Signs that weaker pound is having an impact

The following two items suggest that the falling value of the pound is starting to have an impact on exports and imports. The Guardian reports that there has been a big jump in exports on the back of the weaker pound which has triggered a sharp drop in Britain's trade deficit with countries outside the European Union, while there are signs that cost pressures in industry are easing, suggesting some relief for hard-pressed manufacturers. Exports soared by 12.8% while imports dropped 5.4%. The overall trade in goods deficit shrank to £7.3bn from £7.8bn. Link to article.

BBC news reports that many tourist attractions in the UK have seen an increase in visitors over the Easter period, both from within the UK and from abroad. Link to video

Will a weaker pound always have a positive impact on the trade deficit? What factors will determine whether the UK benefits or not?

Inflation up ...and down!

The rising price of imported goods - particularly fruit, vegetables and toys - has caused an unexpected rise in one measure of UK inflation. The Consumer Prices Index (CPI) was pushed up to an annual rate of 3.2% in February, from 3% a month earlier. But a sharp fall in mortgage repayments caused the Retail Prices Index (RPI), which includes housing costs, to fall to zero for he first time in 49 years. Economists had predicted that both measures of inflation would fall.

Link to BBC News

Some interesting links on the BBC News site. One explains who the likely winners and losers are from the inflation changes whilst another enables individuals to calcualte their own inflation rate by completing a table of their expenditure, providing a good illustration of how an average rate masks the experiences of individuals.

Are you an inflation winner?
Calculate your inflation rate

The basket of goods used to calculate th einflation index has also been revised. LInk

What type of inflation is the UK experiencing? If the authorities wished o bring it back within the governments target range of 2%, what could they do? Would this be appropriate in the light of the current state of the economy?

Quantative Easing: The story so far

The BBC's Hugh Pym breaks down what quantitative easing means and why it's happening.

Link: Quantitaive Easing - the story so far

Government credit at its limit?

The government has limited scope to implement its planned stimulus package as borrowing soars, according to a key economic think-tank. The Ernst & Young Item club forecasts that net borrowing will rise to £180bn in the forthcoming tax year and will exceed the Chancellor's own prediction. It said that public finances were deteriorating "at an alarming rate". Last week the IMF said that the UK would have to borrow 11% of national income to battle the financial crisis - the highest of the G7 nations. That figure was overly optimistic, according to the Item club. It forecasts borrowing to stand at 12.6% of GDP next year and that the UK would be running deficits over the next decade.

Link to BBC News

Break-up of airport monopoly ordered

The competition watchdog has ordered BAA to sell three of its seven UK airports, ending its monopoly ownership of the leading airports in London and in Scotland. In the toughest corporate sell-off ever demanded by the Competition Commission, BAA, a majority owned subsidiary of Spain’s Ferrovial, will be required to sell Gatwick, Stansted and one of either Glasgow or Edinburgh airports within two years. It will keep control of Heathrow, its most prized asset

Link: Airports face biggest shake-up in history

The commission said it had found “competition problems with adverse effects for both passengers and airlines” at all seven of BAA’s UK airports – Southampton and Aberdeen are the other two. A “key problem” was BAA’s common ownership, which precluded any competition between them.

Link:Promise of new era of lower charges - provides details of how passengers and airlines should benefit. However, there is some concern that individual airports are still monopolies and could raise their charges to recoups the costs of purchase unless there is some form of price regulation. The market will not be sufficiently competitive to ensure effective self regulation.

Unemployment hits 2 million

UK unemployment has risen above two million for the first time since 1997, official figures have shown. During the three months to January, the number of people unemployed totalled 2.03 million, up by 165,000, said the Office for National Statistics (ONS). For February, the number of people getting jobseeker's allowance added a record 138,400 to reach 1.39 million. There are now 10 jobseekers for every vacancy advertised in UK jobcentres, the TUC claimed earlier this week. The ONS added that the unemployment rate jumped to 6.5% between November and January.

The BBC News site has an interactive graphic showing how unemployment has risen in different regions of the country over te past 18 months. It is interesting to see how widely dispersed the rise has been. However, while the national average for unemployment is now 6.5%, in some regions it is much higher. Among the worst hit are the North East of England (8.6%), the North West (7.7%), London (7.5%) and the West Midlands (7.9%).

