Is Britain in danger of going bust? – Personally, I do not think so…

Britain is officially in recession, and many are concerned if it is close to the stage of bankruptcy. The reasons for possible bust can be either the debt of banking system, either the debt of the state.

Those who argue that UK economy will bankrupt because of the private banking sector foreign debt say that it is over 4.6 trillion pounds, and with the depreciating currency British banks will be unable to repay it. It is true, but if we consider fact that that 1.5 trillion of those assets is held by the UK banks, and that the banking system has foreign currency assets, we can see that the UK is not likely to bankrupt because of it.

Other argument of people who have pessimistic attitude towards British economy, is that it will run of buyers of its debt as the sterling is loosing its value. Yet there is still plenty of potential buyers of governments debt, and it is sold on very low rates, so it is not very likely that the demand for it will dry up soon. Politicians are not planning to increase the interest rates in order to protect the value of pound, so there is no threat of further weakening of the economy.

Why is the pound falling, and does it matter?

It is hard not to be aware of the huge depreciation of pound sterling. Since June 2007 it had fallen to dollar in by 25%. What are the causes and outcomes of this occurrence. In this essay I will quickly outline impact of the recession, balance of payments and the strength of Euro on the depreciation of Sterling. Than I will show how it is likely to influence the UK economy.
The recession is the most important cause of the fall in UK’s exchange rate. Firstly, it is the reason for the MPC had to radically lower the interest rates – as wanted the banks to lend more money. This lowered the demand for the Pound. The expectations are also important factor in the currency exchange market. As the recession hit UK economy most severely, as it is in big percentage depended on the financial services, investors and hedge funds will invest in currencies of economies that are more likely to recover quicker. It is worth considering the fact that there is probability that the Bank of England is going to release more money, to save the economy. This also discourages the potential investors to buy more pound.
Another reason for the depreciation of the Pound is the growing current account deficit that has been increasing since 2007. It causes outflow of foreign currencies form the UK economy, and increased supply of the pound.
In discussing the factors determining the value of the Pound, we have to take into consideration that in last few years, Euro has been getting stronger and stronger, even though its value had declined during the recession, it is much more stable than Pound.
The effects of the depreciation of the UK currency have impact on many domestic markets on the housing market, on tourism, on the educational market, as it is one of the most important determinants of the current account.
As the decrease of value of Pound makes the exports cheaper and the imports more expensive, it probable that there will occur decline in the trade deficit, but this depends on how much spare capacity have the exporters and what is their marketing potential. Those who might gain from the weak pound especially are the Universities as there service is very price elastic – as the students are group that does not have much disposable income and often depends on there parents money. Another group that is likely to gain from the weak Sterling is the tourism industry.
Depreciation of Pound might lead to increase in house prices, as they might be relatively cheaper to for a foreign buyer, it depends on expectations, and forecasts – if people will expect Pound still to be depreciating, they will not invest in the houses in England.

Who else gained on recession, and why?

The recession is part of the economic cycle, in which there is a severe contraction of capacity of the economy. Because of this many sectors of economy might suffer. Even though some might gain from the occurrence of changes typical for recession. Here I will discuss those who gain because of increased demand for inferior goods and those who gain because of the increased demand for services that help saving money.

As noted earlier, recession might cause augmentation of demand for inferior goods. Those are i.e. busses, trains, low quality food (as mentioned in the Telegraph article). People who provide those goods are most likely to gain during the recession. A typical example of that would be the Leaderprice – chain of supermarkets well known from its low prices. The domestic tourism can be putted as an example of an inferior for which demand is likely to soar.

People who provide services and goods that may make production process or consumption cheaper might also gain from the recession. Good example are services like e-bay, which provides second goods for which demand is soaring during recession. Good example are layers, for whom demand has grown due to the increasing amount of bankruptcies, insolvent clients of banks. To deal with problems the are most likely to hire a layers.