A Question of Economics

Signs that weaker pound is having an impact

2009-04-21T15:53:00.006+01:00

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!

2009-03-24T14:04:00.005Z

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

2009-03-22T22:15:00.002Z

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?

2009-03-22T22:02:00.002Z

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

2009-03-22T21:43:00.007Z

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

2009-03-22T21:25:00.004Z

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!

2009-03-07T22:42:00.002Z

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

2009-03-07T22:08:00.005Z

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

2009-03-02T14:45:00.009Z

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

2009-02-24T13:14:00.007Z

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

2009-02-24T12:53:00.006Z

Click on the graphic to view it in new window

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?

2009-02-24T09:29:00.006Z

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%

2009-02-17T21:03:00.002Z

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

2009-02-17T20:24:00.006Z

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

2009-02-16T19:46:00.005Z

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?

2009-02-15T16:01:00.005Z

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

2009-02-12T11:22:00.004Z

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

2009-02-12T10:14:00.004Z

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!

2009-02-11T23:34:00.004Z

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?

(Click on the image to open it in new window)

Obama's fiscal package

2009-02-11T23:28:00.005Z

(Click on the image to open it in a new window)

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?

2009-02-10T12:53:00.005Z

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

2009-02-10T12:14:00.005Z

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?

2009-02-06T10:14:00.004Z

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%

2009-02-05T22:02:00.003Z

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?

2009-02-04T10:56:00.007Z

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?

2009-02-03T20:07:00.006Z

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!

2009-02-01T22:34:00.007Z

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'

2009-02-01T19:46:00.005Z

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?

2009-01-31T21:29:00.005Z

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

2009-01-29T22:55:00.004Z

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!

2009-01-27T15:27:00.006Z

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'?

2009-01-22T14:42:00.005Z

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.

2009-01-21T12:22:00.003Z

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

2009-01-20T15:48:00.007Z

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?

2009-01-20T14:04:00.005Z

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

2009-01-20T13:16:00.005Z

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

2009-01-19T14:07:00.008Z

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

2009-01-19T13:52:00.005Z

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

2009-01-12T14:29:00.003Z

'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'

Local impact of the downtown

2008-12-02T14:32:00.004Z

The FT has produced an interactive graphic that looks at the local effects of the global slowdown.It shows you how the different regions of the UK are coping, highlighting the declines in house prices, the rise in unemployment and the escalating numbers of corporate insolvencies. (Link)

The return of coal?

2008-11-27T15:28:00.004Z

The Observer reported that Britain is poised to expand its coal mining industry, despite fears that the move will lead to a rise in climate change emissions and harm communities and the environment. In the past 18 months 14 companies have applied to dig nearly 60 million tonnes of coal from 58 new or enlarged opencast mines. At least six coal-fired power stations are planned. If all the applications are approved, the fastest expansion of UK coal mining in 40 years could see southern Scotland and Northumberland become two of the most heavily mined regions in Europe.
The demand for new mines is being driven by dramatic increases in the price of coal. This has quadrupled in two years and has risen by 45 per cent since the start of this year. Opencast, or surface, mines are much cheaper than deep mines, but those living nearby can suffer years of pollution. (Link)

Menu costs

2008-11-27T14:54:00.005Z

Geoff Riley highlighted the 'menu costs' associated with the cut in VAT. (Link) The FT carries a similar article where retailers, whilst broadly welcoming the chancellor's cut in the rate of value added tax, warned that the reduction was difficult to implement and would be eclipsed by clearance sales in the next few weeks. With many retailers already cutting prices by about 20 per cent to stimulate spending in the run-up to Christmas, the cut from 17.5 per cent to 15 per cent in the rate of VAT comes into force on December 1 and lasts until the end of next year. As retailers privately warned of a "logistical nightmare" in adjusting prices, the pre-Budget report acknowledged that overall prices would be "reduced progressively rather than immediately". The difficulty of physically changing the price of thousands of product lines at the busiest period of the retail year will be a substantial challenge for those retailers that choose to move on December 1. (Link)

'Too low inflation' warning

2008-11-25T13:14:00.005Z

Speaking to the Treasury Select Committee about inflation, Mervyn King, Governor of the Bank of England, warned that the risk it could fall below 2% in the medium term has "increased significantly" in recent weeks. He said this was due to the sharp fall in global oil and commodity prices, and declining consumer demand. UK inflation fell to 4.5% from 5.2% in October. The government wants inflation to be as close as possible to 2%. and Bank of England targets the Consumer Price Index, which excludes the effects of mortgage interest payments. "We will take whatever action is necessary to ensure that inflation is close to target in the medium term," Mr King said.
UK interest rates are currently at 3% following a 1.5 percentage point cut at the start of this month, and many economists are forecasting a further cut in interest rates in December. He added that the government's cut in VAT will also help lowe the rate of inflation.

Is there an ideal rate of inflation?

Why is the target set at 2%?

What are the dangers of falling prices?

What is the difference between deflation and disinflation?

Pre-Budget Report...or is it a 'Mini Budget'

2008-11-25T12:22:00.005Z

As to be expected there is wide coverage of the details of Alistair Darling's statement to the Commons. BBC News offers its usual broad coverage with some analysis and reaction. The details of the measures are summarised in the following link. (Pre-Budget details: at a glance) Much more analysis in the FT (Details plus short video analysis) and a more detailed analysis (Link) Jonathan Freeland in The Guardian narates a short video comparing the UK package with that announced by Barack Obama. (Link)

Salvation now...pain later?

2008-11-24T14:04:00.007Z

As we await the Autumn Statement, speculation is rife as to the ways in which the planned spending increases and tax cuts will have to be paid for in the future. The BBC reports that the top rate of tax will be increased from 40p to 45p in the pound after the next election for those earning over £150,000 per year. This appears to be a reverse in Labour's policy, reierated in their 2005 General Election manifesto, not to increase the top rate of tax. Also, it highlights differences that are starting to emerge between Labour and the Conservatives over future tax and spending policy; the Conservatives have said they would pay for any increase in government borrowing by scrapping planned rises in expenditure. (Link to BBC for details) and (FT)

The FT has produced a 'checklist' for the Autumn Statement, detailing certain aspects of the economy. (Link)

Energy shortfall

2008-11-12T11:07:00.003Z

The BBC News reports on the possibility of major blackouts in the next 10 years due failure to secure sufficient energy supplies to meet expected demand. Highlights the importance of investment, especially in an industry expected to address serious environmental concerns as well as ensuring supply. Link to BBC News video)

UK already in recession - Bank of England

2008-11-12T10:59:00.003Z

The Bank of England says the UK entered a recession in the middle of 2008 which will continue through 2009. In its quarterly inflation report, the Bank warns that the economic landscape has changed dramatically since August. It now expects inflation to decline to 1% by 2010, below its 2% target, in a dramatic change to its last forecast. This could open the way for further interest rate cuts if the Bank is to maintain inflation at its target rate in two years' time. "We are certainly prepared to cut bank rate again if that becomes necessary," said Mervyn King, the Bank of England's governor.