Link

Money, money, money!

The Bank of England on Thursday announced unprecedented steps to prevent the deepest slump since the 1930s when it unveiled plans to inject up to £75bn into the economy over the next three months.Alarmed by signs that Britain's malfunctioning banking system is starving consumers and businesses of credit, Alistair Darling gave Threadneedle Street clearance to begin creating money – the last-gasp measure used by Japan to end a decade of recession and deflation.The Bank said it would embark on quantitative easing next week, after its monetary policy committee cut the bank rate for the sixth time since the global financial system came close to collapse last Oct­ober. The rate is now 0.5% – a level not seen before in the Bank's 315-year history.
Mervyn King, the Bank's governor, said it was unlikely that bank rate could go any lower and policymakers would shift focus to creating money instead. "We are very close to zero. What we are doing now is switching to injecting money into the economy directly."

Link to The Guardian

Bank creates cash: 'This is the last roll of the dice - an unconventional weapon'

Larry Elliott on quantitative easing - printing money - Audio link

Is the decision to print money right? The experts think so. But ... Link

The Global Downturn ... in graphics

BBC News has produced a series of key indicators illustrating the results of the crisis in global financial markets. Huge amounts of money have been committed in financial support for banks. Governments are spending billions of dollars to kick-start economic growth. Measures include tax cuts and building projects. The financial landscape has changed dramatically, with several giants of the business world disappearing. The UK has spent £94bn to prop up Royal Bank of Scotland, HBOS and Lloyds TSB as well as nationalised Northern Rock and parts of Bradford & Bingley. The Treasury and the Bank of England have pledged hundreds of billions of pounds of further support for the fragile banking system. World economic growth is expected to slow sharply, with the UK among the hardest hit. Developing countries such as China and India should fare better. As countries try to spend their way out of recession, debt levels are forecast to rise. Interesting comparisons of the UK, USA, Germany and France.

Link

Scotland to impose minimum price on alcohol

Measures to tackle alcohol abuse by stopping cut-price offers have been outlined by the Scottish Government. It has proposed a range of measures including the radical step of a minimum price per unit. It would be the first country in Europe to take the step. The details of the price to be set will be worked out with economists to find the most effective level. The blueprint said the amount of advertising by supermarkets over recent months suggested that cheap alcohol did play a key role in determining where people shop. Health Secretary Nicola Sturgeon said: "Plummeting prices and aggressive promotion have led to a surge in consumption, causing and adding to health problems ranging from liver and heart diseases to diabetes, obesity, dementia and cancers.

However, the proposals have not been universally welcomed. Fiona Moriary, director of the Scottish Retail Consortium, said the plans would add costs to responsible shoppers without making any difference to irresponsible drinking. She said: "Irresponsible drinking is not about price or availability yet this is the main focus of the government's approach. We need to develop solutions that educate rather than alienate, instead the government has retreated to its bunker and is neither listening to the evidence presented nor willing to tackle these issues in a consensual manner." The Portman Group, an alcohol industry body which promotes responsible drinking, said the government was not listening to reason. Chief executive David Poley said: "People who drink to get drunk would not be influenced by these measures

Link

Do you think setting a minimum price for alcohol will reduce consumption? What factors will determine its success?

What externalties ar associated with excess drinking? Even if price controls don't reduce consumption is it something that could have benficial effects?

Business investment falls sharply

Business investment fell heavily in the final three months of last year as the financial crisis restricted banks from lending to companies.Business investment by manufacturing and non- manufacturing companies in the three months to December was estimated to have fallen by 3.9 per cent from the previous quarter and was 7.7 per cent down on the same period in 2007, the Office for National Statistics said. “Businesses are increasingly and substantially scaling back their investment in the face of sharply weakening demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions, deteriorating profitability, and serious concerns and uncertainties about the potential length and depth of the recession,” said Howard Archer, economist at IHS Global Insight. “On top of this, the marked downturns in the commercial property sector and the housing market are substantially depressing construction investment.“

While business investment data are frequently subject to revision, the figures underscore a key feature of the current recession – it is investment-led, with the drop in business spending having knock-on effects that are now filtering through the economy and pushing up the number of unemployed.

