Impact of the Global Financial Crisis (2007-2008) on the UK Economy

This report provides a detailed analysis of the 2007-2008 global financial crisis and its profound impact on the United Kingdom's economy. It begins by outlining the causes of the crisis, focusing on the subprime mortgage market in the United States and the subsequent collapse of financial institutions like Lehman Brothers. The report then examines the crisis's effects on the UK's financial markets, including the collapse of Northern Rock and the nationalization of other banks. Furthermore, it assesses the role of monetary and fiscal policies implemented by the Bank of England and the UK government to stimulate economic recovery. The report analyzes key macroeconomic indicators, such as economic growth, unemployment, and inflation, to evaluate the UK's performance since 2009. Finally, the report provides an overview of current trends and directions for the UK economy, offering recommendations for future growth and stability.

2007-2008 Global Financial
Crisis

Executive Summary
In the following report the impact of global financial crisis on the economy of United Kingdom
will be analysed. The causes of global financial crisis analysed by analysing the data acquired
from secondary sources. The impacts on financial services and institutions of United Kingdom
will be assess by analysing the impacts of global financial crisis. Further, the role of monetary
and fiscal policy has been assessed in this report. The performance of economy of United
Kingdom after 2009 has been covered by analysing macroeconomic indicators. Eventually the
current trends and directions of national economy of United Kingdom has been analysed in this
report.

Table of Contents
INTRODUCTION...........................................................................................................................1
To discuss the run up to and causes of the Global Financial Crisis.................................................1
Global Financial crisis.................................................................................................................1
Causes to Global Financial crisis................................................................................................2
Global Financial Crisis and its impact on financial market.............................................................3
Impact on financial market of United Kingdom.........................................................................3
Monetary policy and fiscal policy used to stimulate United Kingdom economy towards recovery
..........................................................................................................................................................4
Monetary policy..........................................................................................................................4
Fiscal Policy................................................................................................................................5
Indicators of Macroeconomic demonstrating recovery in United Kingdom and Performance of
UK since 2009..................................................................................................................................5
Macroeconomic indicators detailing recovery in UK.................................................................5
To discuss trends, directions and provide advice for the future......................................................8
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

Illustration Index
Illustration 1: Economic Growth of United Kingdom.....................................................................5
Illustration 2: Public Sector Investment in UK ...............................................................................6
Illustration 3: Unemployment rate in UK........................................................................................7
Illustration 4: Inflation Rate in UK..................................................................................................7

INTRODUCTION
Since the great depression of 1930s, the financial crisis of 2007 and 2008 was considered
as the worst financial crisis of 21st century (Ntim, Lindop and Thomas, 2013). It was also known
as global financial crisis and affects superpowers like United States of America and European
countries. In accordance with this context, this report will cover the aspects of global financial
crisis and its causes. The impact of crisis on the financial markets of United Kingdom will be
discussed in this assignment. Further, the role of monetary policies and fiscal policies of United
Kingdom will be assessed in recovery of the economy. The variables of macroeconomic will be
discussed and the performance of national economy of United Kingdom will be evaluated in this
report after 2009. The trends, directions and recommendations will be provided so that nation
can move forward towards growth and development.
To discuss the run up to and causes of the Global Financial Crisis
Global Financial crisis
The global financial crisis embarked in August 2007 with a crisis in the sub-prime
mortgage market in United States of America. Sub prime mortgage is the type of loan which is
provided to the individuals who want to purchase real state or house but have difficulty in
maintaining the repayment schedule (Bourkhis and Nabi, 2013). In United States, the financial
crisis begins with the collapse of one of the biggest investment bank named “Lehman Brothers”
on 15th September 2008. Banks have created ample amount of funds and providing loans for
mortgage purpose. This increases the price of houses and real state sector of the country. Thus,
the flow of money from buyers blocked and the loan takers were unable to repay the loan to
banks. This increases the financial crisis in banks and leads to huge recession in the country. The
immoderate risk taken by banks and financial services like Lehman Brothers enlarge the
financial impact globally.
In European countries, the debt crisis in the banking sector using the euro currency
followed later. In 2007-2008, the banks giving loan approval rates was high, which attracts
ample amount of homebuyers. This led to increase in the price of housing and real state sector.
The appreciation in value led large number of homeowners to borrow against their homes as an
apparent windfall (Haas and Lelyveld, 2014). The high delinquency rates led to a speedy
downfall of the financial instruments which includes bundled loan portfolios and derivatives.
The value of these assets started diminishing and this led to increase in banking crises. The
1