UK consumers plan to spend 7% less this Christmas than they did last year, a survey from business advisory group Deloitte has suggested. Deloitte warned this festive season may be "one of the toughest in decades" for retailers. The expected fall compares with a 7% rise in spending in 2007. (BBC News)

Unemployment rise confirmed

2008-11-12T10:16:00.003Z

The rapid rise in unemployment was confirmed with the publication of figures that show the total to be the highest for 11 years. The number of people out of work in the UK in the three months to September jumped by 140,000 to 1.82 million - the highest in 11 years. The unemployment rate rose to 5.8%, up from 5.4% in the previous quarter, according to official figures. The number of people claiming the Jobseeker's Allowance rose by 36,500 to 980,900 in October - the highest monthly increase since 1992. Many economists believe that the number out of work will rise to 2 million by Christmas. (Link to BBC News)

"The last recession in the early 1990s saw 31 consecutive monthly rises in unemployment so we are likely to have plenty more bad news on the labour market to come," said James Knightley, economist at ING Financial Markets. "We suspect (the claimant count) will push towards 2.5 million in 2010. The LFS measure of unemployment currently stands at 1.85 million and this is likely to push above 3 million over the same time period." (The Guardian)

“The dole queue is now growing by a 1,000 people a day – each one a human tragedy of wasted potential,” TUC General Secretary Brendan Barber said. “And the signs are that redundancies are coming even faster since these figures were collected. Countering unemployment must be public policy priority number one.” (FT)

The BBC News site contains a section looking at how some individuals are coping with unemployment. (Link)

Who can cut taxes the most ... and will it work?

2008-11-11T11:13:00.008Z

As the leaders of the main political parties announce proposed tax changes to deal with the impending recession, Larry Elliott in the Guardian explains the likely effects of tax cuts and highlights the fact that '... Keynes never saw tax cuts or increases in public spending as a panacea for ending slumps. He believed fiscal policy should only be used once every other economic tool had been exhausted; his remedy for the Great Depression was a mixture of devaluation, protectionism and cheap money, with public works only to be wheeled out as a last resort.' The recent experience of Japan, with a series of tax cuuting measures and the USA, highlights a risk, namely that tax cuts have to be large-scale to be effective and, even then, may only have a temporary impact, which can be limited if consumers believe that tax cuts now mean tax increases later.

(Link to article)

See Geoff Riley's thoughts on the announcements (Tax Stimulation)

Tackling the drinking culture

2008-11-11T08:31:00.007Z

BBC News has coverage of call by MPs to ban 'Happy Hours' and possibly regulate the price of alcohol, through the imposition of a minimum price The Select Committee report evidence showed the biggest problem faced by police forces was violence and disorder caused by excessive drinking of cheap alcohol. Other official figures on the cost of goods over time show alcohol has become much more affordable in the last three decades. Many of the negative externaliies associated with excess drinking are detailed in the article. (Link to BBC News)

Think about whether the imposition of a minimum price would be effective in reducing consumption of alcohol.

MPC cuts interest rate by 1.5%!

2008-11-06T16:00:00.001Z

(FT video)

Government borrowing highest since 1946

2008-10-23T08:54:00.004+01:00

The public finances lurched to a record deficit last month driven by a weakening economy and overspending by the government, and analysts say much worse is yet to come as the economy tips into recession.The Office for National Statistics said that public sector net borrowing came in higher than expected at £8.1bn, a record for a September and way above the £4.8bn shortfall seen in September last year. That left the cumulative PSNB for the first half of the 2008/09 fiscal year at £37.6bn versus £21.5bn in the same period a year ago and the highest since records began in 1946. An interesting graphic showed Debt as a % of GDP and despite the current figures the UK remains near the bottom of the table with a figure of 43.6%. For the US it is 60.8%, France 63.9%, Germany, 64.9%, Italy 104% and Japan 170%. If the support for Northern Rock is removed the figure for the UK stands at 38%. There is a view that the the National Debt will reach 100% of GDP by 2010/11 and whilst it is acceptable to borrow during a recession, these higher borrowing figures have emerged before the recession has really started. Link

There is an explanation of the significance of higher government borrowing. (Link)

Haven't we got the message yet?

2008-10-22T11:17:00.007+01:00

The Bank of England governor and an influential think tank have predicted that the UK economy is likely to sink into recession in 2009. Mervyn King told business leaders in Leeds he was concerned about rising unemployment and falling house prices. Economic fears sent the pound plunging to a five-year low against the dollar. Meanwhile, the National Institute of Economic and Social Research says the UK is on the brink of its first full year of recession since 1991. The Bank of England has also been criticised for being too slow to cut interest rates in response to the UK's worsening economic situation.

Link to BBC News - includes a short video clip of Mervyn King's statement.

Also, see the set of charts that Geoff Riley has put together on tutor2u blog entitled 'In the Long Run'. Think about the impact of short run fluctuations against long run trends. (Link)

Suddenly its OK to be a Keynesian again!

2008-10-21T09:34:00.005+01:00

Geoff Riley on tutor2u highlights the focus on Keynes this weekend in his article on the blog. (Mr Keynes makes a return) As well as putting government policy into a Keynesian context, it includes links to a selection of the comment this weekend. The Guardian published the cartoon above together with the article 'Darling invokes Keynes as he eases spending rules to fight recession.'

Gap between rich and poor pay narrows in UK

2008-10-21T09:18:00.003+01:00

The gap between rich and poor in the UK has decreased since 2000, an international survey has concluded. The Organisation for Economic Co-operation and Development (OECD) says the decline in inequality in Britain has been "remarkable". The report's author told the BBC: "...the poor have been getting richer more rapidly than the rich since 2000." But the report says the UK still has one of the highest levels of income inequality in the developed world.

Links: BBC News

The Guardian

News of recession dominates

2008-10-19T19:58:00.004+01:00

Numerous articles in The Observer today about UK economic prospects ... namely that the recession is upon us. The Ernst and Young Item Club will warn this week that we are in the grip of a severe economic slowdown at the same time as GDP figures are widely expected to confirm that a recession is already underway. Item expects GDP to decline outright next year by 1% - the first full year of decline since 1991. It predicts a gradual recovery in 2010, with the economy recording growth of just 1%. Consumer spending would be hard hit over the next two years, as households try to rebuild their finances in the face of sickly income growth and plunging property prices. Link to Ernst and Young There isa good report of the forecast on the BBC News site. Link

There is an interesting view of the likely impact of the recession and the suggestion that it will be nothing like the one that gripped Britain in the early Eighties. It will hit people in different industries - finance and leisure, not manufacturing. And London, not the North, will bear the brunt. Link: It's grim down South