Link

How significant is the contribution of investment to aggregate demand? Explain how the fall in investment is affecting employment.

No V-shaped recession

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According to Ashley Seager in The Guardian 'it was always fanciful to expect we might be in what is known as a "V-shaped" recession, where we tumble quickly in and then bounce back out.' The latest eonomic perfomance figures from around the world make grim reading; 'Japan - the world's second largest economy - reported last week that its gross domestic product had shrunk by 3.3% in the fourth quarter of 2008. That is the equivalent of 13% over a 12-month period... The eurozone's biggest economy, Germany, is suffering the same problem as Japan and China in that it cannot export anything to a world economy in which demand has collapsed. The credit crunch is giving way to a manufacturing crunch - and it's deepening. There was also grim news from the United States with figures showing industrial production down 10% year-on-year in January. Car production in the world's largest economy is now a staggering 50% lower than a year ago. And housing starts there have fallen to a new low, suggesting the three-year-old housing downturn is far from over.'

Link to article

The UK recession is “not yet clearly worse” than other postwar downturns, although there is still a “strong case” for a further easing of monetary policy, according to a member of the Bank of England’s rate setting committee. Andrew Sentance, a member of the Monetary Policy Committee, said “the global financial crisis and synchronised global downturn” were “producing a recession which is relatively severe compared to past precedents – but not yet clearly worse than the mid-1970s and early 1980s downturns in output”. But Mr Sentance also admitted that monetary policy was unable to prevent recessions.“If there is a general lesson for monetary policymakers from this financial crisis and the resulting recession, it is a sense of humility,” he said. “Like the bankers, we are not the masters of the universe either.”

Link to FT article

Does Royal Mail need to be privatised in order to survive?

The government want to sell a stake of about 30% in Royal Mail to the private sector to help pay for the modernisation of the service. It is argued that the injection of private capital is necessary to fund the modernisation the company needed. Many European postal firms have automated a lot of their services which saved them money and made them more efficient. Union leaders and MPs are worried about the threat to jobs and the impact of private sector involvement on the Royal Mail's "universal service" obligation to deliver mail to every UK home. There are fears that selling off 30% will open the door to full privatisation in the future compromise this obligation. Ministers say they are committed to the universal service but argue that Royal Mail is less competitive than its European counterparts and needs to improve its performance in order to safeguard its long-term survival.

UK inflation rate declines to 3%

Consumer Prices Index (CPI) inflation fell slightly in January to 3%, from 3.1% in December, figures have shown. CPI inflation has now fallen for four months in a row from a high of 5.2% in September, driven down by falls in energy costs and fuel prices. Retail Prices Index (RPI) inflation, which includes mortgage costs and is often used in pay negotiations, fell to 0.1% from December's 0.9%. The drop in RPI may lead to pressure on employers to limit pay rises. The headline RPI rate of 0.1% is the lowest rate it has been since 1960. In addition to falling energy prices, the reduction in VAT from 17.5% to 15%, announced in the pre-Budget report in November, also had an effect.

Link to BBC News

According to The Guardian, sterling, not inflation, is the real worry. Whilst there is some concern that inflation has not fallen as much as expected...'what little inflation remains in the system is a symptom of the falls in sterling that have already happened; not a cause of anything more worrying in itself. It is further uncontrolled falls in sterling we should be concerned about, rather than outdated battles about monetary policy.'

Link

Economists under fire

As to be expected in the wake of the deteriorating economic situation, economists (and economics!) are at the forefront of criticism. Ilanna Bet-El reireated her view in the The Guardian (Economists should get smarter) that 'economics may be less than a science, quoting Jane Jacobs, author of Cities and the Wealth of Nations. "Never has a science, or supposed science, been so generously indulged. And never have experiments left in their wakes more wreckage, unpleasant surprises, blasted hopes and confusion, to the point that the question seriously arises whether the wreckage is reparable."'

'The massive stimulus bill just passed in the US is apparently an attempt to repair the current wreckage. However, since it is mostly based upon economic theory, there is room to doubt its future success: this may be yet another vastly expensive experiment based on a model, which is the tool of the economist. And given simulated models of securitised mortgages are what brought about the crisis to start with, what is now needed is a severe dose of harsh reality, combined with some common sense.'

