Globalization has bought the world together and thus it forms a more integrated societies and businesses. On one hand these business get a boost from industrialization similarly on the other hand they face problems all together. After the great depression of 1930’s business were effected in 2007-2008 financial crises much immensely. However, the financial and economic crises are likely to increase significantly as predicted by the International Monetary funds in its economic forecast for global growth of 2016-2017. The economic crises have severely affected the manufacturing sector of the country. This report has highlighted that business downturn due to the declining prices of oil in the international market and certain internal problems such as reduction in skilled employers, debit financing and decrease in number of employers. This situation brings down turn in business and thus it would ultimately affect the final consumer, with price hikes and reducing the purchasing power. Therefore, aim of the following essay is to identify the challenges laid by Global Economic vulnerability on the organizations of the United Kingdom.
The “globalization” term became common in the late 1980’s, when the multinational corporations (MNC’s) were in surge of huge increase in the foreign direct investment (FDI) (Briguglio et al., 2009). Hence, FDI and MNC’s became important factors of the world economy. Thus, the great importance of MNC’s has altered the overall structure of the global economy (Kostova and Roth, 2002). Now these MNC’s became players of the international market. Thus, businesses with such huge investment also profoundly affected the global economy. This international financing linked economies because of it volatile and speculative nature it causes immense shifts in the financial movements (Luo and tang, 2007).
The International Monetary fund in its economic forecast for global growth of 2016-2017 has predicted that the financial and economic crises are likely to increase significantly in upcoming year. The report has highlighted the issue of global economic vulnerability due to decrease in oil prices and likely diminished growth prospects for world’s emerging markets. The oil prices always were one of the propagators of economic situations (Berument and Dogan, 2010). According IMF report of 2016 conducted in February 26-27 in Shanghai, China the financial turbulence has increased in the international market leading to falling prices and the economy also becomes more vulnerable to adverse shocks. The China being the second largest economy poses threat to the world economy because of its slower growth in recent year. According to the economists, this would give much weaker outlook to economic growth. However, the IMF still believes that this year the economic growth will expand to 3.4%. Therefore, there is a need of taking multilateral actions in order to strengthen economic growth and reduce the risks. These actions includes such as coordinating the international policy response, secondly an introduction to new financial structure that is for the safeguard if global financial safety net. Finally, a global coordinated initiative must be taken in order to remove the burden of refugee crises especially in Europe.
As UK is an open economy therefore it is not affected just by the domestic market but also the overall events that are taking place around the globe. The likely global economic issues can significantly affect the growth of companies in the UK market (Barker et al., 2007). In the global realm, all of the international businesses rely heavily on transacting with each other and any downfall in the global economy can negatively affect the global trade by reducing the level of imports and exports within different nations. One such industry which is heavily affected by the global crises is the manufacturing sector of UK. According to the annual manufacturing report 2015 the low note in the manufacturing sector is observed in the country is due to the heavily dependence of industries on the import of oil and UK’s trade deficit. Therefore a great concern from the economists of Britain on the renewed decline in the oil prices, around the globe as the price reduced to $27 a barrel in March 2016. The Global investments in the oil extraction firms have dropped significantly leading a discouragement in the economies such as US and Europe. Amongst other concerns include high interest rates, the fears related to economic vulnerability around the globe cuts in the government spending and also the consumer general changes in spending patterns (Melton, 2005). According to Howard Archer, chief UK and European economist view the ground realities are harsh yet there is hope for manufacturers from the modifications in government policies in order to sustain oil market and incorporating changes in interest rates in facilitating manufacturers. The UK has always had a growing trade deficit especially in manufacturing sector (McCarthy and Anagnotou, 2004).
The FDI finance the trade deficit, with the view of improving the productivity in the sector and also to sustain employment. Though UK government needs a plan for long term sustainability, in order to produce more export goods otherwise it will ultimately leads to more import goods. In current economic situation the UK needs a more proactive approach for the improvement of its manufacturing sectors, balance of trade. Otherwise the dependence on financial market and worldwide recession will don’t allow the industry to grow further (liu et al., 2000). According to the IMF report 2016, UK may severs downturn because of low productivity growth, high household debits and also the upcoming referendum in European Union membership. Therefore, there is need to increase the pace of business cycle in the country. Though, there is a need to take certain initiatives to improve the sluggish economy of the country.