individuals who gets loans from the banks was unable to repay the loan. The banking sector and
other financial services was greatly affected by this and this lead to increase in banking crisis.
This crisis impacts on the stock markets as the prices begins to fall and people who invested in
the share market faced constant and huge losses (Vazquez and Federico, 2015). The companies
of housing and real state sector faced the major loss in year 2007-2008 which results in
foreclosures, evictions and prolonged unemployment.
Causes to Global Financial crisis
There were certain causes which led to the global financial crisis in 2007-2008. The financial
crisis happened because banks were able to create too much money, too quickly, and used it to
push up house prices and speculate on financial markets. The table below shows the share of
bank loan provided to the real state sector.
Type Share
 Residential Property 31.00%
 Commercial Real State 20.00%
 Business outside financial sector 8.00%
 Personal Loans 8.00%
 Financial Sector 32.00%
2
31.00%
20.00%
8.00%
8.00%
32.00%
Distribution of Loan
Residential Property
Commercial Real
State
Business outside
financial sector
Personal Loans
Financial Sector

The table shows the amount of loan distributed in residential property sector, commercial
real state, financial sector, personal loans & credit cards and business outside the financial sector.
31% of the loan has been provided to the residential property. This impacts on the real state
market economy of United Kingdom and it increases the price of housing sectors of the country.
Lending large amount of cash into the property pushes the real state market and pushing the level
of personal debt simultaneously (Bénétrix, Lane and Shambaugh, 2015). Banks charges certain
sum as interest on the loan given to the lenders and with debt has to be paid along with the
interest. As the price of real state market increases, customers tends to avoid making investments
in housing sectors, thus the lenders were unable to generate the money and eventually unable to
repay the loans. The financial crisis was primarily caused by deregulation in the financial
industry.
In August 2007, the financial market of United Kingdom, does not able to solve the issue
of increasing non repayment of subprime loans. The interbank market froze completely, due to
fear of unknown amidst of banks. That permitted banks to engage in hedge fund trading with
derivatives. Banks then demanded more mortgages to support the profitable sale of these
derivatives (Kapan and Minoiu, 2013). They created interest-only loans that became affordable
to sub-prime borrowers. But the lenders remain unable to repay the loans and thus, banks refused
to provide any other loan. This shrinks the market economy of United Kingdom. The country
was suffering from recession and high inflation rates thus impacting on the overall national
economy of the country. In the draining economy, banks refused to provide any loans whether
personal or mortgage loans thus the national economy of the country suffers greatly.
Global Financial Crisis and its impact on financial market
Impact on financial market of United Kingdom
Global financial crisis of 2007 and 2008 impacts negatively on the financial markets of
United Kingdom. On August 9, 2007 the first observable event indicating a possible financial
crisis occurred when BNP Paribas completely evaporate liquidity from the market economy of
the country. BNP Paribas freeze three of their funds, indicating that they have no way of valuing
the complex assets inside them known as Collateralised Debt Obligations (CDOs), or packages
of sub-prime loans (Nelson and Katzenstein, 2014). On September 13, 2007 The Bank of
England provided emergency funds to Northern Rock Bank so that they can sustain the financial
crisis period. As the bank was unable to generate source of income. The Northern Rock Bank
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provide loans for mortgage and residential real state. Due to increase in sub prime crisis, the
lenders was unable to repay the loan on time and thus led to increase in bank crisis.
On 17th September 2008, Lloyds Banking Group announce a 12 billion deal to acquire
HBOS plc which was a banking and insurance company. This impacts on the shareholders of
HBOS and the price of shares plummeted rapidly. On 15th September 2008, the biggest global
financial service providing firm “Lehman Brothers” charged for bankruptcy and the company
became insolvent. The Lehman Brother thus taken over by the Bank of America (Dimitriou,
Kenourgios and Simos, 2013). On 28th September 2008, Fortis which was giant in European
banking and insurance sector was partially nationalised. The step taken in order to ensure that the
organisation sustain in the recessional economic environment. On 17th February 2008 the
Northern Rock Bank was nationalised by the government of United Kingdom for temporary
period. Bradford and Bingley Building society was nationalised effectively by the national
government of United Kingdom in 2008. The nationalisation of the company was to provide aid
at the time of global financial crisis. Though the company was partially sold to the Spanish
Grupo Santander Bank. On 8th October 2008, the Bank of England reduce their interest rate to
4.5% to support the commercial and other banks so that they can sustain in the recessional
economic environment in the country (Reinhart and Rogoff, 2013).
Thus, the global financial crisis impacts on the financial and retail market of United Kingdom
negatively. Further, due to huge fall in retail sales, other non financial market like furnishing and
DIY sectors also impacted negatively. Many business organisations dissolve in the era between
2007 and 2008. This impacts on the national economy of the country greatly as inflation and
unemployment rates promulgate rapidly.
Monetary policy and fiscal policy used to stimulate United Kingdom economy
towards recovery
Monetary policy
Monetary policies are the policies which are formulated by the central bank of the
country. It consists of the actions of central banks, currency board and other regulatory
committee. The motive of creating monetary policy is to stabilise the economic environment and
maintaining flow of liquidity effectively and efficiently (Bordo and Haubrich, 2017). At the
times of global financial crisis 2007-2008, the Bank of England made certain transformations in
their monetary policies and provides bailouts to business giants so that they can survive in the
4