She challenges the assumption that the answer to our economics woes is to get consumers back into the shops. Many consumers just don't have the money, credit has dried up and most of us in developed countries have sufficient consumer goods and don't actually really need anything. 'There is no obvious solution to the financial crises, but it should be clear that they cannot be resolved by economic theory or by depending on mass consumerism: that is a way back to the bad past.'

Instead economists should use 'a full range of tools as appropriate to a specific situation rather than sticking to a specific model or theory. In other words, rather than just veering between tax cuts and stimulus, between funding banks and buying up their bad debt, there should be room for examining each case in the round of a given economy and society – and seeking to balance both, not just the books.'
We should 'start thinking about "smart consumerism": a mode in which need and quality would be at the heart of production and consumerism rather than cheap credit and greed. More money would be exchanged per item, but less frequently: both sides would therefore stand to gain, and the environment would be filled with fewer cast-off items. '

Link to article

The mechanistic approach to economics has failed. We need to embrace creativity

Very thought-provoking piece by larry Elliott in today's Guardian. He considers whether we are on the brink of a 'depression', concludes that we just don't know and points the finger at economist who have come to rely on mechanistic models with flawed assumptions. 'One reason we are in this mess is that we assumed far greater foresight than actually existed. All the fancy models purporting to show only a minuscule risk of financial blow-out were flawed. They assumed the complexity could be captured by mathematics and pseudo-science. One silver lining to the storm cloud over the global economy is that there will now be an overdue revolution in how we do economics. Already, the cutting edge of the profession is looking to other disciplines - biology and psychology in particular - to explain why models that work in theory come a cropper in practice.' He draws on a new book by Richard Bronk to support his view. 'As Richard Bronk notes in his fascinating new book (The Romantic Economist): "Standard economics assumes that economic agents are perfectly rational; that is the basis of its predictive equilibrium-based models. Modern versions generally allow for certain types of information problem and market failure, and recognise that institutions and even history play a role; but they still assume that these factors do not call into question the underlying model of agents as rational utility maximisers within those constraints... There have been many economists down the years who have expressed scepticism about reducing their discipline to a mechanistic subject. Malthus told Ricardo to be wary of becoming too attached to abstract hypotheses; Schumpeter talked of creative destruction; Hayek saw the market as a voyage of discovery; Keynes stressed the importance of "animal spirits".

The models rely on past behaviour for their predictive ability and 'What we now know is that even the very recent past is an unreliable guide to the future; that risks are not distributed in a linear and predictable way; that human beings do not always act rationally even when they think they are; and that shocks are much more likely than economic orthodoxy would suggest. All of which explains why it is virtually impossible to say where the global economy goes from here. '

Read the article (Link) and consider reading the book!

How does it make you think about the models we use in economics?

Is the higher price of petrol justified?

BBC News reports that the price of petrol has been creeping up steadily since the beginning of 2009 despite the fact that the price of crude oil hase been falling. The average price of a litre of petrol is now 90.48p and diesel 100.74p, analysts Experian Catalist said. This compares to a recent low on 6 January of 85.89p for petrol and 98.06p for diesel. However, the price of crude oil is now 40% lower than the last time petrol cost 90p a litre, back in March 2007, according to the AA. Oil prices have tumbled by more than $110 since July last year. US light, sweet crude is currently trading at about $34 a barrel. Link

What factors, other than the price of crude oil, do you think influence the price of petrol? Do any of these justify the increase in the price of petrol?

UK now 'in deep recession' - economy will shrink by 4% this year

Further confirmation (if any was needed) of the worsening of the UK's economic position. The governor of the Bank of England, Mervyn King, has warned that the UK is "in a deep recession" in 2009 and said rate cuts may no longer work and hinted thta 'unconventional' measure may have to be used. In its latest forecast for economic growth and inflation, the Bank says that the UK economy will decline sharply in the first half of the year. And it says that there is a significant risk that the recession will be even longer and deeper than expected. The Bank forecasts the economy will shrink by 4% from mid-2008 to mid-2009.

Link to BBC News

What do you think Mervyn King meant by 'unconventional' measures?