Will Hutton highlights that aspect of a recession that has the most impact on individuals - unemployment. 'Over the good years unemployment came to be characterised as a matter of choice; there was work out there if you wanted it or could be bothered to get out of bed. It has been a controversial argument; worklessness has always been part of a vicious circle of self-reinforcing lack of self-worth and poverty of opportunity, tending to be clustered in areas of deprivation. It is rarely if ever a matter of choice. People want to work. Human beings want to realise our potential and dreams. Work provides sustenance, meaning and structure to our lives. It is where we meet the bulk of our friends and partners. In a recession the argument that the unemployed are unemployed by choice will not wash. To stand idly by is to condemn our fellow citizens to poverty, futility and meaninglessness.' It is the young (school and college leavers, new recruits) who have yet to show their usefulness and to acquire new skills who are affected first. He goes on to outline measures which should be taken to inject spending power into the economy, the quickest and most effective, ironically, by putting cash into the hands of the unemployed. Raising unemployment benefits and increasing cash payments should be a priority - it is not just that need the cash but that they spend it the fastest. The next most effective measure is to increase spending on the national infrastructure. Link to article

See Geoff Riley's excellent blog (Could the UK budget deficit reach £100bn?) for an overview of current government borrowing and the National Debt.

Momentous Day!

2008-10-13T22:38:00.002+01:00

On the day that the UK government took a substantial stake in a number of banks the BBC News site provides an excellent overview of curent developments and background to the financial crisis. Link to Global Financial Crisis

It is shaping up to be one of the most tumultuous times on record in the global financial markets.
The financial landscape is going through a period of upheaval with some major firms folding, other operations merging and a limited number of companies in both the Europe and the US, being rescued at a governmental level. Link: Financial Crisis in Graphics

The Guardian published an article outlining the likely effects of a recession on the real economy. Link to article

The 2008 Crash

2008-10-06T14:53:00.003+01:00

Really good supplement in yesterday's Observer on The 2008 Crash.

Will Hutton presents 'A Short History of Modern Capitalism' explaining that whilst it has been defined by long periods of growth there have been severe convulsions, induced mainly by a financial crisis. Stage one, lasting from 1899 to 1929 was an age of modernity, characterised by the devlopmennt of the automobile, aeroplane, radio, skyscraper, ocean liner and a whole range of domestic electrical appliances. Then came Convulsion one, the Wall Street Crash followed by the Great Depression. Stage two, recovery followed by reconstruction after WW2 lasted from 1993 until 1973. It was charactersied by government intervention and mangement of economies. Oil price rises and stagflation were the prominent features of Convulsion two from 1973 to 1979. Stage three saw deregulation under Thatcher and Reagan and the rise of globalisation, leading to the financial crisis we have today with too much debt, too little capital and excess greed. (Link to article)

Other sections detail the start of the credit crunch and assess its impact on Britain and how it swept across the world. Will Hutton suggests that ' ...as our financial system lies onthe brink of collapse, it is time to build a new one, based on fairness instead of naked greed, and with long-term commitment to building businesses and supporting investment.' (Link to the supplment 'The 2008 Crash')

Panic in the markets...and bad news from the UK economy

2008-09-30T12:08:00.007+01:00

Continued focus this morning on the financial markets following the failure of the US Congress to agree the financial rescue package. Tutor2u highlights some of the reaction and the detailed press coverage (all worth a read!).

Alongside this, almost unnoticed, further bad news about the UK economy which saw no growth in the second quarter of 2008, while the gap in the current account widened to its highest level in almost a year. Data from the Office for National Statistics (ONS) showed economic output remained the same as in the first quarter, confirming previous estimates. Growth was 0% in the second quarter - which was even lower than the 0.3% figure for the first quarter of 2008. Separately, balance of payments information showed there was a deficit of some £11bn in the current account in the second quarter. The current account deficit - which is the difference between imports and exports - widened by more than had been expected to £10.98bn, compared with £5.49bn in the first quarter. This is the biggest the deficit has been since the third quarter of 2007 and it equates to 3% of GDP. (Link: UK confirms economy at standstill )

This added to the news yesterday that new mortgage lending collapsed in August, according to the latest figures from the Bank of England. Banks and building societies lent an extra £143m in home loans last month, just 5% of July's lending figure and only 2% of the lending in August 2007. August is traditionally the quietest month for house sales. But house buyers may have been put off buying properties because of the continued fall in prices and widespread predictions of an imminent recession. (Link: Mortgage lending slumps)
The fall in house prices has accelerated in England and Wales, according to the Land Registry. Its latest report shows that prices fell by 1.9% in August, taking the annual rate of price deflation to 4.6%. (Link: House price fall 'accelerating')

All of this raises interesting questions about how we behave when we think there is going to be a recession. What will be the effect on growth if we decide to postpone consumption? What would we expect to happen to the balance of payments if we enter a recession? Why has there been an increase in the current account deficit at a time when the economy is slowing down? Will this news encourage the Monetary Policy Committe to lower interest rates?

Britain still attractive to foreign investors

2008-09-26T11:37:00.004+01:00

The Guardian highlights the fact that Britain attracted the most foreign direct investment (FDI) in Europe in 2007 according to the United Nations, but the financial turmoil in the global markets will have a detrimental effect on investment next year. In its annual World Investment Report, the UN Conference on Trade and Development (Unctad) said that the UK was the number one destination for inward investment in Europe in 2007, attracting more than $1tn (£540bn). Globally, the UK was second only to the US. The main reason for the growth appears to be the increase in merger and acquisition activity. (Link to article)

What impact does increased investment have on the economy? Does it matter that this increased investoment comes from overseas?

Bad news for Ireland and New Zealand

2008-09-26T11:17:00.004+01:00

With all attention on the UK and US economies at the moment it is easy to ignore developments elsewhere. It is reported thet the Irish Republic's economy has fallen into recession after shrinking for a second quarter in succession. The Central Statistics Office (CSO) said gross domestic product (GDP) had contracted by 0.5% in the three months to the end of June. The economy had shrunk by 0.3% in the first quarter of the year. It is the first time Ireland has experienced a recession since 1983. The economy is now facing its most difficult period since high unemployment and emigration hit in the early 1980s.

The New Zealand statistics agency says the economy has gone into recession for the first time since 1998. Gross domestic product shrank 0.3% in the first quarter, and 0.2% in the second quarter this year. But annual growth until June remained positive. New Zealand is suffering from the global credit crunch, rising food and fuel prices, and drought which cut production in agricultural industries.

Links: Irish economy goes into recession

New Zealand slips into recession

What is the technical definition of a recession? What key features characterise a rescession?

The financial crisis - is it nearly over?

2008-09-23T13:33:00.005+01:00

As uncertainty about the effects and details of the financial rescue plans continue to affect world share markets (Shares slide amis bail out fears), Geoff Riley provides a good reflective piece on the tutor2u blog. In his view 'We shouldn’t for a moment think that the worst is over. My fear is that the UK economy and the UK government remains vulnerable to a fresh wave of negative speculation as the markets test the British government’s resolve to protect our leading financial institutions. ' He also provides some excllent links to articles that explain what has been happening and possible implications. I particularly like the piece by Roger Bootle in the Daily Telegraph where he focuses on the financial crisis to highlight the limits of the free market - well worth a read. Link to Geoff Riley's piece

Inflation up to 4.7% - another letter!

