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'