Unemployment up to 1.97million

UK unemployment rose to 1.97 million between October and December, the highest level since 1997, figures show. The jobless number climbed 146,000 for the three-month period, data from the Office for National Statistics showed. For January, the number of those getting jobseeker's allowance added 73,800 to reach 1.23 million. The unemployment rate hit 6.3%, the highest since 1998, and comes as The Bank of England recently warned of a "deep recession" for 2009. Link to BBC News

The FT has a short video outlining the likely longer term prospects for the job market - and it isn't encouraging! Link

Graduates... take lower skilled jobs!

Students are being urged to take lower-skilled jobs or do voluntary work when they graduate this summer, after a poll of employers revealed widespread cuts in graduate recruitment. Vacancies for graduates in the City alone nose-dived 28% in the past year, the survey found. Leading companies from the banking, accountancy, construction and IT industries announced cuts to their graduate training positions for 2008, while across the board graduate pay has been frozen, the survey reported. In the worst hit industries starting salaries have been cut in an attempt to prevent further job losses.

Link to article

What impact do you think this information might have on those considering applying to university in the coming year?

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Obama's fiscal package

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Following our discussion in the Year 12 lesson today about Obama's fiscal stimulus, I saw this graphic in The Guardian which shows how $838bn will be distributed across the economy. $637bn will be in the form of a variety of spending projects and the remaining $182bn in tax cuts. According to The Guardian ... 'Obama's spending bill, which will be funded entirely by the taxpayer, aims to create or save millons of jobs by beginning work on thousands of New Deal-style projects to renew the country's crumbling infrastructure. It also provides aid for the unemployed, help for schoolchildren and students, and various energy measures.' The aim is to get the US out of recession as soon as possible. Billions of dollars will be spent on bridges, roads, waterworks and sewage disposal. Another big area of expenditure is education. The congressional budget office estimates the bill would create between 1.3m and 3.9m jobs by the end of 2009. US unemployment is 7.6%, about 11million people.

How will this spending 'be funded entirely by the taxpayer? Can you explain how increases in spending by the government and tax cuts will create jobs?

The end of monetary policy as we know it?

Three former members of the Bank of England's rate-setting committee have urged the central bank to rethink its monetary policy. Dr Deanne Julius, Sushil Wadhwani and Willem Buiter are all part of a new monetary policy forum, set up by Fathom Financial Consulting. The forum is designed to scrutinise the Bank's Monetary Policy Committee (MPC). The former MPC members are now urging the Bank to consider the use of quantitative easing - creating money to buy assets - as a tool for ensuring economic stability. Dr DeAnne Julius told the BBC: "We are clearly at the end of monetary policy as we know it." Link to BBC News

For explanation of Quantitative Easing see earlier blog.

Fall in UK's trade gap

The UK's deficit on trade in goods with the rest of the world fell to an 18-month low in December. Britain's goods trade gap fell to £7.367bn from a record £8.114bn in November, the Office for National Statistics (ONS) said. That was the lowest the gap - the difference between imports and exports - has been since June 2007 and was well below analysts' forecasts of £8.1bn. The narrowing gap was driven by a 2.5% fall in imports rather than an improvement in exports. The ONS provisionally estimated the trade deficit for 2008 as a whole at £93.2bn, compared with £89.3bn in 2007.

Link to BBC News

Link to The Guardian

Do you think there is a strong link between the weakening of the pound and the fall in demand for imports?

What is Quantitative Easing?

If you have heard the term 'Quantitative Easing' but are unsure what it means then the graphic in today's FT should help. As interest rates reach their lower limit with doubt about the effectiveness of rate cuts, the Bank of England is looking for other measures to stimulate spending in the economy; 'Quantitative Easing' is such a measure. Link

As predicted ... interest rate cut to 'historic 1%

The Bank of England has reduced interest rates to a record low of 1% from 1.5% in an attempt to boost the shrinking economy. This marks the fifth interest rate cut since October, as the Bank seeks to encourage more lending. However, there are concerns that savers will be hurt by lower interest rates. And business groups argue that this rate reduction will not be enough to ease the economic crisis, and will not encourage banks to lend. (See the concerns of the NIESR in yesterday's blog). Link to BBC News

Geoff Riley provides a good summary of the decision and a comprehensive chart-based student handout. Link

End of rate cuts?

