Collapse in new car sales - motor industry clutching at straws
The Society of Motor Manufacturers and Traders has reported a collapse in new car registrations as potential car buyers stay away due to a combination of low consumer confidence, tighter rules on credit and rising fuel and insurance costs. New car registrations in the UK fell 21.2% in the year to September to 330,295 units and the year-to-date volume is down 7.5% to 1,794,419 units.
read more...»The Ascent of Money
Niall Ferguson, Professor of International History at Harvard University, Senior Research Fellow of Jesus College, Oxford University and a Senior Fellow of the Hoover Institution, Stanford University has a new series due shortly on Channel 4 with the title The Ascent of Money. There is a public lecture at the LSE on Thursday 6th November for those interested in going. Details available here.
Labour pains for a slowing US economy
The decision last week by the US Congress and Senate to pass a bill enacting the seven-hundred-billion dollar bail out for the bad debts of the US banking system may have provided short term relief to Wall Street traders and embattled financial institutions. But there is no denying that the labour market effects of the US slowdown are now coming sharply into focus.
read more...»Looking back over seven momentous days
It was perhaps the most remarkable seven days that any of us who have been teaching Economics for a generation or more have experienced. The financial markets risked meltdown, iconic investment banks went to the wall, indeed investment banks have more or less disappeared from Wall Street. The UK government refused to allow a major high street bank to collapse and was prepared to relax competition policy rules to nudge Lloyds-TSB into bed with HBoS. The FSA stepped in to ban short selling (Aaron Haselhurst is on great form here explaining what short selling is!) And we ended the week with an ultra-ambitious plan to nationalise the bad debts of the UK banking system in a move likely to cost the US taxpayer hundreds of billions of dollars.
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.
To use a phrase once coined by a Labour Party spin doctor, last week was a good week to bury bad news.
One of the stories that fell under the radar for most people was the scarcely credible increase in UK government borrowing of more than £10bn during the month of August. The five-month public sector debt level is running way above the March 2008 budget projection, and is already more than £40bn - we are now looking at a rise in government borrowing of up to 70% more than last year and the accumulation of government debt is a very worrying development for those of us who believe in the mantra that today’s borrowing is tomorrow’s taxes. In a week when consumer price inflation in the UK surged to 4.7% the macroeconomic climate facing the British economy worsens by the day. 2009 will prove a very difficult year for the economy.
A selection of articles from the press today on the crisis
Stephen King in the Independent: ‘Capitalism can be incredibly unstable and state intervention is back, big time’
Larry Elliot in the Guardian: This week’s financial crisis marks the end of an epoch
Ken Rogoff in the Times on some of the implications of the US bail out of the financial system
Financial Times editorial on the bail out
Roger Bootle in the Telegraph on the limits to free markets
Robert Peston’s unmissable blog including this post on the emergence of a new world order.
Beware unexploded and highly toxic debt bombs
Until the banking system finally works out just how much toxic bad debt there is out there parcelled up into all of those complex multi-tiered financial instruments then the credit crunch will never be resolved. Indeed the events of Bloody Sunday and Meltdown Monday will - in the near term - serve only to accentuate the severity of the credit crunch. We have moved swiftly from a world in which the word scarcity barely seemed to exist in financial markets to a position where the supply-lines of credit to business and household customers have become as blocked as the fattest artery.
read more...»China’s cut price export machine misfires
How much longer will China’s export machine - built on selling low cost manufactured products to the rest of the world - continue to grow at double digit rates? In an important article in today’s Sunday Times, Michael Sheridan argues that
“The fabled “China price” of cheap consumer goods has kept global inflation low, undercut workers in every industrialised nation and brought millions of Chinese peasants into a raw capitalist economy. That phase of globalisation may now be coming to an end, economists say. The export machine that powered China’s spectacular growth is slowing as the cost of manufacturing in China and shipping goods to Britain goes up daily.”
Rampant wage inflation, the huge rise in global shipping costs and an appreciating currency - all of these are having an impact on China’s cost competitiveness. The OECD for example is forecasting that the annual growth of Chinese exports will halve in 2008 and 2009.
Here is the rest of the article
My Chinese economy chartroom poster set is now available.
read more...»Signed, sealed and delivered - The Box starts a journey
Containerisation has long been regarded as one of the key drivers of the current wave of globalisation. And now the BBC is putting together a series of video reports entitled The Box to demonstrate the impact that containerisation is having on our lives. Here Declan Curry finds out how the container box has transformed the way cargo moves around the world and in this report, Declan explains why such containers are so important in the modern world.
The series is inspired by the recent book by Marc Levinson “The Box How the Shipping Container Made the World Smaller and the World Economy Bigger” and seems destined to produce and tremendously rich vein of news clips for us over the next year. Hat tip to John Richards for alerting me to this.
