The UK economy depends on global events because it has close trade ties with other countries. Cashfloat explores the role of the global economy in the UK financial crisis of 2008.
The Global Economy & the UK
Before the financial crisis of 2008, the UK economy benefited from a rise in the services sector. This promoted excellent growth in the two decades preceding the crash. However, output production declined, so the credit crunch destroyed the financial services sector. The damage was so devastating that the UK could have had a much worse recession than it did. Luckily, the government stepped in with measures to prevent further economic collapse.
The global economy affected the UK in the 2008 crash in three aspects. The first was trade. When the number of exports from the UK fell, and imports became more expensive, it led to economic decline. Second, the crash immediately affected the amount of credit available through financial trading. Third, the global financial problems sowed widespread uncertainty. This instability in the market seriously affected the economy. The financial meltdown drew a clear connection between UK financial policies and the global financial scene.
How World Events Affect Financial Policies
The Bank of England’s Monetary Policy Committee monitors the economic situation in the UK. They decide how to counter the effects of world events on the UK economy using different financial strategies. So, as exports fell and borrowing costs increased it was up to the government to stop the collapse. They introduced several policies, including lowering interest rates and propping up big banks.
Tightening credit falling prices for commodities shaped economic policy after 2007. The 2010 Eurozone crisis also slowed down exports. The government feared that UK banks had too much exposure to the euro, so they pumped them with more money. This squeezed credit even tighter while the housing market was still suffering from the credit crunch.
The biggest response to the world events was the sharp drop in interest rates from 5.75% in 2007 to 0.50% in 2009. Next followed a series of quantitative easing to further boost the UK economy. In 2012, the government created the Funding for Lending Scheme to kick-start more bank lending. As a result, the UK has suffered less than some other economies also shaken by world events.
Managing the Effects of Global Issues
Many other world problems besides the financial catastrophe of 2008 affected the UK economy. Changes in other countries’ fiscal policies can affect UK trade and tourism. Production in the global economy can also affect the supply of commodities which affects the UK. The global financial system severely affected the UK economy in 2008. However, the flexible exchange rate in the UK helped minimise the consequences somewhat. The exchange rate could depreciate, so exports could improve and help the economy recover.
