Money, money, money!

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

Link to The Guardian

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

Larry Elliott on quantitative easing - printing money - Audio link

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

The Global Downturn ... in graphics

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

Link

Business investment falls sharply

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

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

Link

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

No V-shaped recession

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

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

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

Link to BBC News

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

Unemployment up to 1.97million

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

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

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

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

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

British tourism bucks the trend!

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

Link to article

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

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

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

Link to BBC News

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

Link to 'Countdown to Recession'

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

Public finances feel the effect of the recession.

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

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

Link to FT article

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

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

Link to video

Is spending more the answer?

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

What do you think?

Link to article

Fiscal policy - economists embrace public investment

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

Links:

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

A New Enthusiasm for a Fiscal Stimulus

Local impact of the downtown

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)

UK already in recession - Bank of England

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)

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

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)

Government borrowing highest since 1946

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?

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!

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.'

News of recession dominates

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.