recessional economic environment. On 8th October 2008, The Bank of England reduced the
interest rate by 0.5% to 4.5%. Further on 6th November 2008, Bank of England shocks the
country by reducing the interest rate to 3%. The 1.5% reduction was one of the largest reduction
after the independence of England. The interest rates was further reduced to 1.5% in January
2009 and to 1% in February 2009 (Coulibaly, Sapriza and Zlate, 2013). The final reduction seen
in March where the interest rate was reduced to minimum level which was 0.5%. Further, Bank
of England pumps another £50 billion into the economy.
Fiscal Policy
Fiscal policies are the policies which are formulated by the government of the country in
order to adjusts their spending levels and tax rates. It is the sister of monetary policies. There
were certain transformations made by the government of United Kingdom in order to pumps up
the national economy. Government of United Kingdom introduced a temporary declination of
2.5% in Value Added Tax (VAT). The government further avail fund of £5 billion found in order
to provide training to young and unemployed youth of the country (Bech, Gambacorta and
Kharroubi, 2014). Nonetheless, the UK has significant automatic stabilisers which contributed
far more than discretionary action and more than most other countries.
Indicators of Macroeconomic demonstrating recovery in United Kingdom and
Performance of UK since 2009
Macroeconomic indicators detailing recovery in UK
The macroeconomic indicators detailing recovery in the national economy of United Kingdom is
provided below:
5

Economic Growth
The above graph shows the economic growth of United Kingdom from beginning of
2008 to 2015. From the above graph it can be understood that due to global financial crisis, the
economy of the country faced huge downfall (Ntim, Lindop and Thomas, 2013). Due to high
unemployment rate, deep recession and high inflation rates, the market economy of the country
was not able to recover effectively. Though since the beginning of 2013, the country observes
stable economic development.
Gross Domestic Product (GDP):
6
Il
lustration 1: Economic Growth of United Kingdom
(Source: Pettinger, 2017)

The above graph represent the fall of public sector net investment in Gross Domestic Product
Value of United Kingdom. The public sector investment reduced and reduction in interest rates
leads to downfall in gross domestic product value of the country (Bourkhis and Nabi, 2013).
Further, due to lack of new business investments and lack of liquidity in the market economy, the
gross domestic product value decline from 3.5% in 2009 to 1.9% in 2013.
Unemployment Rates
7
Illustration 2: Public Sector Investment in UK
(Source: Pettinger, 2017)

The unemployment rates increases in global financial crisis to 8% in 2009. Due to lack of
investments and volatile stock market positions, the organisation was afraid to invest in new
markets. Further, inflation rates impacts the customer purchase behaviours and companies
observes lower sales at that time (Haas and Lelyveld, 2014). Thus, in order to lower the
company's expanses, the management lay off ample of employees from their organisations.
Further, after the global financial crisis, the unemployment rate begin to reduce. Due to stable
economic growth and governmental interventions the unemployment reduced to 5.8%. This
impacts on the national economy greatly and effectively.
Inflation Rates
8
Illustration 3: Unemployment rate in UK
(Source: Pettinger, 2017)