2008-09-19T13:45:00.004+01:00

The annual rate of UK inflation rose to 4.7% in August from 4.4% the month before, a higher-than-expected jump. Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - fell to 4.8% from 5%. The biggest contributor to this rise was the increase in energy prices which outweighed a number of prices falls. For the third time the Governor of the Bank of England, Mervyn King, was forced to write a letter to the Chancellor explaining why the inflation target had not been met. The BBC site as a nice video feature looking at the content of the Governor's letter. (Link)

Lloyds TSB takeover of HBOS

2008-09-18T09:27:00.009+01:00

The Lloyds TSB-HBOS proposed takeover highlights a number of the issues we have been focusing on during the first few sessions of the A2 course.

The vulnerability of firms once their share price comes under pressure from the markets
The impact of a merger/takeover on the vulnerable company (Will the Chief Executive of HBOS survive? How many jobs will be lost? How will the business be rationalised?)
The economies of scale that can be exploited by the new business (“..significant cost savings can be made…”) Will some of these be passed on to customers?

What impact will it have on competition in the banking market? The government is likely to relax the competition rules even though “…the enlarged group will hold a third of the UK mortgage market”.

Links:
Black Horse becomes White Knight - good graphic showing decline in HBOS share price price
Lloyds TSB unveils HBOS takeover
Profile: Lloyds TSB and HBOS

Still concerns about 'stagflation'.

2008-09-15T15:46:00.004+01:00

The CBI has become the latest organisation to predict that the UK will fall into recession this year. The business group estimates that the economy will shrink by 0.2% between July and September, and then by a further 0.1% from October to December. Its report follows similar warnings from the European Commission and the British Chambers of Commerce. An economy is generally considered to be in recession after two successive quarters of declining output. (Link)

The Governor of the Bank of England has warned MPs that inflation, now at 4.4%, is set to exceed targets once again. Mervyn King said "it would not be surprising" if he had to write to the chancellor next week explaining why inflation had exceeded targets of 2%. He added all advanced economies were facing "testing times", but he saw no reason why the UK could not cope. However, Mr King also warned there was no quick fix for the current mortgage crisis affecting the economy. (Link to article and Video clip)

Manufacturing output and house sales down

2008-09-09T12:25:00.002+01:00

UK manufacturing output declined for a fifth straight month in July, official figures showed, underscoring the weak state of the UK economy. The Office for National Statistics said that manufacturing fell by 0.2% between June and July, more than the 0.1% analysts had expected. Economists said that the figures were further evidence that the UK economy was likely to enter a recession. (BBC link)

The slump in the UK property market continued in August, with some estate agents selling fewer than one home per week in the past three months. The Royal Institution of Chartered Surveyors (Rics) said sales were at their lowest level since its monthly survey started in 1978. It said the fall in prices slowed, for the fourth month in a row, but they were still much lower than a year ago. Rics said the continued shortage of mortgage funds was "stifling" buyers. (BBC Link)

How do people experience inflation?

2008-09-05T14:17:00.003+01:00

The BBC reports that food prices in UK supermarkets and shops have risen by 8.3% since January. Meat and fish - up 22.9% - registered the biggest price increases for any one category in the survey, with fresh fruit and vegetables up 14.7%. Retail analysts Verdict Research also found price rises of nearly 50% for some individual food items. The figures come amid growing concern about the high cost of food, which is exceeding the official inflation rate. On Wednesday, the British Retail Consortium (BRC) said that food price inflation over the past year amounted to 10% - more than twice the official Consumer Prices Index (CPI) inflation rate of 4.4%. Other research has shown that prices of many other items (e.g. energy) have risen by significantly more than the headline rate of inflation. Link to BBC report

Recession 'within months'.

2008-07-10T10:31:00.004+01:00

The UK is facing a serious risk of recession within months, the findings of a survey of almost 5,000 small, medium and large businesses suggest. The British Chambers of Commerce's (BCC) quarterly report found the credit crunch and rising costs had dented the most important sectors of the economy. BBC News has an interview with David Frost, Director General of the BCC, where he talks about the changing mood of small/medium sized businesses. (Link to BBC News)

Good article by Larry Elliott in The Guardian (Click for link) in which he questions whether the official definition of a recession (two consecutive quarters of negative growth) is the most helpful measure in explainign the position the economy is in... 'an economy would not be in recession if it contracted by 5% in the first quarter, expanded by 0.1% in each of the following two quarters and then contracted again by 5% in the fourth quarter. '

News today that house prices continue to fall, down 2% in June (Link), house builder Barratt cuts jobs (Link) and that times are becoming even tougher for first-time buyers (Link).

How much money do we need to live?

2008-07-02T15:19:00.002+01:00

A single person in Britain needs to earn at least £13,400 a year before tax for a minimum standard of living, the Joseph Rowntree Foundation (JRF) says. A couple with two children need to spend £370 a week and a pensioner couple need £201 excluding housing and childcare costs, the charity says. Film tickets, a bottle of wine and a bird feeder were on the list of goods people need to participate in society. There is a graphic on the BBC News site showing the varying amounts for different groups broken down by category of expenditure. (BBC News)

According to The Guardian, the report said families without a working adult received about two-thirds of the minimum budget in state benefits. Single people without work received less than half of the minimum budget in benefits. The basic state pension gives a retired couple about three-quarters of the minimum income, but claiming the means-tested pension credit could top up their income to just above the minimum standard, the report said. The study found that almost everybody classified as being in poverty had an income too low to pay for an "adequate" standard of living as defined by the panellists. (The Guardian)

Further confirmation of slowdown in housing market

2008-07-01T12:16:00.003+01:00

UK house prices fell by 0.9% on average last month, according to the latest survey from the Nationwide. The decline was less severe than the record 2.5% fall seen in May, but prices were now 6.3% lower than a year ago. The Nationwide survey found that the housing market in Scotland had been more resilient than elsewhere. Although prices in the three months to June had fallen in Scotland by 1.8% compared with the previous quarter, it was the only area to see an annual growth, up 0.6%. (Further details here)

This survey follows news yesterday of a record low for mortgage approvals. The Bank of England said 42,000 homes were approved in May, a 28% fall compared with the previous month and 64% down on a year ago. This is the lowest since the Bank began reporting the figures in 1993 and lower than many analysts' predictions. Mortgage lending has slumped owing to the credit crunch with institutions reducing their willingness to lend. (Click here for details)

Economy slowing down ... or is it?

