Recovery refers to the ability of any economy to regain its normal growth trajectory after a prolonged period of negative performance. Recovery in economic terms entails reversing the developments that led to negative growth in the first place. However, recovery is most likely achievable where new economic policies are instituted. In the case of the UK economy, the stakeholders concentrated on achieving a balance between imports and exports in order to achieve recovery. Good economic recovery is dependent on the internal factors of the parent economy. However, in extreme circumstances, recovery may depend on external factors such as bailouts and regional-based policies. For example, Greece’s economic recovery could not be achieved through internal policies and the country had to depend on a bailout by the European Union.
A fall in the value of the British pound is likely to decrease the value of imports in the UK. Consequently, it would be more expensive for citizens to import goods from other countries especially those outside the European Union. A fall in the value of the British Pound discourages individuals to import non-essential goods thereby lowering the value of imports. For example, when the value of the British pound is low the cost of imports rises but their value remains dismal (Wade 19).
A reduction in UK labor productivity will raise the value of imports in the country. The dynamics behind this trend come from the fact that a reduction in productivity affects the competitiveness of locally manufactured goods (Hodson and Quaglia 939). Hence, the value of imports from other regions rises because they are often cheaper compared to locally produced goods. For instance, economic experts have found that a drop in labor productivity affects the most labor-intensive industries such as construction.
A weak British pound has several possible benefits to the UK economy. First, a weak pound might increase the value of the country’s exports. A weak British pound makes locally produced goods quite competitive on the international market. Consequently, the value of exports from the UK might increase as a result of the weak British pound. For example, financial experts reckon that “a shift towards more manufacturing and exports is required if a sustainable economic future is to be built” (Munoz, Stefan and Roca 882). Therefore, any positive improvements in the local manufacturing sector are a welcome development.
A weak British pound can also be an agent of economic recovery. For instance, during the most recent economic crisis in the UK, the stakeholders were grappling with the need to strike a balance between imports and exports. A weak British pound can solve this problem by lowering the value of imports whilst raising the value of exports. For example, statistics indicated that during the height of the economic crisis in 2009, imports rose by 7% while the value of exports was dropping (Baldwin 39). A weak British pound is a viable remedy for bridging an import/export deficit. A balance in imports and exports can spearhead an economic recovery.
Another benefit of a weak British pound is that it can raise employment levels. A weak British pound increases demand for locally manufactured goods thereby increasing employment opportunities within industries. In addition, a weak pound can also translate into increased demand for raw materials hence creating new jobs in the process. For example, research indicates that a rise in the export of financial services in the UK had a significant impact on both consumer spending and employment levels.
The depreciation of the British pound failed to improve the balance of trade in the UK mostly because of a rise in the export of raw materials. Exporting raw materials often neutralizes the rise in the value of exports. Furthermore, the balance of trade was difficult to achieve because the economy was on a recovery path. Consequently, the demand for imports in form of raw materials peaked as a result of revitalized construction and manufacturing needs. The currency depreciation also failed to remedy the balance of trade because at the time there was a sharp rise in consumer demand (Melvin and Taylor 1320). On the other hand, the rising level of imports increased the momentum of external trade to unprecedented levels.
The rise in taxation and cuts in public spending is most likely aimed at the need to devalue imports and value exports. Taxation levels are expected to increase the levels of employment, especially in the public sector. Consequently, the increased level of taxation can be used to stimulate the levels of domestic consumption in relation to production. Trade deficits are mostly caused by increased production and low levels of public spending. However, in the case of the UK trade deficit, the levels of public spending were up to while the rates of domestic production were low. Hence, the public was consuming more goods and services than the country was producing. Cuts in public spending will reverse the direction of the trade deficit by ensuring that individuals are stimulated to produce as opposed to spending (Beetsma, Giuliodori, and Klaassen 415). Taxation takes resources away from individuals and puts them in the hands of the government. On the other hand, the government is mandated to correct economic anomalies on behalf of the public.
Baldwin, Richard. The great trade collapse: Causes, Consequences, and Prospects, London: Cepr, 2009. Print.
Beetsma, Roel, Massimo Giuliodori, and Franc Klaassen. “The effects of public spending shocks on trade balances and budget deficits in the European Union.” Journal of the European Economic Association 6.2‐3 (2008): 414-423. Print.
Hodson, Dermot, and Lucia Quaglia. “European perspectives on the global financial crisis: Introduction*.” JCMS: Journal of Common Market Studies 47.5 (2011): 939-953. Print.
Melvin, Michael, and Mark P. Taylor. “The crisis in the foreign exchange market.” Journal of International Money and Finance 28.8 (2008): 1317-1330. Print.
Munoz, Pablo, Stefan Giljum, and Jordi Roca. “The raw material equivalents of international trade.” Journal of Industrial Ecology 13.6 (2009): 881-897. Print.
Wade, Robert. “The global slump: deeper causes and harder lessons.” Challenge 52.5 (2012): 5-24. Print.