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    “Future resources of economic growth” – By: Ayesha Hashim 

    “Future resources of economic growth” – By: Ayesha Hashim 

    The impact of the recession, which has affected the UK and other developed nations, is expected to linger, although signs of recovery are emerging globally and domestically. Historical data suggests that economic downturns linked to banking crises result in long-lasting effects on potential output, characterized by slow growth recovery due to declines in capital and human capital stocks. Recovery from such downturns is typically hindered by sluggish business investment and credit growth. However, in the long run, recessions can stimulate productivity by reallocating resources to more productive sectors, fostering innovation and entrepreneurship, and enhancing human capital through increased education and training opportunities. Looking ahead, macroeconomic forecasts indicate a shift in expenditure composition towards business investment and net exports, reflecting a rebalancing of demand away from consumption and government spending.

    In 2009, private household consumption experienced a contraction, but it is estimated to have grown by 1.1% in 2010. However, due to modest increases in real household incomes, the forecast predicts a 1.3% year-on-year growth in household consumption for 2011. This growth rate is expected to accelerate gradually, reaching 2.2% by 2015, although it will still lag behind GDP growth each year until then. Despite this, private household consumption is anticipated to contribute positively to annual growth throughout the forecast period, albeit less than before the 2008-09 recession.

    Meanwhile, general government consumption and investment, which expanded in 2009 and 2010, are projected to decrease annually in the coming years due to the government’s fiscal consolidation efforts. Both measures will grow slower than the total economy’s GDP until 2015.

    Business investment, which plummeted by nearly 19% in 2009, is estimated to have grown by approximately 1.3% in 2010. The forecast anticipates a robust growth in business investment of 7 to 10% annually from 2011 to 2015, averaging at 9%. This growth is expected to outpace GDP growth significantly during this period, contributing positively to GDP growth each year starting from 2011.

    Net trade contributed positively to growth in 2009 when domestic sources of growth were contracting. However, it subtracted from growth in 2010. The forecast predicts a positive contribution from net trade in 2011 and each subsequent year until the end of the period, driven by the recovery in global trade and the continued depreciation of the sterling.

    The UK’s long-term prospects are influenced by ongoing changes in global demand and supply, driven by factors like globalization, technological advancements, and competition from emerging economies. While sectoral forecasts are challenging, trends such as the shift from manufacturing to services are expected to persist, with a focus on knowledge-intensive sectors. UK’s strengths in publishing, finance, business services, and information technology are likely to endure, supported by rising global incomes. Innovation will be crucial for competitiveness, across the entire value chain, amid increasing global competition, especially in lower-wage, lower-skill activities.

    Increasing specialization will elevate the importance of specialized skills. Investment in intangible assets will grow in significance, with a decreasing emphasis on physical investment. However, investment abroad to tap into emerging markets is expected to rise. Despite the 2008-09 recession, employment declined less than output, attributed to real wage moderation, flexible work hours, and a willingness to take on part-time roles. Unemployment rose less than anticipated, with forecasts predicting employment to surpass 30 million by 2015, driven by growth in market sector employment outweighing declines in general government roles.

    Ayesha Hashim 


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