China’s currency manipulation to soften the slowdown
Perhaps fearful of a steep slowdown in exports to a weakening global economy, the Chinese monetary authorities appear to be engaging in another bout of active manipulation of the Yuan in the foreign exchanges.
read more...»Anguished of Edinburgh
The BBC’ Business Editor Robert Peston offered a rapid fire tutorial in the credit crunch in his address to the Edinburgh Book Festival today. Some people have perhaps unfairly labelled him as “Pessimistic Peston”, the man who first revealed the state of the liquidity crisis at the Northern Rock in early September 2007. But he delivered an engaging and witty talk to a large group of the well heeled of Edinburgh who clearly have weighty financial issues on their minds.
read more...»Globalisation and the skills bias of world trade
The latest edition of the Economic Journal contains new research by Paolo Epifani and Gino Gancia that focuses on the skills preium for highly skilled workers in an age of globalisation. Whilst increasing economic integration between countries has undoubtedly contributed to a process of income convergence across nations, one of the paradoxes it that it can also lead to greater pay and earnings inequalities within countries - this research helps to explain why.
“Since the mid-1970s, the wage gap between high-skilled and low-skilled workers has widened. At the same time, world trade has increased dramatically: between 1980 and the late 1990s, the share of countries ‘open to trade’ rose from 35% to 95%, and the volume of trade of the average country rose from 59% of national income to 74%....Globalisation increases the size of the market firms can access. Some industries can take advantage of a larger market more easily than others as they benefit from ‘economies of scale’.The study argues that those industries that take advantage of a larger market are more likely to employ skilled workers, and so the wages of skilled workers will rise faster than unskilled workers in a period of globalisation.”
The rest of the media briefing on this new research is available here
Oil - a coming supply crunch?
A new report by Paul Stevens for Chatham House the international affairs think-tank argues that unless there is a collapse in global oil demand within the next five to ten years (presumably the result of a severa global slowdown or sizeable shift to oil substitutes) there will be a serious oil ‘supply crunch’ because of inadequate investment by international oil companies (IOCs) and national oil companies (NOCs). An oil supply crunch is where excess crude producing capacity falls to low levels and is followed by a crude ‘outage’ leading to a price spike. If this happens then the resulting price spike will carry serious policy implications with long-lasting effects on the global energy picture. The Stevens report can be downloaded in pdf format from this link.. Paul Stevens is Senior Research Fellow for Energy at Chatham House and Emeritus Professor at Dundee University.
IMF health check on the UK economy
Tucked away in between a report on financial stability in Moldova and standards and codes of business in Azerbaijan lies the latest health check on the UK economy from the International Monetary Fund. There is plenty of decent macroeconomics in there for A2 economists preparing for the Bank of England competition later on this autumn - but the IMF is true to its traditions - preaching fiscal and monetary policy orthodoxy during these turbulent times.
read more...»Credit Crunch
The FT is running a series on the Credit Crunch which started one year ago. Well worth looking at, especially for students applying to university this Autumn. It can be viewed at Big Freeze
New Zealand tips into recession
Another country joins the list of economies tilting into recessionary headwinds. Data for the second quarter of 2008 is expected to show that the New Zealand economy has entered a recession for the first time since the fall-out from the 1997-98 emerging markets financial crisis. Consumer and business confidence has declined and rising inflation has hit household real incomes. The New Zealand Treasury reports that
“The fall in profitability, both experienced and expected, is due to weakening demand from households and increasing cost pressures. More firms are now reporting demand as the main constraint on production as opposed to supply factors such as labour, finance and capital.”
More here from the BBC and also from the New Zealand Treasury report.
Zimbabwe introduces a Z$100bn banknote
Tracking GDP for the Roman Empire
The Today Programme on Radio 4 had a spell-binding interview with an economic historian who has devoted virtually the whole of his working life to creating national income statistics for the world economy - data that we can use today to enrich and deepen our understanding of why some countries grow faster than others. Click here for a discussion between Evan Davis and the historian Angus Maddison, Emeritus Professor at the Faculty of Economics at the University of Groningen. He explains how you can work out the GDP of the Roman Empire! And here is a link to his most important work.
Light at the end of the pipeline?
It is not supply that will drive the world price of oil down in the near term - it is demand. Oil prices dropped by the biggest amount in three-and-a-half years yesterday as commodity dealers sold on fears that the world’s leading economies are facing a sustained economic downturn. A firmer dollar and weaker prospects for economic growth should - in the absence of supply shocks to crude production and refining output - bring prices down further providing some relief to motorists, the aviation industry and countless others.
Prices are incredibly volatile at the moment - and the huge number of options contracts tends to increase volatility, with computers programmed to automatically sell once prices reach certain thresholds.
The Guardian: “Fears of recession drive shares and oil prices down”
Jim O’Neill on Globalisation
Jim O’Neill the Chief Economist of Goldman Sachs writes on the benefits of globalisation for the UK economy in today’s Sunday Telegraph
“For the nation that provided the English language to the world, that provides the link between east and west in terms of time zones, globalisation - the major structural trend of our generation - is going to become an ever greater bonus….At the heart of all of this is the expansion of the so-called BRIC economies. The emergence of Brazil, Russia, India and particularly China, closely followed by another group of emerging economies with large populations that we have dubbed the “Next 11”, will drive our future.”
