2008 Financial Crisis---Summary

2008 Financial crisis impact on UK such as never previously existed. The continuously worsen situation led UK’s government and Bank of England substantially hard to guard against the wave of the economic recession. A new tide of trade protectionism, government financial rescue policies and incentive economy plan cannot effectively prevent economy in a short term from continuing to deteriorate.

After the research, I draw this figure 7 below to show the relationship between parts of the main financial crisis factors as a summary.
         Figure 7: The process of a vicious circle during recession

In conclusion, as financial crisis started in the beginning of 2008, sterling exchange rate depreciated more than 7000 points until end of 2009, which affected the trading of both exports and imports more than 20%, while imports and exports were both decreasing that we can easier to understand that many firms would receive less and less orders which in turn caused firms to layoff staffs or even have to en-fronting the possibility of go to bankruptcy. After that, unemployment rate increased sharply typically around those 18-24 young people group, when people lost their jobs, they started to cut spending and could not afford the high mortgage loan. Borrowers were facing the situation of defaulting the contracts. Banks and mortgage intermediary unable to suffer the loss either. Some banks have to ask for help from the government who agreed to conduct bailout plans, nationalizing by buying their stock and also use monetary policy of quantitative easing to save the market. As government try to rescue the banks and house agents, investors have already doubt UK’s economy strength and do not have enough confidence to invest in UK, since then financial crisis would go through such a long series to recover.

2008 Financial Crisis--- Impact on UK House Prices

Financial Crisis impacted significantly on UK's house prices. In recent years, the house price has rosen skyrocketly and reached an unprecedented level till 2008. With a continous trend of unbrokensies in property values since the deregulation, the mortgage markets became profitable and attractive to banks around the world. Lenders were offering loans that actually more than six or seven times of borrowers real incomes and also more than the face value of their underlying properties, which forshadowed the excessive risk along the property market.
Put it another way, such unreasonable boom has already portended the real estate bubbles would explode in a near future.

                                   Figure 5: UK annual house price rates of change (all dwellings)
                                   12-month percentage change

                                      Source: Communities and Local Government House price Index   
               
The graph above shows that UK's house price decreased sharply from 2008 to 2009 by 25% after financial crisis and moved up until the middle of 2010, and then decreae to the average point in 2011.
According to Halifax House Price Index, I made a table to show how house price changed in Northern Ireland.
         Table 1: Northern Ireland house price index (Halifax House Price Index)

From this table we can clearly see how financial crisis impact on Northern Ireland's house price. There is a dangerous house bubble after 1998, and this bubble getting bigger until 2007 where arrived its peak (31.1% higher than 2006). As predicted, Northern Ireland's average house price decreased by 19.6% in 2008 and cannot stop dropping by 13.17 each year until 2011. Large abruptturn totally shows that financial crisis has strongly impact on Northern Ireland's average house price.
In addition, during my research I find out that UK's Luxury houses (value above 4 million pounds) were sold out with 40% more than last two years' price. Rich people invest into luxury houses instead of deposit their money in bank is apparently for the purpose of avoiding financial institutions' default risk. 'This crisis of confidence led to major liquidity problems for many banks and insurance companies worldwide.' (University of Liverpool)
Besides, as far as I concerned, Gold once became the safe-haven investment paradise for the past few years with a stable appreciation path.
                        Figure 6: House price changed in UK from 2008 to 2011

                               source: House price index- May 2010

The figure 6 shows the change of house price around UK between 2008 and 2011. Obviously all regions' average house price dropped remarkably in both 2008 and 2009, even more serious, high level house bubble exacerbated Northern Ireland's house price fell prominently. Since its average house price rose sharply before 2007 which is the fastest house price increased and highest averge price in the UK outside London and south east. Poorly, figure 6 gives the information about Northern Ireland's house price that decreased around 35% in two years while its averge house price became the lowest of any region in the UK.

Martin Ellis, housing economist at Halifax said: "Northern Ireland has done particularly badly as much of the sharp gains in the years prior to 2007 have since been reversed."

With continuous downwards trends in property market, most investors stated that they would still keep pessimistic attitude to the unpredictable house price. Expected weak economy and high pressures with household's budget put average house price decrease even further.

2008 Financial Crisis--- Impact on Unemployment Rate

2008 financial crisis gave rise UK's unemployment rate to increased from 5.1% (2008) to 8.4% (2011). Nevertheless many economists have predicted that UK's unemployment rate would climb up to 9% in the end of 2012. The following figure reveals the rates' changing in recent years.
                     Figure 3: Unemployment rate- Seasonally adjusted data

                                Notes: Data collect from eurostate

As we can see from the figure 3 above, the unemployment rate was floating back and forth in a range between 4.3% to 6% from 2000 to 2008. Right from the spring of 2008, it went straight up to 8% just within one year and deteriorated to 8.4% till 2011 where still didn't show any obvious improvement until end of the same year. According to Financial Times statistics, unemployed staff in the whole country rose from 48,000 to 2.7 million in the end of last year, also a biggest jump since 1992. "These numbers are truly horrendous and much worse than I had feared," said David Blanchflower, a labour market expert and member of the Bank of England's monetary policy committee.