The back lash in the UK manufacturing sector is not only affected due to these variable but also due to the internal variables that is causing harm to this sector. As discussed earlier with the changes in demand and spending patterns of consumer, the industry requires more responsive employees as well. The skilled labour in this sector can make it more receptive according to the customer needs. According to the UK manufacturing report 2015 there are so many vacancies available most of the respondents said of about 84% which is a huge number. These vacancies are to be filled with next generation with minimal experience. The government role is very important here, as many economists are of view that UK government has put a little effort in the vocational training and more emphases on the academic degrees. For Instance German industry has increased many folds due to the high level of training in companies (Pischke, 2001). However, there is a great need of training and development in UK for the upcoming generation in order to increase the industries efficiency and productivity.
With the problem of unskilled labour however, many of the company owners are reluctant due to the uncertainty in world economy therefore, the margin of growth declines. As Bloom (2009) incorporated that because of uncertainty firms and households take a step back and adopt a more comprehensive approach of “wait and see”. In this approach, firms delay investment and also cause pressure by the investor for greater compensation as more risk involves (Blanchflower et al., 2007).
There is a need to improve the channels that have significant effect on UK manufacturing sector. The changes that are caused due to the flow of goods and services across boarders come under the trade channel. The world shocks, such as oil prices discussed earlier, can significantly affect the business, the price hikes in turn effect the firms cost, which will be increased and further push pressure on squeezing the purchasing power of the customers in the country (Blake et al., 2003). As, this global economic vulnerability contributes negatively in manufacturing businesses by decreasing their level of selling and can affect profitability negatively. Moreover, the level of income of household can also fall, which can affect the purchasing power of people negatively (Blanchflower et al., 2007).
The financial channel underlies the exchange of financial assets across nations. This channel allows a flow of financial assistance to the firms across countries and helps in boosting global economy (Krkoska, 2001). Nevertheless, in time of strain the business passes on certain shocks too and importantly in manufacturing sector. This channel affects the UK economic activities and also has impact on the business investment and house consumption (Blake et al., 2003). As the system of UK is credit landing as discussed previously, in which if a certain economic shot observed in any part of the world may weakens the demand condition in that nation further the banks led with much of non-performing loans.
As with the interlinked economies, IMF urges for bold actions taken by G20 countries in order to boost global economy. In order to reduce vulnerability of the national economy, there is need to solve global issues as well. The IMF report suggests that countries need to implement the growth strategies that are made in the Organization of Economic Co-operation and Development (OECD). Another major issue that has affected many European economies is the refugee flow in these countries due to the gulf war (Caspi et al., 2016). Recognizing it as a global issue there is a need of multilateral agencies funding and their perspective in future will help in solving the problem.
The economic disturbance in the economies needs to be restructured as to minimize its effect. There are certain sources if they are streamlined that would help to reduce the economic shock. Although the UK political economist builds much shock absorbent economy after the depression of 2007-2008 but nevertheless there are still things that need to be done in order to improve the economic situation of the country. According to Chowla and Rachel, (2014) the world is full of events and each of which is interlinked, therefore there is a need of adjusting the behaviors and situation with each ‘shock’ in a slightly different way. They classified into different categories. It includes the demand, supply/price shock and the world financial shock. According to Killan (2007), the demand shock is associated with the changing pattern of the spending. It may be caused due to any reason as the demand shock certainly changes the pattern of spending, hiring and investing. Similarly the world price or supply shock comes from the production sector where the supply of goods and service are affected by the global economy. Certain Events that unexpectedly decrease the supply of certain goods and service which in turn creates the price hike. As the study of Reinhart and Rogoff (2009) indicated that financial crises is largely incorporated from the slower recoveries of financial lending which creates such devastating situation in world economy. Similarly the Hills, Thomas and Dimsdale (2010) also presented a similar stance in this regard they incorporated that financial lending is the cause of crises and also it further propagates it.
Being UK as an advanced economy it is indeed the need of the economy to adopt practices to minimize such shocks. As UK exchange rates are much flexible that would help the country in such alarming situations (Hills et al., 2010). Advance economies such as UK nevertheless is much more aware of the present situation and also takes steps in being flexible and less vulnerable to the economic shock.
The UK needs to revise the current structure of economy and it needs to take initiatives. As with current situation in the manufacturing sector, UK needs to put significant influence on this important and productive industry. Incorporating major concerns such as trade deficit, oil dependence of the country and the unskilled labor give an idea that the manufacturing sector have been shrinking. The government, in order to sustain economic growth, must offer different growth strategies in sector which can result in sustained and long term economic growth. As being aware of the economic downturn around the globe, there is a need for revising the economic structure of the country. UK is an advance economy and the country has taken steps in order to be less vulnerable to economic shock and be more flexible in order to safe guard its economic position. Being the world as integrated society, an event take place in any part of the world the repercussions needs to be faced by every society. Though with better policies and practices the negative repercussions affects can be minimized.
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