As the Monetary Policy Committee begins its monthly meeting, an influential think-tank has said there was "not very much point" to the last cut. Martin Weale of the National Institute of Economic and Social Research said that other measures such as the Bank buying corporate bonds would be better. It is not the cost of credit that is deterring borrowers but that credit is not available. The think tank warned that the contraction of credit meant that rate cuts by the Bank of England were now ineffective in stemming the downturn. The NIESR predicted the UK economy would shrink by 2.7% in 2009, its worst performance for 60 years. Link to BBC News

With regard to the lack of available credit, see the video posted on the tutor2u blog. It concerns Leyland Daf trucks, explaining that whilst demand for vehicles is high, many smaller companies cannot get loans in order to puchase trucks whose price is around £100,000. It shows how this affects company production and employment, and its knock-on effects to suppliers and the local/national economy. Link

As the Monetary Policy Committee meets, the Bank of England announced that it has lent £185bn to financial institutions since April under its special liquidity scheme (SLS), set up to allow banks to temporarily swap assets that were difficult to trade, such as mortgage-backed debt, for UK Treasury Bills. It was designed to help encourage banks to resume normal lending practices by reducing the uncertainty that having illiquid assets on balance sheets was creating. Link to BBC News

Digital Britain - the consumer knows best?

Following the interim report on 'Digital Britain' by the communications minister, Lord Carter, which emphasies a key role for public sector support to secure Britain's place at the forefront of the global digital revolution, an interesting response in the FT. The chief executive of BSkyB, Jeremy Darroch, argues the case for leaving consumers and the market to determine the direction and nature of developments. He argues that in broadcasting ...'The consumer’s experience has been transformed. That is to be celebrated. But one feature has not changed much at all. The interim report on Digital Britain by Lord Carter, communications minister, reminds us that the traditional distrust of the market’s role in the provision of high-quality content is as strong as ever. Digital Britain proposes to support the creation of digital content and offset the decline in advertising revenues through alternative funding mechanisms.' He believes that a positive climate for commercial investment should be created. 'Consumers could make an informed choice about products and services they wish to consume and pay for. The revenues could drive profitable returns and reinvestment in further high-quality content.' Regulation will be replaced by effective consumer choice that will ensure quality. Link to FT article

Would leaving developments in digital technology to the private market result in efficient allocation of resources or market failure? Is broadband (and other such products) a 'merit good'?

British tourism bucks the trend!

The Independent on Sunday reports that 'grounded by the diminishing value of the pound and fears about the recession, record numbers of Britons will choose to holiday at home this summer. New figures suggest that 2009 could be a bumper year for British tourism.' After years of chichi mini-breaks in boutique hotels, the humble self-catering holiday is coming back, with Hoseasons, Butlins and the Youth Hostels Association (YHA) all reporting increased business. "Bookings for 2009 are up 20 per cent on last year," said Peter Joyner of Hoseasons. "Because we are the biggest self-catering firm in the UK we are a good barometer of what is going on in the rest of the industry." "UK holidays are usually cheaper than going abroad. If you go to a cottage in Britain you can just pack the car up and take all your own food. You've got greater control. When you go abroad you've got unknown elements," said Mr Joyner. Butlins also reported that bookings for the school summer holiday are up 15 per cent on last year. The YHA said January bookings were up on 2008.

Link to article

Are self-catering holidays in the UK and the other holidays referred to in the article examples of inferior goods? Think about the income elasticity of demand for such holidays.

Cameron calls for 'capitalism with a conscience'

David Cameron, leader of the Conservative Party, today called for “capitalism with a conscience” and said it was time for wealth to be distributed “more equally”. The Tory leader said that while he would stand up for business, he would also “stand up to business when the things that people value are at risk”. Speaking in front of world leaders, financiers and corporate directors at the World Economic Forum at Davos, Mr Cameron said: “…it is time to place the market within a moral framework - even if that means standing up to companies who make life harder for parents and families. It is time to help create vibrant, local economies - even if that means standing in the way of the global corporate juggernauts. And it’s time to decentralise economic power, to spread opportunity and wealth and ownership more equally through society, and that will mean recapitalising the poor rather than just the banks.” Mr Cameron spoke to the audience of the halcyon days of the 1950s where “there was a sense that everyone could have a slice of the pie”.

