This document discusses the UK's policy response to the recent recession, which included reducing interest rates and quantitative easing. It also discusses international regulations like Basel III that increased capital ratio requirements for banks. The UK saw smaller employment declines than GDP declines during the recession due to wage moderation and employer financial stability. Ongoing issues discussed include the Eurozone debt crisis, financial sector regulation, and the road to economic recovery.

1. EC-111 British Economy
Recent UK Macroeconomic
Trends
Dr Catherine Robinson
F26, Richard Price Building
Office Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30
Appointments: c.robinson@swansea.ac.uk

2. So, the UK policy response
•To emphasise international co-operation and co-ordinated
fiscal and monetary policy responses to help move the UK
and world economies out of recession
•a number of levers during the recession:
Bank base rate reduced to 0.5 per cent
Bailing out of some banks and finance to support the balance
sheets of the banks
Value Added Tax temporarily reduced from 17.5% to 15%
Quantitative easing of £200billion – Asset Purchase Facility by
which the Bank of England can buy corporate bonds
Car scrappage scheme
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3. Into 2009…heading into
double dip…
 But the market is still jittery (Flash crash of the NYSE in May
2010)
 International organisations meeting to define standards in
banking (BASEL I – 1980s and non-binding)
 To raise capital ratios, to improve stability in international
banking and to reduce regulatory differences globally
 BASEL III (September 2010)
 Increased the capital ratio requirements
 Insisted on new capital buffers
 Banks argued that there was a risk of a double dip as a result
 Banks consolidated and tried to diversify – also M&A
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4. And the currency markets??
 Contagion means that currencies are suffering
 Euro problems in Ireland, Greece and now Portugal and
Italy…
 Cyprus problems in the news recently
 A country that was developing via two sectors – tourism and
off shore banking
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5. How can we ensure this mistake
doesn’t happen again?
 Regulate the financial sector more effectively
 Commission a report – the Independent Commission on Banking
 Sir John Vickers
 Report published in September 2011
 recommendations on ring-fencing domestic retail banking, 1/6th to
1/3rd of banking assets to be within the ring-fence
 Competition in banking sector needs to be improved
 “Future of Finance”, 2010
 Report by LSE stars – Adair Turner, Andy Haldane and lots of
others
 Highlights that central banks and governments should shoulder
some of the responsibility for the failure – argue as yet, this hasn’t
happened
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6. Financial Services Act
2012
 Came into effect on 1st
April, 2013
 Brings Bank, FSA and treasury
under the same umbrella
 Criticised in the past for little
coordination between the
institutions
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7. Management of the financial
system
 Increasingly understood that the financial system had
changed beyond recognition from the 1980s
 Many banking investments were obscured, bordering
on illegal (Barclays fined £500m by the UK treasury)
 Libor scandal extended beyond Barclays in the end
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8. Why are banks regulated in the
first place?
 Goodhart (2010)
 Market failures:
 Monopoly control
 Asymmetric information
 Externalities (social costs to bankruptcies)
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9. What has happened to our macro
variables?
Source: Gregg and Wadsworth
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10. International variations
• Gregg and Wadsworth (2010) group countries into 5
categories on the basis of changes in the GDP and
unemployment over the recession:
 Those with small falls in employment relative to GDP (UK
and Sweden)
 Those with small falls in employment relative to
GDP, having introduced employment subsides
(Italy, Germany, Netherlands and Japan)
 Those with similar employment and GDP falls (France)
 Those with larger employment falls than GDP (US, Spain
and Ireland)
 Those with little fall in GDP (Australia)
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11. Why did the UK labour market hold
up?
Employers entered the recession in fairly good financial shape
Able to absorb some of the downturn without shedding jobs
 Total hours worked have fallen sharply and the share of part-timers
risen
 Workers accepted nominal wage moderation early on in the
recession
increased chances of finding work if they are made redundant
• The impact on productivity (and international competitiveness) and
public finances has been large; hence the cuts
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12. Cost of crisis
 The level of debt in most Western Economies is a
direct result of bank bailouts
 Severe recession
 Bank of England policy of “quantitative easing”
 Exchange rate system in Europe under threat
 Greece most obviously
 Irish IMF loan and the austerity measures
 Italy, Spain and Portugal also under pressure
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13. Slide 30.13
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Country
National
Debt 2009
National
Debt 2014
Budget
deficit 2009
Budget
surplus
required* in
2014
US 88.8 121.0 -12.3 4.3
Japan 217.4 239.2 -9.0 9.8
Germany 79.8 91.4 -2.3 2.8
France 77.4 95.5 -5.3 3.1
Britain 68.6 99.7 -10.0 3.4
G20 100.6 119.7 -8.6 4.5
*To bring respective national debts back to a maximum of 60% of GDP by 2014
Source: IMF, World Economic Outlook (various)

14. And now the Euro…
 Weaker countries within the Eurozone have suffered –
especially Greece
 No longer considered to be a good debtor
 Agreed to a range of austerity measures for the
foreseeable future in exchange for Euro bailout to prevent
national bankruptcy
 A wider EU problem
 The ECB issued €530bn of cheap loans for Banks to
ease liquidity concerns
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15. Failures of macro models?
 How come no one saw this coming?
 Well, some did (but not as many as now claim they did)
 Housing market had been overvalued for years in the UK
 Savings far too low
 Did our macroeconomic models let us down?
 Over-reliance on inflation targeting?
 Argued that MONEY is a glaring omission from existing
new Keynesian macro models
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16. There will be other
mistakes…
 Macroeconomic models will not cover all eventualities
 Abstractions from the real world
 Simplifications
 BUT still powerful tools
 A new focus on risk?
 The role of credit ratings are also under scrutiny
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17. Road to recovery
 Osborne:
 Treat the recession
 Tighten the fiscal belt – balance the budget
 Reduce government spending – rebalance the UK economy
 Encourage growth through private sector enterprise and growing
exports
 Regulatory reform of the financial sector
 Balancing the need for reform against the footloose nature of financial
intermediaries
 Balls:
 Treat the depression
 Looser fiscal policy to encourage growth
 Short term increase in government spending to get the economy back
on track
 Tougher stance on financial sector reform
Is the second policy approach viable?
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18. References
 Griffiths and Wall (2012) Applied Economics, Chapter 21 for UK financial
institutions, Chapter 30 for the basics
 Crafts and Fearon (2010) ‘Lessons from the 1930s Great Depression’, Oxford
Review of Economic Policy, 26(3), 285-317
 Drinkwater, Blackaby and Murphy (2011) ‘The Welsh Labour Market
Following the Great Recession’, WISERD Policy Brief
 A play by Julian Gough: goat futures explains the housing bubble
 For up to date information, have a look at the Economist blog:
 http://www.economist.com/blogs/blighty
 Deeper understanding in the current debates going on:
 Finance for the Future, LSE Report of 2010, available at
http://www.financeforthefuture.org.uk.
 This is really tough stuff though, so just read the summary!
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19. Review
 We have covered a lot
 70 years in about 10 hours!
 What have we looked at?
 A bit of theory
 Macroeconomic variables
 Tinbergen’s model
 Flexible targets
Keynesinan versus monetarism
Inherent tradeoff between macro variables
 Post war macroeconomic performance in Britain was not
bad, but could perhaps have been better
 What did post war Britain look like? Capital, labour,
intermediates, employment, output, balance of payments
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