A/A* Guarantee

7 Day Money-Back
Guarantee

500+ Grades Boosted

UK economy 'close to stalling' in July as high interest rates hit firms

Written by Edgenie (Original Source from The Guardian)
Last Updated: July 27, 2023 • 5 min read

Summary:

  • The pound has experienced its longest sequence of daily drops since the onset of the Covid-19 pandemic, due to speculation that a faltering economy will restrict further rises in UK interest rates.
  • The UK economy nearly stagnated in July, causing sterling to depreciate for the seventh consecutive day against the US dollar, the worst run since March 2020.
  • The decline reflects market expectations that the Bank of England will not need to raise borrowing costs beyond 6% from the current 5% to control inflation.
  • Despite expectations of a 0.25 percentage point rate increase in the upcoming monetary policy committee meeting, the pound has continued to fall against the dollar, reaching $1.281.
  • The purchasing managers' index (PMI) supported these views, with output declining from 52.8 in June to 50.7 in July, suggesting that the economy is barely growing; inflation in the private sector has also been at its lowest in over two years.

A Level Economics Possible Questions:

  1. Explain the impact of the weakening UK economy on the value of the pound and its implications for interest rates.
  2. Discuss the relationship between interest rates and currency value, using the case of the UK and the recent depreciation of sterling.
  3. Analyse the Purchasing Managers' Index (PMI) data and explain its role as an economic indicator in the context of the UK's current economic situation.
  4. How might a decline in the value of the pound impact UK's import and export markets? Consider the concepts of elasticity and terms of trade in your answer.
  5. Evaluate the potential impact of the Bank of England's expected interest rate increase on the UK economy, considering both short-term and long-term consequences.

Answers:

  1. The weakening UK economy can lead to a depreciation of the pound as it reduces investor confidence, leading to lower demand for the currency. This can also imply that the economy is not robust enough to handle higher interest rates, which could lead to slower growth or a contraction, so the Bank of England may limit further increases in interest rates.
  2. Interest rates and currency value are interconnected. Higher interest rates typically support a currency's value as they offer investors a higher yield, making the currency more attractive. In the recent case of the UK, despite the Bank of England raising interest rates, the pound has depreciated due to concerns over the health of the UK economy.
  3. The Purchasing Managers' Index (PMI) is a measure of the economic health of the manufacturing sector. It provides information about current and future business conditions to company decision-makers, analysts, and investors. In the UK's current situation, the fall in the PMI indicates a slowing economy, which is barely growing.
  4. A decline in the value of the pound can make UK exports cheaper and more attractive to foreign buyers, potentially leading to an increase in export volume. However, it also makes imports more expensive, which can lead to inflation if the increase in import costs is passed onto consumers. The overall impact on the trade balance would depend on the price elasticity of demand for UK's imports and exports.
  5. The Bank of England's expected interest rate increase can have both short and long-term impacts on the UK economy. In the short term, it could lead to higher borrowing costs, which could slow down consumer spending and investment, potentially slowing economic growth. However, in the long term, higher interest rates could help control inflation and stabilize the economy, which might be beneficial if the economy is overheating.

Possible A Level Economics 25 Marker Question

Evaluate the potential economic impacts of a weakening currency on a country's economy, with specific reference to the recent depreciation of the pound in the UK. Discuss the implications for interest rates, inflation, trade, and overall economic growth. Provide examples and relevant economic theory in your response.

UK economy 'close to stalling' in July as high interest rates hit firms

Summary:

  • The pound has experienced its longest sequence of daily drops since the onset of the Covid-19 pandemic, due to speculation that a faltering economy will restrict further rises in UK interest rates.
  • The UK economy nearly stagnated in July, causing sterling to depreciate for the seventh consecutive day against the US dollar, the worst run since March 2020.
  • The decline reflects market expectations that the Bank of England will not need to raise borrowing costs beyond 6% from the current 5% to control inflation.
  • Despite expectations of a 0.25 percentage point rate increase in the upcoming monetary policy committee meeting, the pound has continued to fall against the dollar, reaching $1.281.
  • The purchasing managers' index (PMI) supported these views, with output declining from 52.8 in June to 50.7 in July, suggesting that the economy is barely growing; inflation in the private sector has also been at its lowest in over two years.

A Level Economics Possible Questions:

  1. Explain the impact of the weakening UK economy on the value of the pound and its implications for interest rates.
  2. Discuss the relationship between interest rates and currency value, using the case of the UK and the recent depreciation of sterling.
  3. Analyse the Purchasing Managers' Index (PMI) data and explain its role as an economic indicator in the context of the UK's current economic situation.
  4. How might a decline in the value of the pound impact UK's import and export markets? Consider the concepts of elasticity and terms of trade in your answer.
  5. Evaluate the potential impact of the Bank of England's expected interest rate increase on the UK economy, considering both short-term and long-term consequences.

Answers:

  1. The weakening UK economy can lead to a depreciation of the pound as it reduces investor confidence, leading to lower demand for the currency. This can also imply that the economy is not robust enough to handle higher interest rates, which could lead to slower growth or a contraction, so the Bank of England may limit further increases in interest rates.
  2. Interest rates and currency value are interconnected. Higher interest rates typically support a currency's value as they offer investors a higher yield, making the currency more attractive. In the recent case of the UK, despite the Bank of England raising interest rates, the pound has depreciated due to concerns over the health of the UK economy.
  3. The Purchasing Managers' Index (PMI) is a measure of the economic health of the manufacturing sector. It provides information about current and future business conditions to company decision-makers, analysts, and investors. In the UK's current situation, the fall in the PMI indicates a slowing economy, which is barely growing.
  4. A decline in the value of the pound can make UK exports cheaper and more attractive to foreign buyers, potentially leading to an increase in export volume. However, it also makes imports more expensive, which can lead to inflation if the increase in import costs is passed onto consumers. The overall impact on the trade balance would depend on the price elasticity of demand for UK's imports and exports.
  5. The Bank of England's expected interest rate increase can have both short and long-term impacts on the UK economy. In the short term, it could lead to higher borrowing costs, which could slow down consumer spending and investment, potentially slowing economic growth. However, in the long term, higher interest rates could help control inflation and stabilize the economy, which might be beneficial if the economy is overheating.

Possible A Level Economics 25 Marker Question

Evaluate the potential economic impacts of a weakening currency on a country's economy, with specific reference to the recent depreciation of the pound in the UK. Discuss the implications for interest rates, inflation, trade, and overall economic growth. Provide examples and relevant economic theory in your response.

⭐⭐⭐⭐⭐

Get the A/A* A Level Economics support you need
500+ students are getting As and A*s with EdGenie