Jim spoke at the Keynes Society in February and there is a report here
Oil at $500 a barrel - not a flight of fancy
The maverick economist Willem Buiter argues that $500 for a barrel of oil is not out of the realms of possibility.
“Once global growth returns to its underlying trend, however, say three or four years from now, I expect the relentless upward march of commodity prices, including oil, gas and agricultural commodities, to continue. The reason is simple. Global demand growth is heavily biased towards energy-intensive production and consumption in emerging markets.”
Such price spikes necessarily bring about huge shifts in the balance of economic power at least in the short term towards energy producing countries and would entail most (but not all) of the rich developed world adjusting to a sharp fall in real income. But by the time prices reach such levels, the incentives for conservation and investment in energy efficiency will have become over-powering.
The fact that we are at least considering prices for oil of almost unbelievable heights is indicative of how the world is changing before our eyes.
The rest of his article is here
In Business Week, Steve Levine questions whether the Saudi’s have the capacity to boost their sustainable supply to anything close to 12.5 million barrels a day
High oil prices threaten Asian trade model
Ambrose Evans-Pritchard is on good form in the Telegraph today looking at how the spike in oil prices is theatening the very basis of the Asian trade model. In a world where distance now costs money - ever-rising freight charges are acting like an import tariff for countries whose export-led growth has been built on mass volume manufacturing and the ability to transport these products in huge bulk around the world’s shipping lanes at a relatively low cost.
“The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete. Asia’s intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin. Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded….........globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.”
The rest of the article is here
Shipping freight and derived demand
Freight ships are one of the best examples I know of a service whose demand is derived from the simple need among exporters and importers to transport their products around the world. So when the global economy changes gear and the chill-winds created by record high oil prices and a slowdown in consumer spending start to bite, it is more or less inevitable that the major shipping businesses will feel the pinch.
The Telegraph carries a report on this today. Ships are leaving Asian ports not full to to capacity a sign perhaps that the increased costs of shipping products is starting to limit demand for freight services.
Apparently the index to watch out for is the Baltic Dry Bulk Index - a measure of commodity-shipping costs - and this bell-weather measure has fallen sharply in recent days hinting of a shift in the balance between supply capacity and demand for ships to move the major raw materials by sea.
Too much freight capacity in the industry? Or a really important lead indicator that 2009 will be a really tough year for the global economy?
Firm Foundations for Fair Trade
Demand for fair trade products is rising nearly twenty times faster than the growth of the UK economy amid signs that consumers are increasingly willing to pay a premium price for ethical products.
read more...»More on inflation
The Economist is running with a leader on inflationary woes today.
read more...»Brazil’s widening wealth gap
Gillian Lacey-Solymar, Business correspondent for BBC Newsnight has a piece on tonight’s show about the rising inequality in Brazil as her economy continues to experience breakneck growth. Expect an excellent video clip to be available from the BBC web site immediately after the Newsnight programme has aired. Excellent for highlighting the links between growth and income and wealth distributio, especially with a tax system that appears to have regressive effects on the lowest income earners.
Policy conflict for the UK economy?
The IMF is forecasting a slowdown in global growth to 3.7% in 2008 and 2009. This is in contrast to recent growth rates of over 5%.
read more...»Well it helps the stereotypes…
I normally dislike these “heads up” blog entries because most of our audience are already prolific readers of other news content, but the latest edition of The Economist has published a great piece on the similarities and differences between the British and American public. And it can’t have been an accident that the poll (YouGov & Polimetrix) just happened to coincide with Monsieur Sarkozy’s state visit on Wednesday.
read more...»Mind Map: Credit Crunch
Our A2 macro group mind-mapped the Credit Crunch in a lesson on Friday, a text summary appears below and the original map is also available as a pdf file.
read more...»Yuan’s World
Countries running gigantic trade surpluses must take some responsibility for rebalancing the world economy by raising their own domestic demand for goods and services. That was the message I took from a speech on the balance of payments given last week by John Gieve, deputy governor of the Bank of England. In a talk to the Sovereign Wealth Management Conference in London. Mr Gieve argued that stronger action is needed to correct some of the deep rooted balance of payments imbalances in the world economy and that sovereign wealth funds will have an increasing role to play by boosting investment in their domestic economies to close some of the gap between domestic savings and investment.
Some key points from his speech are given below:
read more...»Credit Crunch in 3:07
I teach a General Studies course on Friday mornings and will be looking at the credit crunch and the link between financial and economic crises tomorrow.
read more...»The Decoupling Debate
The D word - ‘decoupling’ - is at the heart of the debate regarding global economic prospects for 2008 and beyond.
The term refers to the shift by developing economies - and newly industrialising countries in particular - away from dependence on strong demand in the West for their products.
read more...»
