Recession of 2009

United Kingdom

The rapid growth of the British economy in the early years of the 21st century had been partly due to the success of its comparatively large financial sector and to the development of a comparatively vigorous housing boom, and those factors had a strong influence upon the impact of the recession that followed the collapse of the Lehman Brothers bank in the United States. Even before that collapse, some of its banks had been forced to make large writedowns because of their involvement in the subprime mortgages crisis and there had been a run on one of them , but the banking panic that followed the fall of Lehman Brothers, threatened the continued existence of the financial system. In October 2008 the British Government announced a £500 billion rescue scheme , including powers to take equity stakes in ailing banks and an undertaking to guarantee interbank loans. An impending collapse of the UK's financial system was averted, but the surviving banks adopted a policy of deleveraging that resulted in a severe credit crunch followed by a general economic downturn. In the second half of 2008 gdp fell by 2.2 per cent with falls in financial sector output and in housing and commercial investment. The effective exchange rate fell by about 20 per cent during 2008, but its effect was more than offset by falling overseas demand, and there was also a fall in exports. Early fiscal and monetary action was taken to tackle the growing recession . A fiscal stimulus amounting to 1.4 per cent of GDP was introduced by the November Pre-Budget Report, including a temporary 2.5 percentage point reduction in value-added tax and a bringing forward of £3 billion of capital investment, and by March 2009 the Bank of England had reduced its the bank rate from 5% to 0.5% and begun a programme of quantitative easing. The UK’s national debt had been comparatively low at the outset of the recession, but there has since been a large increase in the budget deficit, which is expected to rise to over 9 per cent of gdp by the end of 2009, mainly as result of the operation of automatic stabilisers. The reduction in value-added tax appears to have had an early effect upon retail sales. The government's policy was endorsed by the IMF, but was attacked by domestic critics and (at first ) by members of other European governments .