconomyunderlabour/default.html
GRAPH 4: UK and European Economic Growth (%)

When comparing the UK and Europe data, it is clear to see that while sustained positive growth has been common, the volatility of the European economies is far greater than that of our own. The government appear to have led the UK economy on a more balanced path, with lower peaks and shallower slumps.

This shows that the economies of other nations have also had a sustained growth period, and this is also the situation across the world economy.


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Source: Created using data from http://www.imf.org/external/pubs/ft/weo/2006/02/chp1data/FIG1_11.csv
GRAPH 5: World Economic Growth during the latest decade.

Looking from a global perspective, Graph 5 shows that world economic growth has consistently been positive over the years of the current government. The world economy has been strong and this global strength has been very influential in the ease with which the government has been able to keep our economic growth stable and keep the economy out of recession.

It is worth noting, however, that world growth is higher than that of the UK. Many developing nations, such as China, have very high rates of growth as they industrialise and ‘catch-up’ with western economies. The UK is already developed and rates of those catch-up countries would be unsustainable for our economy.

Over Time

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Source: http://www.tutor2u.net/economics/presentations/a2economics/macro/EconomicCycle/default.html
GRAPH 6: UK Economic Growth since 1980s

When looking at a time period, here the Labour years, it is important to look at the economic history preceding this time. In the early years of the 1980s and then again in the early 1990s the UK experienced negative economic growth, with a deep recession and a 4% shrinkage in output.

The economy then rapidly recovered, with a boom situation, before another sharp fall and recovery. This cyclical pattern, mentioned already, was the boom and bust system that became a repeating, painful feature of the economy.

It is clear from Graph 6 that the large fluctuations that appeared in the late part of the 20th Century, have been greatly levelled out, with much less variation and a sustained positive rate of growth – which itself has been fairly high.

There have been changes in the speed of growth and that is to be expected of a free market economy, but the government’s achievement is the removal of the cyclical change that was very apparent in the economy previous to their election to power.

Recent changes

The UK government has presided over a long period of the UK economy, and as shown above, the results have been inline with global patterns and they have been successful in their aim of keep the economy in positive growth.

However, more recently a number of external shocks in the global economy have hit, and its stability is now a worry for many people.

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Source: http://www.statistics.gov.uk/cci/nugget.asp?id=192
GRAPH 7a: UK Economic Growth by quarter

Source: http://www.bankofengland.co.uk/publications/inflationreport/irfanch.htm
GRAPH 7b: UK Economic Growth predictions fan chart

Economic growth in the UK for the first quarter of 2008 was 0.3% (Graph 7a), a 3 year low since the first quarter of 2005. Since then, in the second quarter of 2008, growth has halted with a 0.0% change in GDP for the three months to June.

This is a worry, as unemployment rises, consumer spending slows and inflation continues to rise with large price rises in fuels and commodities caused by increases in global demand. When these are global products in a global market, it is very difficult for our government to have any effects on prices.

The very high cost of borrowing, due to our Banks worrying about their liabilities, has created a credit crunch where people cannot borrow to spend (as has happened over recent years) and a dramatic fall in the supply of mortgages means demand for homes has slumped. Falling demand causes a fall in the price level, and with negative equity in their homes, many people, rightly, feel significantly less well off and are, as such, less likely to spend.

This is combined with slowing consumer demand and rising inflation, and risks falling into a period of ‘stagflation’ where growth is very slow and inflation is high. These two situations together make the situation very difficult to manage.

Growth is on a downward trend (Graph 7b), and there is now a likely chance of it falling into negative values and sinking to a recession. While the external shocks are outside of the control of the government, their handling of them will greatly affect how long, deep and painful the, possibly, impending recession period may be.

Evaluation

The government has managed the economy well, creating an extended period of stable growth which was not seen in the earlier boom and bust times before Labour came to power.

The macro-economic government policy which has been responsible for this is difficult to pin-point, however an independent Bank of England may have made better, less political monetary policy decisions and this has been backed up by the government’s fiscal policies. The strong growth has been powered by spending, from the government, business and households. The level of spending has, perhaps, been too great and more encouragement towards saving, especially for the government, should have been implemented.

Some say Labour has simply taken the credit for this period, those such as Ken Clarke, Chancellor of the Exchequer between 1993 and 1997, who refer back to the years before 1997 where he insists the foundations for a stable economic climate were laid by the previous Conservative government.

Our growth, however, has been global and such an economic climate has meant that the UK has faired well as part of the global economy. The UK has performed well though, better than many other nations. This, if not the stability, is more likely to be due to the government actions.

After a strong period of economic management, their record for successful management of the economy has recently come under threat, with increased external threats to our stability. Growth for 2009 is predicted to be only 1%, with a strong possibility that it could be less – a large fall from the strong, sustained growth this government has achieved so far. But looking forward to 2010 and 2011, the growth may recover, and this recessionary period may turn out to be only transitory.

Please note that this was written during Summer 2008, before the worst of the economic problems of the following months