2008-06-19T13:02:00.005+01:00

The Bank of England had warned the UK was heading for difficult times and it would act to rein in inflation. The Bank of England's governor, Mervyn King, said the UK was facing its "most difficult economic challenge for two decades". (View video of speech) The following day a record level of retail spending in May provided a respite from gloomy economic predictions, but it also fanned fears of higher interest rates. Sales rose by 3.5% during May, the strongest monthly growth since January 1986, statistical office figures show. Shocked analysts said the figures ran contrary to signs of a slowing economy and weak consumer confidence. (Details here)

Mervyn King made it clear that inflation was set to rise whilst house prices would fall. He said the MPC was "prepared to take whatever action is needed" to bring inflation back down to the government's 2% target. The latest inflation figures showed that the rate of consumer price growth had accelerated to 3.3% in May. However, Mr King added that monetary policy alone could not prevent the current effects of rising food and energy prices on living standards. People would have to accept that their pay rises would have to be limited which would affect real take home pay and make life difficult for some.

Inflation 'likely to rise further'

2008-06-18T13:09:00.004+01:00

Both official measures of UK inflation rose in May. CPI was up to 3.3% from 3% and RPI to 4.3% form 4.2%. Rising food and energy prices could push UK consumer inflation above 4% this year, the governor of the Bank of England has warned. This month's rise meant that he has had to write the dreaded letter to the Chancellor explaining what measures are being taken to bring inflation under control. In it he says "As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%... (but) there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity prices." British households must learn to live with higher prices and without increased wages, Mervyn King warned. (Link to BBC News) (Link to The Guardian article)

UK households have become increasingly aware of inflation over the past year, and expect it to rise over the coming 12 months, new research suggests ... energy, petrol and food price rises have increased inflation awareness. Inflationary expectations have proved to be significant in accelerating the rate of inflation in the past. (Link to BBC News)

The Bank of England’s Monetary Policy Committee voted eight against one to hold interest rates at 5 per cent this month, but some members were ready to consider an immediate rate rise to contain inflation, minutes of the meeting showed on Wednesday. “If there were a serious threat to medium term inflation expectations then a pre-emptive rise in rates would be appropriate. Delay would only increase the eventual costs of bringing inflation back to target,” the minutes said.

Further evidence of economic slowdown

2008-06-18T10:54:00.003+01:00

Numerous reports overthe past few days have confirmed a significant economic slowdown. The Chancellor, Alistair Darling, has said that there is "no doubt" the UK economy is slowing and has warned it will be a "difficult year" ahead. He warned of the dangers of allowing inflation to increase, calling for pay restraint to prevent the development of a wage-price sprial, so familiar to economics students of my generation. He pointed out that fuel and food price increases were hitting consumers. (Link to details)
This follows the warning from the CBI that 'the economy will grow at its slowest pace for 17 years.' The CBI's quarterly economic outlook shows that the employers' body has lowered its forecast for GDP growth in 2009 by 0.4% to 1.3%. The slowdown in consumer spending is set to intensify, says the report, pushing consumption growth down to 0.7% in 2009, the lowest level since 1992. (Link to details of the survey)

An indicator of the economic situation, contruction, was also under the spotlight with the news that the number of new houses being built had slipped to its lowest level since 1945. The biggest reason for this appears to be the inability of potential buyers to obtain mortgages. (Link to article)

Investment and growth

2008-06-06T15:00:00.004+01:00

The Economist reports that the biggest investment boom in history is under way. Over half of the world's infrastructure investment is now taking place in emerging economies, where sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs—twice the average infrastructure-investment ratio in developed economies. Largely as a result, total fixed investment in emerging economies could increase by a staggering 16% in real terms this year, according to HSBC, whereas in rich economies it is forecast to be flat. Such investment will help support economic growth this year as America's economy stalls—and for many years to come.

Infrastructure investment can yield big economic gains. Building roads or railways immediately boosts output and jobs, but it also helps to spur future growth—provided the money is spent wisely. The infrastructure boom has global implications. Increased investment means more imports of capital equipment, which will help to slim current-account surpluses in China and elsewhere, and so reduce global imbalances. Rising demand for building materials will keep commodity prices high. Last, but not least, will be the negative impact on the environment. An expected 75% increase in emerging economies' electricity demand over the next decade will worsen air pollution and global warming. (Read full article here)

IEA says world needs energy ‘revolution’

2008-06-06T14:09:00.005+01:00

The world needs to spend $45,000bn on green technologies in the next 40 years, or 1.1 per cent of annual global economic output, to halve greenhouse gas emissions by 2050, the International Energy Agency said. The investment – much of it needed to accelerate development of new technologies such as hydrogen fuel cells and carbon storage – is roughly equivalent to the gross domestic product of Italy, though the IEA said it represented “a re-direction of economic activity and employment, and not necessarily a reduction of GDP”. (FT article)

Watch video here.

OECD highlights inflation worries

2008-06-06T13:40:00.003+01:00

The Organisation for Economic Co-operation and Development (OECD) has said inflation remains a danger, as oil prices have shown a sharp increase. "Ministers were concerned about inflationary pressures and indications inflationary expectations may be drifting upwards," the OECD said. They also said attention should be paid to fiscal balances, especially where inflationary pressures remained high. It also believes that the British economy is entering a period of "significant down-swing" that will see it grow even more slowly in 2009 than this year and house prices will fall further.
In its half-yearly economic outlook, the OECD was particularly downbeat about Britain, predicting that the economy would only expand by 1.8% this year. That rate will drop to 1.4% in 2009 - the lowest since 1992, when Britain was in a deep recession, and half the pace of 2007. (Details - click here)

House prices ... the fall continues

2008-06-03T09:08:00.003+01:00

Many good articles about the housing market in the past few days. Further evidence of falling prices from the Halifax (Click here for details). It said the annual fall in prices was the biggest it had seen since 1993. If prices continue falling at the rate seen since the start of the year then they will fall by 16% over the course of 2008.

'Negative equity hits 250,000 - and there is worse to come' was the chilling headline from The Observer. (Click for the article) Larry Elliott is not surprised that prices are falling - A crash was inevitable and - despite the wailing and the gnashing of teeth - ultimately desirable as well). Also, he questions some of the myths of the housing market and suggests that interest rates are only one factor that influence housebuyers. (Click here for article)

Angry shareholders

2008-05-25T22:25:00.004+01:00

A number of example this week of potential shareholder power: HSBC is likely to face a significant protest vote againt its renumeration policy believing that the prosed payout is excessive and the performance criteria insufficiently stretching. Last week, almost half of Royal Dutch Shell's investors refused to approve its remuneration report because of concern about retention bonuses for three directors, while almost 40 per cent of shareholders in GlaxoSmithKline also abstained or voted against its report for the same reason. The internet company Yahoo has postponed its annual meeting as its board struggles to escape a shareholder uprising led by the billionaire corporate raider Carl Icahn. The potentially rowdy gathering in California was due to be held on July 3 but Yahoo has put it off to an unspecified date. Shareholders are unahappy with Yahoo's failure to agree to the takeover by Microsoft.

What is the 'real' rate of inflation?