'British unemployment today posted its biggest rise since the country's last recession 17 years ago as the financial crisis filtered through to the jobs market.' (Julia Kollewe and Ashley Seager, 2008) Last world-wide economic crisis broke out in 1992 and the globe market was extremely weak at that time. The similar situation happened after 2008 financial crisis, large number of graduates were facing a much tougher and ever most competitive recuitment market, not to mention to find desirable jobs. Thousands of jobs are being lost in even top firms, where banks have merged or collapsed or nationalised, and on the high street, where growing numbers of retailers are going bust,  left the remaining staffs to complete the workload of three employees on one person. There were not enough job plces to fill up job seekers. Many young people prefer to stay at home and rely on claiming jobless benefits rathern than giving another try which would apparently increase the burden of government deficit. Another trend is some students decide to continue study master courses during economic downturn series in order to give more room for securing jobs. As the vacancies number shrink, it will be more and more difficult to get people back into work. It will not simply be a case of retraining the unemployed group of people if there are not enough jobs for them to return to.


The figure 4 below shows the number of people who are unemployed from 1992 to 2011.
               Figure 4

It reveals that UK's unemployment rate in 2011 almost equal to the figure in 1992's recession. Some economists are suggesting the government to deal with this issue by imitating the rescue solutions in 1992 (drop UK's foreign exchange rate) to stimulate UK's financial market.

2008 Financial Crisis--- Impact on Imports and Exports

UK’s export and import increased almost ten years, however this situation totally changed after 2008 financial crisis. Recession led many developed countries face a serious financial problem. Financial crisis also cause world industry index glide. Many countries imports from UK might not absorb as before, therefore UK’s world export of goods and services decreased by 22.1% in USD. Financial crisis has hit hard trade in UK, therefore UK’s government able to protect local industries which issue protection policies to reduce imports, and this could reduce competition for local business, since then UK’s imports decreased by 22.5% in USD.
                        Figure 2: total UK Exports, Imports and GDP, 1980-2009, Million USD

               Source: IMF and WTO GDP figures shown on right-hand axis, all in current prices.

The graph shows that UK’s exports, imports and GDP all increased from 1980 to 2008, and decreased dramatically in the July of 2008, the reason why the whole figures not decreased right way since financial crisis happened, because companies received orders may earlier than the crisis, so after factories finished their orders, UK’s exports and imports both decreased immediately. As mentioned in first blog (2008 Financial Crisis---Impact on UK Exchange Rate), sterling decreased more than 7700 points, and this is one of the main reasons why UK’s imports dropped almost one fifth of the total amount in a short time. In general, when sterling worthless, UK’ exports should be increase, however exports declined 22.1% which only 0.4% lower than the imports. I do believe that EU countries and the USA both tried to reduce imports to keep their local business maintain a momentum of healthy development and these structural led UK’s exports dropped, the reason is more than 60% UK’s exports transactions to the USA and EU countries.

In a short, the UK’s premier Cameron promised too much when he suggested that a stimulus package would keep the economy ‘health’. However, the speed of recovery is still slow than his promise, the repid deterioration of the situation is not a good information for people revise UK's emergency economic outlook.

2008 Financial Crisis--- Impact on British Exchange Rate

As far as I know, 2008 financial crisis gave a strong impact to the UK's economy and financial market. The growth rate decreased sharply from the end of 2007 until 2009, there was a large fall in retail sales, massive companies went to bankruptcy which led to a substantial high unemployment rate especially in the 18-24 age group. Severe reduction could not be ignored in both personal and corporate credit besides a rapid downturn in the housing and construction markets. Since then, British sterling exchange rate depreciated dramaticlly just like the year of 1992 (black Wednesday).

As we all know, financial sector is one of UK’s core industries. Since UK’s economic scale is smaller than the USA, when crisis happened, it would absorb stronger adverse impact than the USA. The truth is UK’s financial system suffered a crushing blow.

This economic phenomena can be distinctively reflected on the forein exchange market during 2007 to 2009. As far as I concerned, exchange rate floating is highly sensitive than any other financial derivatives, high risk shifts in high profit. Most of the instant financial affairs and information can be reflected on the exchange rate immediately, it could be a deep gap in even one minute, not to mention a global financial crisis.
                      Figure 1: British sterling exchange rate (2002-2012)

source: Financial Times, 2002-2012 £/$ currency pair yearly change        

As we can see from the figure 1 above which the sterling and US dollar curreny pair exchange rate is based on yearly changing. between 2002 to 2012. The sterling exchange rate towards US dollar on 5th Nov 2007 is 2.12$/£ which decreased dramatically to 1.35$/£ on 19^th January 2009, GBP sterling dropped nearly 7700 points, 27% within one year and a half, the largest decline since 1971. I think nobody could ever anticipate such a steep decling even in the middle of its endless decreasing and never could they make a guess of its ending point. Some of the trader in the foreign exchange market might have seized the opportunities to sell on sterling and gain profit, however, some may be forced to liquidated without correct risk hedge and management.


''There are emerging signs that the worst may be over, although recovery is likely to be slow.'' (John Kitching, 2009). All the passive information indicated that UK would go through a long-term Great Depression series after financial crisis. While three years afterwards, it looks like UK’s economy embarked on a slow but steay recovery road.


Sterling exchange rate reached its lowest point in March 2009 and climbed up slowly with the same pace of economy recovery resistantly. The devaluation of pound results in significantly reducing of tuition fees for foreign students planning to study in UK, shrunk the prices of luxury goods. How is the the huge depreciation in sterling had affected on UK imports and exports? This will be debated in coming posts.