ECONOMIC RECESSION

UK Economic Downturn

UK Economic Downturn

Introduction

In this assignment I will be discussing the factors that caused the global financial crisis of 2008/2010 and will be evaluating the impacts of the crisis on the UK economy. Firstly a recession is defined as a period of negative economic growth for two consecutive quarters. This means there is a fall in National Output and National Income. Inevitably a recession will involve higher unemployment and an increase in government borrowing. The financial crisis of late was caused by factors including, subprime lending, complex financial systems, greed, high oil prices, globalization and the collapse of the Lehman brothers. All of these factors will be explored throughout. The GDP growth rate is shown in the graph below:

Discussion

Sub-prime Mortgage

Subprime mortgages are a big factor when talking about the recession. These are borrowers who might be less likely to repay a loan and therefore default. Subprime borrowers may be classified as subprime. Banks offered loans to people in the subprime category often putting more interest on the loans as they are a greater risk for the bank however the banks were happy to take on the risk as they could receive a greater interest rate back. This subprime crisis in the US spread to the UK and in 2007 Northern Rock the fifth largest mortgage lender at the time, needed emergency money from the government due to investors not investing in Northern Rock as they didn't like the risk of the subprime borrowers. This news had big effects on the economy as it caused interest rates to rise making it harder for people to borrow and pay back loans. This was the first time the bank of England had lent money to a firm since the 1970s. This showing how big a part the subprime mortgage crisis played in the financial crisis. Many other banks across the world were affected by the subprime mortgages such as the Swiss Bank UBS the world's first top-flight bank. UBS announced a $3.4bn loss from sub-prime related investments.

Oil Prices

Another big factor playing a part in the financial crisis was the price of oil. In January 2006 the oil stagnated and with consumption at a high demand and a big demand from a growing China which had 9.6% growth in 2006. This drove prices to $100 per barrel which was at $42 in 2005. This having a huge effect on the economy even affecting the staple foods price which escalated due to the increase price of crude oil. With prices rising for all goods and services and people decided not to spend due to the increase in price of goods. This would to prove a big factor in the cause of the fanatical crisis.

Globalization

Another factor influencing the economic downturn could be caused by globalization. With the world trading all goods and banks working on an international level all countries have failed at the same time and has had bigger effects. On September 15, 2008, a shock wave flowed through homes and business ...