2008-05-23T08:29:00.006+01:00

A superb article by John Kay (Full article here) on the differences between the official rate of inflation, as measured by the CPI (currently 3%) and perceptions of inflation. 'There has always been scepticism about official measures of inflation, but the gap between popular perceptions and the government’s statistics has never been so wide.The popular newspapers have sent intrepid reporters down to the shops to discover the truth, by filling a typical shopping basket. The results are “alarming”, “the most savage increase in living costs for a generation”. The Daily Express found an 11½ per cent increase in prices, the Daily Mail put it at 15 per cent.Yet what the Office for National Statistics does is just what the Express and Mail did, except that the ONS does it much more carefully.

As he points out, the CPI is an average and as such 'disguises a range of experiences' and it is the 'most salient prices' that form our perceptions of inflation. 'The price of petrol is highly salient: not only do people buy petrol regularly, but even when they are not buying it, they routinely pass signs that display the price. We are most observant of the prices of goods we buy regularly and often and of the cost of undifferentiated products, such as petrol or milk, for which price comparisons are easier and likely to stick in our minds.' He points out that perception of inflation is not determined by the ONS but by experieince.

Huge rise in alcohol related admissions

2008-05-22T15:08:00.004+01:00

The Guardian reported that the number of people admitted to hospital in England due to drinking alcohol has more than doubled in the past 12 years, NHS figures revealed today. In 2006-07, 207,800 people were admitted to hospital because of their drinking. This included people who were drunk, had liver cirrhosis or an alcohol-related illness such as heart disease, as well as those injured or assaulted while drunk. This is more than double the amount in 1995-96, when 93,459 people were admitted to hospital, and a 7% rise on the 193,637 admissions in 2005-06. Almost one in 10 (4,888) of those admitted to hospital last year were children under 18, the study, by the NHS Information Centre for health and social care, found.

This is a good example of negative externalties and the report highlights the strain that this increase on alcohol-related admissions is putting on the NHS.

What could be done to reduce the number of alcohol-related admissions to hospital? Would increased taxation reduce alcohol consumption? Should supermarkets be prevented form offering alcohol at discounted prices?

Energy supply industry is a 'comfortable oligopoly'

2008-05-22T14:50:00.004+01:00

Britain's electricity and gas supply industry is a "comfortable oligopoly" that feels little need to innovate or compete, an industry watchdog told MPs yesterday. Allan Asher, chief executive of Energywatch, said that over the last decade the number of gas and electricity suppliers had fallen from 20 to six, while in some areas only two or three firms competed. "There is a myth that there is vigorous price competition between them [the suppliers]. For the main product they most actively sell - direct debit for dual fuel, gas and electricity - the price difference between the cheapest and most expensive is £30 a year; it's just a few pence a week."

An interesting example of price discrimination was highlighted in that the price that companies charged consumers using pre-payment meters, who are often among the poorest. In some cases, meant they paid far more than customers paying by direct debit. Pre-payment meters should be called "the poor-pay-more meters", he said. Guardian article here.

What features make an industry such as energy supply susceptible to oligopoly?
What could the Competition Commission suggest that would make it more competitive?

Aviation policy should be rethought

2008-05-21T13:34:00.006+01:00

The government should completely rethink its aviation policy and shelve plans to expand Heathrow and Stansted airports, according to an influential advisory body.The Sustainable Development Commission, chaired by Sir Jonathon Porritt, said there were big question marks over the environmental and economic arguments underpinning the proposals for British airport expansion. It warned that the government faced a wave of legal challenges if it did not hold an independent review of its 2003 aviation white paper, which sanctioned new runways at Heathrow, Stansted and other airports. It believes that a full cost benefit study should be undertaken to consider the full implications of the expansion of air travel. Read further details.

A good example of an economic activity with many private benefits but also numerous external costs (ask those people who live near an airport - I am one of them!)

Fuel prices 'keep cars off road'

2008-05-20T09:18:00.004+01:00

It is generally assumed that the demand for petrol is relatively price inelastic, hence the increasing duty that has been imposed over the years. But we may now have reached a price that is startring to encourage some motorists to reconsider their transport options if a report by the AA is to be believed. High prices of petrol and diesel are making UK drivers think twice about travelling by car, a survey suggests. The AA polled 17,500 members, and found 27% had cut back on other areas of spending, 16% had decided to travel less by car, and 21% had done both. Petrol prices have risen sharply this year, although government figures have only shown car traffic falling 2%. The Petrol Retailers Association says that average prices could go up as much as 5 pence a litre by the weekend. Link to BBC News.

Why do you think 27% had 'cut back on other areas of spending' to maintain their perol or diesel consumption?

Food price rises 'hit UK harder'

2008-05-20T09:12:00.007+01:00

The UK is "more exposed" to rising food price rises than its peers, adding to recessionary fears, according to a report by Ernst & Young. Its Item Club says "the implications for business are profound" - making it more likely firms will raise prices. Unlike the US which has a balance of food and France which has a surplus, the UK has a trade deficit in food. The Item Club report says that as food prices keep rising, this reduces the chance of an interest rate cut in the UK. "The danger now is that rising food world prices and energy prices will lead to excessively tight monetary policy", it says, as the government seeks to counter the rise by "squeezing domestic costs". As food and energy prices contribute 1.7% to Consumer Prices Index Inflation - which recently reached 3% - this leaves "little room" for price rises elsewhere. Input costs have risen by nearly a quarter in the 12 months to April, eating into consumers' disposable incomes. Link to article.

The government's 2% inflation target will require a 1.5 percentage-point premium on interest rates because of spiralling food and energy prices. This will lead to sharply lower growth and rising unemployment, as many as 60,000 jobs lost, according to the Item club report, which uses the Treasury model to forecast the economy. It urged the chancellor, Alistair Darling, to exclude food and energy from the inflation target or risk excessive pain for voters in the run-up to the election. Read the Guardian article.

Larry Elliott in The Guardian

2008-05-19T11:07:00.005+01:00

In his article 'Farewell prudence, hello £2.7bn slush fund', Larry Elliot reflects on Labour's efforts to deal with the criticism of the abolotion of the 10p tax band and the political uproar it has caused. It is a solution that is too late...' The trouble is that it has taken 14 months to find this solution and it came only after the government first insisted there was no problem and then said the poor state of public finances meant only a far less generous package was affordable.' Does it stand as a credible economic policy?

The £2.7bn can now be seen as a 'political' move designed to influence the Crewe and Natwich byelection. He compares it to the last time tax giveways were used to try try to gain electoral advantage, Norman Lamont in 1992. He suggests the government's reasons for the change, quoting Alistair Darling "As I made clear at the time of the budget, it is right and sensible to allow borrowing to rise and investment to be maintained as the economy slows. Debt is lower than in the past and low by international standards. Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times generated by the turbulence in world financial markets and global commodity price inflation."

