Possible Causes of a Recession in the UK

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recession is a period of negative economic growth for 2 consecutive economic quarters. In the post war period UK economic growth has been characterized by the boom and bust economic cycles. A period of growth is followed by high inflationary growth and then a downturn in the economy. However since 1992 the UK has experienced a long period of economic growth, the longest period of uninterrupted growth this century. It appears the UK has temporarily avoided the threat of recession, but although forecasts remain positive there are many factors that could push the UK into recession.

Possible causes of a recession could include:

1. Fall in house prices. The UK economy has a strong dependency on the housing market. Most people own a house, renting is not common like on the continent. Borrowing costs are a high % of income because people take out large mortgages.

If house prices were to fall there would be a negative wealth effect which would adversely affect consumer spending and cause a fall in AD. Some people say house prices are overvalued because of speculation. However others argue the UK market remains strong because of shortage of supply and constant demand. However the housing market is very susceptible to even a small rise in interest rates. If interest rates rise it would increase mortgage costs and there would be a big fall in demand and therefore consumer spending.

2. In addition record levels of consumer borrowing means the economy is likely to be significantly affected by any rise in interest rates. The savings ratio is at an all time low. If interest rates were to rise then it would cause great pain to consumers.

3. Decline in Manufacturing sector. For a long time the UK manufacturing sector has becoming more uncompetitive with the rest of the world. Mainly because of competition from Asian countries with lower labour costs. In this sector the UK is experiencing rising unemployment, causing unemployment to go back above 5% (ILO Labour...
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