BALANCE OF PAYMENT

International Money and Finance: Balance of Payment

International Money and Finance: Balance of Payment

Current Economic Situation of UK's Economy

In the last quarter of 2011, the economy appeared to present signs of recovery from the greatest recession in decades. In the final quarter, the economy expanded by 0.1%. On the whole however, the UK GDP growth was 0.9% for 2011. Despite the greater flexibility in the labour market, the unemployment rate has increased by 0.5 percentage points to 8.2 per cent over the past year. This may reflect the impact of public sector job losses as well as firms' reluctance to hire new workers (Myers 2012; ONS 2012). This is also seen in a rise in the number of redundancies, which have picked up moderately over the past year. However they remain well below levels seen during the recession in 2008 and 2009. The following table shows the historic unemployment data and predictions for 2012.

Source: Bank of England Inflation Report, Feb 2012

Also, the inflation level has fallen from its peak in late 2011, and is likely to fall further over the coming year. At the end of 2011, CPI stood at 4.2%. Most part of the modest economic improvement was attributed to the better performance of the services sectors, the backbone of UK's economy (The Telegraph, 2010). Furthermore, the central bank's injection of £200bn was also one of the drivers of economic activity. With interest rates kept low, the economic engine of many sectors had a steady recovery.

The growth predictions for an economy depend on several factors like the level of inflation, unemployment, government debt levels and balance of payments. The greatest indicator of any economy is the level of GDP growth. It is likely to further fall in the year 2012, with GDP increasing by about 0.6%. .

For 2012, the Bank of England predicts the CPI to reach 2% (Bank of England 2012). But how fast and how far inflation falls will depend on: the balance between demand and potential supply in the UK economy; the degree to which any persistent spare capacity weighs on wages and prices; and the paths of energy and import prices (BBC News 2012). The following figure shows the inflation levels from 2010 to 2012.

The current state of UK's economy is dependent on several socio-economic and policy factors. There were many factors that resulted in escalating the economic downturn which emerged in 2007-08. These factors vary in their dimensions; however, had significant impact in worsening the economic situation. From the banking point of view, these include low real interest rates, high credit outflow, apparent excess liquidity, sub-prime mortgages, and unreliable assessment of future risks associated with lending in consumer markets (Sun, Stewart & Pollard 2011, p. 64). Hype in the market made the banks to focus on short-term earnings and an abrupt high-scale change was observed in lending without properly assessing the risk on liquidity position.

Risk-taking culture is observed in US and UK banks as considerable incline in sub-prime ...