Elliot thinks this is unconvincing, outlining the the two views on fiscal policy: 'One is Keynesian: the idea that when times are tough, governments should do more than simply allow borrowing to rise as a result of falling tax revenues and rising welfare payments; instead they should raise spending or cut taxes to boost activity. The other is called Ricardian equivalence: attempts by governments to borrow their way out of trouble are doomed to failure because individuals know that there is no such thing as a free lunch, with today's tax cut turning into tomorrow's tax increase. As a result, they don't spend the windfall from the state, but save it for the day when they have to pay it back.' The recent $150bn worth of tax rebates in the USA was designed to reinforce the effects of lower interest rates whereas the £120 per taxpayer will have significantly less effect. Read the full article here.

Inflation ...all the fault of the MPC?

2008-05-19T10:28:00.004+01:00

According to an article in today's FT, 'the increase in consumer prices index inflation since mid-2007 can be largely explained by rising global prices for food and energy. The deeper question, however, is why these have not been offset by slower rises or falls for other products and services, as would be expected if monetary policy had been correctly calibrated to meet the inflation target.' The MPC ' allowed excessively loose monetary conditions to develop between 2005 and 2007. Bank rate was cut inappropriately in 2005 and maintained below its neutral level until 2007. During this period, investors’ risk appetites significantly increased. The result was a prolonged period of buoyant money and credit expansion.' They discussed rapid money and credit growth in 2006 and 2007 but'played down the dangers'. The upshot is that official neglect of monetary warning signals has once again been followed by 'an unexpectedly large rise in inflation although the details of the transmission mechanism differ. In effect, loose domestic monetary conditions have accommodated or even supplemented the inflationary impact of rising global costs.' It is also suggested that there is liitle scope for further interest rate cuts in the near future. Read the article.

Government 'should change inflation target'

2008-05-19T09:32:00.004+01:00

Consumers will be "crucified" unless the government changes its inflation target, a leading economist has warned. Peter Spencer from the influential Ernst & Young Item Club is urging ministers to change the 2% inflation target used by the Bank of England. He warned that interest rates would have to stay at 5% if inflation is to be brought down to 2%. He added that keeping interest rates at their current level would hurt hard-pressed households. Professor Spencer said consumers were paying the price for an inflation target that had become unrealistic given the volatility of oil and food prices. He called for the Bank of England's remit to change so it focused on "core inflation", a measure that excludes food and energy prices and is used in the US. Read details here.

David Smith's piece in the Sundaty Times also makes an interesting read, especially the divergence between base rate and other interest rates in the economy, those that have a real impact on economic activity. Link to article. Geoff Riley provides a summary of the key points on the tutor2u blog. Link

Does the CPI reflect the 'real' level of inflation in the economy?

A view from France

2008-05-16T10:51:00.004+01:00

Greater competition, lower prices, must be welcomed by consumers. Not necessarily so, if the example of France is anything to go by. Many French consumers, unhappy at rising prices, inflation at a 17 year high and lower prices elsewhere in Europe, have reacted unfavourably to a proposed new law enabling more hypermarkets to be built to challenge local monopoplies and greater freedom for them to negotiate prices with suppliers. A poll showed that less than half favoured more competition as a solution to their concerns but rather a reduction in sales tax and a rise in the minimum wage.

Unlike the UK, hypermarkets are not allowed sell pharaceutical products, despite their claims that they could do so more cheaply. Despite a legal challenge, ' the pharmacists' monopoly remains—with Mr Sarkozy himself ruling out any change on the ground that pharmacies are not a business but a “public service”. ' Read the full article here.

How do firms set prices?

2008-05-16T10:19:00.002+01:00

For economics students, obsessed with demand and supply diagrams, setting prices is child's play. But how do firms set their prices? What information do thay need to set a price that will hopefully clear the market. An interesting article in the FT, offering advice to firms about what to consider when setting prices in an economic slowdown. A key factor is to 'understand how price-sensitive customers will behave - and act on that knowledge more quickly than competitors'. Price sensitivity, a concept that should be familiar to students. Read the FT article here.

Water sector competition proposed

2008-05-16T09:38:00.003+01:00

The water and sewerage industry should be opened up to competition, says regulator Ofwat. Competition was "severely limited by legislation" and had "not developed successfully", said Ofwat, the regulator in England and Wales. Opening up the sector would help it address climate change and water scarcity, as well as lower costs. Ofwat said it would challenge firms on price and service until competitof the syatem by whichion was "strong enough to protect customers".

The watchdog said competition would help "respond to the environmental challenge of water scarcity, which the government highlighted in its water strategy". It also said "markets could spur innovation in developing and making better use of water resources and more water efficiency services, supporting sustainable water abstraction". Read the BBC article here.

Think about the challenges the water industry faces. How could competiton help address these? What effect would greater competition have on customers? Would they be able to switch supplers easily? Would it lead to a reform of the way in which most customers now pay for their water?

UK unemployment rises by 14,000

2008-05-14T15:29:00.007+01:00

UK unemployment rose by 14,000 to 1.61 million in the three months to March, official figures show. The number of people claiming Jobseeker's Allowance climbed by 7,200 to 806,300 last month, the Office for National Statistics (ONS) said. Analysts warned the figures may indicate that global financial problems were hitting the UK and could impact the labour market in coming months. The unemployment rate was unchanged at 5.2% in the three months to March. The figures come amid signs that the UK economy is slowing. At the same time, inflation has picked up, driven by higher food and fuel costs. Read the details here.

The Independent had the headline today 'The spectre of 'stagflation'; a combination of stagnant output and high inflation not seen for decades is set to haunt policy makers for months if not years to come. Click here for the article.

Click for video from BBC News with an anlaysis of the change in Unemployment. The commnetator also makes the point that employment has also increased, with an attempt to explain how this can be the case.

With inflation rising to 3%, how influential will this rise in unemployment be in persuading the MPC to cut rates when it meets next month?

Why are food prices rising?

2008-05-14T13:26:00.003+01:00

Food prices have been rising steadily in the past few months and the effects are being felt globally. As agricultural commodities such as wheat and dairy trade at record highs, some governments, such as Russia, are implementing price controls on selected types of bread, cheese, milk, eggs and vegetable oil. But why is food getting more expensive? What role do biofuels play and how has the weather affected crop yields this year? How does the cost of oil factor into the price of food? A really informative FT multimedia feature explains. Click here for link.

Headline inflation up to 3% - further interest rate cuts in doubt?

2008-05-13T15:50:00.010+01:00

UK consumer inflation reached its highest level in 13 months driven by high food and fuel costs, according to the Office for National Statistics. The Consumer Prices Index (CPI) hit 3% on a yearly basis in April, up from 2.5% in March. The monthly rate was 0.8%, the biggest leap since May 2001. According to the figures, the Retail Prices Index rose to 4.2% from 3.8%. The inflation data would probably stop the Bank of England cutting interest rates in the near term, analysts said. "It was a pretty horrific headline number," said Lee Hardman, an economist at BTM-UFJ. "It limits the scope for monetary easing from the Bank, it will be hard for them to cut in June." However, some analysts added that the main drivers of price growth were fuel and food costs, which higher interest rates did little to control or rein in. UK inflation jumps to 3% in April

Listen to Melvyn King, Governor of the Bank of England, presenting this month's Inflation Report. Click here for link. He is quite pessimistic about the short term outlook but believes inflation will be back on target in the near future. He outlines clearly the inflationary pressures currently affecting the UK economy. Most significantly he stated that the NICE decade was over - NICE means non-inflation continuous expansion.