Link to Times Online

There is an interesting 'email' debate between Will Hutton and David Cameron in today's Observer where Cameron is challenged to explain how he would bring about 'capitalism with a conscience'. In one exchange he is aksed whether he embraces Keynesianism to which he responds ..."As a Conservative, I'm naturally sceptical of embracing anyone's theory or ideology, although I agree that Keynes had many good ideas, in particular his emphasis on the dangers of the contraction of credit. Here in Davos you see this clearly right now: for example, a representative from the African Development Bank told me how the lack of credit is holding up the construction of roads, bridges and other infrastructure. So I think our plan for a National Loan Guarantee Scheme would actually achieve many of the long-term outcomes people associate with "Keynesianism". But if by Keynesianism you mean a big fiscal stimulus regardless of the level of government borrowing, I don't agree. The reason is simple: because the government is already planning to borrow so much, if we borrowed a lot more now we'd actually make the recession worse. Why? Because we'd have to show how the extra borrowing was going to be paid back through tax rises. That would damage business and consumer confidence, which is in the end what will get the recovery going.

Link to Observer article

USA - heading for a Depression?

The sharp contraction of the US economy accelerated in the last three months of 2008, with official figures showing GDP shrinking at an annualised rate of 3.8%. With forecasters already predicting the worst US recession since World War II, how big a danger is there that the US economy will slip into a depression similar to the 1930s? The latest figures paint a gloomy picture of the US economy. Consumer spending, which makes up two-thirds of the economy, fell for the second quarter in a row, by 3.5%. This drop was led by a 22% drop in spending on durable goods like automobiles and washing machines. The decline in motor vehicle production was so great that it alone contributed 2% to the fall in GDP.

Link to BBC News

What is the difference between a recession and a depression?

When was th elast time the world economy suffrered a major depression?

Grim expectations for UK economy

There have been more gloomy predictions about the state of the UK economy. The burden of UK government debt will remain above pre-crisis levels for 20 years, says the independent Institute for Fiscal Studies (IFS), a think tank. In its annual Green Budget, the IFS says that the government will need to raise taxes or cut spending by an extra £20bn to repair the public finances. Meanwhile, the International Monetary Fund predicts that the UK will see its economy shrink by 2.8% in 2009. It also expects the UK economy to grow by just 0.2% in 2010.

Link to BBC News

World economic growth is set to fall to just 0.5% this year, its lowest rate since World War II, warns the International Monetary Fund (IMF). In October, the IMF had predicted world output would increase by 2.2% in 2009. It now projects the UK, which recently entered recession, will see its economy shrink by 2.8% next year, the worst contraction among advanced nations. The IMF says financial markets remain under stress and the global economy has taken a "sharp turn for the worse".

Link to BBC News

Watch the IMF press conference highlighting the key aspects of the report.

It's official, just in case we were in any doubt ... the UK's in recession!

The UK is now in recession for the first time since 1991, official government figures have confirmed. Gross domestic product fell by 1.5% in the last three months of 2008 after a 0.6% drop in the previous quarter. That means that the widely accepted definition of a recession - two consecutive quarters of negative economic growth - has been met. It represents the biggest quarter-on-quarter decline since 1980, and a 1.8% fall on the same quarter a year ago.

Link to BBC News

An article in The Guardian details the events leading up to the recession.

Link to 'Countdown to Recession'

Link to analysis 'We will pull through this ... eventually!
Also, there is a graphic showing the cyclical pattern of the UK economy since 1955.
Link to graphic

Bailing out the banks - possible 'Government Failure'?

An article in The Independent analyses the possible consequences of the government bailout of the banks. The overall figure appears to be around £1 trillion , nearly equal to our annual GDP. Will this solve the problems of the banking sector or will they merely be transferred to the state? The amount imvolved will have a big impact on the National Debt which will beome a burden if it is unsustainable. Remember what we mean by 'Government Failure' - where intervention leads to a loss of economic welfare rather than a gain. Is this an example of the costs of intervention exceeding the benefits?

Link to article.

Public finances feel the effect of the recession.

UK public finances deteriorated in December, partly because the £20bn state recapitalisation of Royal Bank of Scotland swelled the government’s net cash requirement to £44.2bn.The budget deficit for the month – tax receipts minus expenditure – totalled £11.4bn against a shortfall of £4bn a year earlier, as the deepening recession slowed tax receipts and pushed up social expenditure. For the financial year to date, a measure that smooths some seasonal fluctuations in the timing of tax receipts and expenditure, the budget deficit was £50.3bn against a shortfall of £22.3bn by December 2007.

But the latest data showed how the deepening recession is taking a toll on tax receipts. Income tax receipts, which include capital gains earned by households and taxes on corporate profits, fell to £13.4bn in December from £14.3bn a year ago and for the current fiscal year are now 1.3 per cent below those of 2007. Overall receipts for April until the end of December are down 1.9 per cent despite a higher tax take of compulsory social contributions which have risen in line with average wages.

Link to FT article

'It was mayhem': Larry Elliott's review of the year

The Guardian's economics editor takes a look at the main events that shaped the financial world in 2008

Link to video

Is spending more the answer?

Came across this article in The Times which should be of interest, following the discussion in our Year12 lesson today. The title of the article ' Punish savers and make them spend money' emphasises the author's view that to save will only make the recession worse and with interest rates so low, there is no real incentive to save. 'Instead of reducing taxes on interest payments, (as the Conservatives have proposed) the Government could tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets - or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump. '

What do you think?

Link to article

Big fall in UK inflation

Consumer price inflation fell sharply in December to an annual rate of 3.1% from November's figure of 4.1%. The biggest factor was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report on 24 November, the Office for National Statistics said. But high food, gas and electricity prices prevented the rate from falling as fast as economists had predicted. The headline Retail Prices Index (RPI) measure fell to 0.9% from November's 3% rate, the biggest fall in 28 years.

Link to BBC News

FT Video

Fiscal policy - economists embrace public investment

Two interesting article in the New York Times explaining the renewed enthusiasm for fiscal policy to tackle the recession in the USA. Mainstream economists are embracing public spending to repair the damage caused by the recession and credit crisis - even those who have long resisted a significant government role in a market system. There seems to be agreement that direct government investment will be more effective than tax cuts in stimulating the economy. The lowering of interest rates isn't likely to have the desired effect due to the unwillingness of people to borrow ' panicked by investment losses or fearful for their jobs'.

Links:

A Trap in a Spending Plan for an Economy That's in Full Retreat.

A New Enthusiasm for a Fiscal Stimulus

Concern over rising rice prices

The price of rice could rise sharply, causing another shortage of the staple grain. Last year the price hit levels not seen in decades, which led to shortages - and riots - in many countries. There are concerns this year's harvest may not live up to expectations because of poor weather and a lack of the credit that farmers need to buy fertiliser. The Thai Rice Exporters Association has increased the price of its benchmark white rice by 3% in the past week to $608 a tonne. It is the fourth consecutive week of increases. A year ago rice cost $370 a tonne but shot up to nearly $1,000 in mid-May 2009.

This is a good example to try out your market analysis and think about why it hasn't been possible to use buffer stocks to stabilise price. Think about the effects of the rise in price - winners and losers?

Link to BBC News

The labour market isn't working

'Unemployment is the big political issue of 2009' according to Larry Elliott in today's Guardian. In a superb analysis of labour markets in the UK and around the world he shows how the position has become much bleaker during the past year and highlights the limits to what policymakers can do. (See link to article on £2500 new job subsidy). However, he believes that active labour market policies are still worth the effort, using the lessons of the 1980s when so many skills were lost, so many people became demotivated and there were lasting personal and social consequences. There is particular concern for the under 24 age group, because 'there is evidence that a spell on the dole when you are young leaves the deepest scars'. Drops in world industrial output don't augur well for a swift recovery and investment flows are threatened by the large amount of government debt associated with rises in injections of public spending that needs to be sold, leading to the classic 'crowding out' effect. (i.e. private investment funds fall as governments compete for a bigger share to fund their increased expenditure). A compulsory read!

Link to article

Link to 'Firms to get £2,500 for each jobless new recruit'