This BBC News clip explains the underlying pressure on prices. Click here for 'Why inflation keeps rising'.

Why do analysts think that further interest rate cuts are unlikely? What are the main causes of the current increase in prices? What type of inflation is this?

Ticket touts back in the news

2008-05-12T11:01:00.004+01:00

Two interesting articles about ticket touts, a subject much discussed recently in recognition that they are unlikely to go away. The FT reported that Madonna is endorsing the sell-on of concert tickets, condemned by some concert promoters as scalping or touting, by making two leading companies in the secondary ticket market official partners for her forthcoming Sticky & Sweet tour of North America and Europe. Secondary ticketing companies enable the public to trade their tickets online with customers who are prepared to pay above their face value. The company takes a cut of about 10 to 15 per cent. Many sports promoters complain that they are not getting any share of the premium on these ticket sales and concert promoters in the UK have pressed unsuccessfully for the government to outlaw the practice. Madonna endorses seconday ticket markets

According to The Observer ticket touts will make more than £10m in the next week by cashing in on the success of Britain's football teams in Europe and at home But potential buyers are warned to be wary. It is illegal to resell football tickets in the UK - unless it is through an official, recognised third party. However, many of the online firms are able to flout the law by operating offshore, out of reach of the UK authorities. Details here.

Think about the market conditions that enable secondary markets (ticket touting) to exist. Should the law be used more effectively against them or should they be allowed to trade under certain conditions (eg give a percentage of the earnings back to the original body that issued the tickets)?

Further evidence of 'cost push' inflationary pressure.

2008-05-12T09:46:00.006+01:00

A Confederation of British Industry (CBI) survey shows that manufacturers are raising prices as they face the strongest cost pressures in over 20 years.The CBI said that small and medium firms were struggling with high energy and raw material prices. However, there is some good news as the survey said that despite the prospect of higher costs, manufacturers were taking on new staff. The reasons appear to be that some firms are benefiting from the weaker pound and strong growth in Asia. At the moment price rises were affecting other businesses and had yet to transfer to consumers. Details here.

This was reinforced by further figures published by the government. The price of goods leaving Britain's factories rose at the fastest level in more than 20 years last month as soaring food and fuel bills pushed up the cost of production. In a fresh inflation warning to the Bank of England, the Office for National Statistics said so-called factory gate prices were up by 1.4% in April and by 7.5% over the past 12 months. Both were the highest since the series began in 1986. Read the article.

What factors will determine the ease to which firms can pass cost increases into consumers in the form of higher prices?

Crunch closes north-south growth divide

2008-05-09T15:19:00.005+01:00

The north-south growth divide will close for the first time in six years as the credit crunch takes its toll on the City, a report out today shows. The difference will disappear next year for the first time since 2002 as London's economy slows down, said Experian, Britain's leading credit reference company. The south has been growing 1% a year faster than the north but this will change over the next couple of years as the credit crisis and consumer slowdown take their toll, especially on financial and business services. London's growth in average output per head - also known as gross value added (GVA) - will fall to 1.5% in 2009 from 2.3% the previous year. In the north-east, GVA will increase to 1.2% from 0.9% the year earlier. "London will see greater falls as it has a much greater share of GVA than the north," said Andrew Goodwin, managing economist at Experian. Read the article here.

What are the implications of a 'two speed economy'?

Repossession orders up by 17%

2008-05-09T13:51:00.004+01:00

The effects of tighter credit and more expensive mortgage payments appear to be having an effect on the housing market with the news that respossession orders are up by 17% (27,530 orders made, up from 23,438 in the same period of 2007). An order is the first stage of the repossession process and whilst many of these homes won't be repossessed the upward trend is a cause for concern. Read details here.

Freeconomics - a new 'economic philosophy'?

2008-05-07T11:49:00.005+01:00

International flights that don't cost a thing? Books or music you don't have to pay for? Even companies handing out cars? Traditional business is based on the certainty that everything has a price. But now US writer Chris Anderson believes we are at the dawn of a new consumerist era, governed by what he dubs 'freeconomics'. A very interesting article in The Guardian exploring this new econimic thinking.

Anderson's freeconomics thesis is that more and more goods and services are being provided for free and that those businesses that fail to follow suit are likely to go to the wall. "As much as we complain about how expensive things are getting, we're surrounded by forces that are making them cheaper," Anderson wrote in a recent article that will form the basis of a book called Free, to be published next year. "Forty years ago, charity was dominated by clothing drives for the poor. Now you can get a T-shirt for less than the price of a cup of coffee, thanks to China and global sourcing. So too for toys, gadgets and commodities of every sort. Even cocaine has pretty much never been cheaper (globalisation works in mysterious ways)." He explores the impact of the internet in the way it has revolutionised economics by reducing the marginal cost to suppliers. "On the web, the marginal costs of manufacturing and distribution are zero, or close to it. This means that you can now experiment with giving away one thing to sell something else much more than you could in the pre-internet era."

Read the article here.

Could all goods and services be provided 'free'?

Postal competition has created 'no significant benefits'.

2008-05-06T14:35:00.005+01:00

The liberalisation of the UK postal service has produced "no significant benefits" for either households or small businesses, a report has said. That is the initial finding of an independent review of the UK postal sector commissioned by the government. It warned there was now a threat to the Royal Mail's financial stability. The Royal Mail's 350-year monopoly ended at the start of 2006, when other licensed operators were given the right to collect and deliver mail. View article here.

While the initial report said homes and small firms had not gained from the increased competition, it said large companies had "seen clear benefits from liberalisation - choice, lower prices and more assurance about the quality of the mail service".

There is still no significant competition in the delivery of letters, due perhaps to "significant barriers to entry." View The Guardian article here.

Think about why potential competitors are unwilling to challenge Royal mail in the area of household letter delivery. In spite of deregulation, what barriers to entry are still likely to exist?

Thailand calls for a rice cartel

2008-05-02T22:40:00.002+01:00

Thailand wants to form an Opec-style rice cartel to give it more control over international rice prices. The world's biggest rice exporter plans to talk to Laos, Burma, Cambodia and Vietnam about co-operating on prices. Rice prices have tripled so far this year with countries such as India and Vietnam restricting their exports. But the idea was met with opposition. The Philippines, the world's biggest importer of rice, also raised objections. "Almost three billion people are rice eaters," said Edgardo Angara, chairman of its senate committee on agriculture. "It's not a good idea, it's a bad idea. It will create an oligopoly and it's against humanity." BBC News

Think about how a cartel of this nature would have control over rice prices. Who would gain from such an arrangement?