Economics Explained, by Evan
Here is a great little article on the Today programme’s website by Evan Davis, looking at the relative merits of Plan A - Austerity - vs Plan B - government spending. He takes the arguments of Jonathan Portes, director of the National Institute of Economic and Social Research, who believes that what’s required at the moment is a short term, temporary fiscal stimulus to boost output and jobs and of Roger Bootle, managing director of Capital Economics, who thinks it would be dangerous for the government to divert from its Plan A of spending cuts.
read more...»Unit 4 Macro: Economics of Fiscal Deficit Reduction
How far, how fast and in what way should the UK government seek to cut the annual budget deficit and improve the state of public sector finances? These questions continue to be at the centre of a fierce debate among economists.
read more...»Unit 4 Macro: UK Bond Yields Reach Record Lows
The yields on UK government issued bonds has been falling steadily in recent months and, as we turned into January 2012, the yield on ten year government debt edged below 2% - when the UK government continues to borrow eye-wateringly large sums, why are bond yields so low?
The yield on a bond is the income received from a fixed-interest bond, calculated as a percentage of the price paid for it. So a ten year bond bought for £10,000 and paying a fixed annual interest of £600 would offer a yield of £600 / £10,000 = 6.0% per annum.
If the market price of a bond rises - for example, it rises from £10,000 to £12,000, the fixed interest remains the same (£600) but the yield will fall. £600 / £12,000 expressed as a percentage = 5%.
read more...»Unit 2 Macro: Quantitative Easing in the UK
On 11th March 2009 the Bank of England started a policy of quantitative easing. QE is also called an ‘asset purchase scheme’. It was extended to a total of £275 billion in October 2011 and is likely to be expanded further during 2012.
Other central banks have introduced quantitative easing in recent year through huge purchases of government bonds. Indeed the economist Gavyn Davies, writing recently in the Financial Times has calculated that “around one half of the bonds issued to fund the budget deficits of the US, UK and eurozone since 2008 have been acquired by the Fed, BoE and ECB.”
This is a remarkable change in the conduct of monetary policy in advanced nations.
Surveys, statements and predictions for 2012
As one of many turn-of-the-year round-ups, the BBC has polled 34 ‘leading economists’ in the UK and EU to find out what they expect for the EU in 2012. Unfortunately this report of the results doesn’t give details, but says that25 of the 27 respondents expect recession to return to Europe next year, with many finding it fairly likely that the eurozone will break up, and 20% expecting that at least one member will leave during next year.
read more...»2012 - Carnage on the High Street
There are many retail industry experts forecasting that the early months of 2012 might be tough for some struggling retailers. We will keep this blog post updated on a regular basis as news of some high profile retail failures comes through. And we will link to media coverage of some of the attempts to restructure retailers under the threat of closure.
read more...»Unit 2 Macro: The UK Housing Market in 2011
This blog provides a chart-based overview of developments in the UK housing market in 2011. The housing industry has a big effect on macroeconomic variables such as output, employment and investment. Has there been a marked recovery in property prices, new housing starts and mortgage lending?
read more...»Economics Christmas panto - Cinderella 2011
I have set my AS and A2 Economics classes a Christmas task, to write a panto script! The Story so far is in the attached word document - it tells the story of Cinderella (aka the UK economy) and the hard times she is facing, with a Wicked Stepmother and two Ugly Sisters to struggle against. But Cinders has some friends, and just as she is in despair, her Fairy Godmother, Buttons and Prince Charming (Supply-side and Demand-side fiscal policy and Quantitative Easing), turn up to rescue her.
The task for the students is to write the script for the rest of the story, as each of her friends describe how they can help, and as she decides which of them can help her to live happily ever after.
My A2 classes spent the last two lessons of term writing and acting out their scripts, with some truly memorable results! My AS classes have been set this as a Christmas task, and I look forward to some great performances to come in January - and I don’t see why this couldn’t be used as an early January lesson.
If I was setting the task now, I would probably insist that they should include at least 3 direct references to the data in Geoff’s great Prospects for the UK Economy in 2012 powerpoint
Cinderella_-_chrismas_lessons_panto_2011-1.doc
Changing Consumer Behaviour - falling incomes
What links rising VAT and energy prices, higher unemployment, loss of bonuses, a reduction in overtime and more part-time working?
read more...»Where is the UK Economy? National Output
The first of an occasional series - putting economic data into context. First we focus on the level of real national output in the UK in the aftermath of the recession and with recovery appearently grinding to a halt.
UK GDP remains well below the peak of national output at the end of the last cycle in the early months of 2008. During the recession, national output fell by a cumulative 7 per cent. Since then there has been a slow and uncertain recovery and the Bank of England has recently slashed their growth forecasts for the remainder of 2011 and for 2012. Growth of less than 1 per cent will cause unemployment to rise and will damage business and consumer confidence (animal spirits) and further undermine planned capital investment spending.
There is a real danger than UK trend economic growth (the estimated annual growth of potential GDP) will continue to edge lower affecting living standards and any chance of the government meeting its medium term deficit reduction targets.
Bank of England: Bank of England finds risk of crisis biggest since 2008
AS Macro: The State of British Business
How well is British business coping in the aftermath of recession and during a sluggish recovery? Are there signs of improvement or are there warning signs that the UK business sector is fragile and vulnerable as we head into 2012? Four AS macro students - James Richardson, Ludo Higgin, Joe Landman and Nick Russell collaborated on this excellent piece and searched for some revealing clues about the resilience of British businesses at this crucial stage of the economic cycle.
read more...»Unit 2 Macro: Can Exports Drive a Recovery?
UK overseas trade is in the news today with the release of a batch of figures showing a record level of UK exports - see BBC news - UK trade deficit cut by higher exports
read more...»UK Unemployment in October 2011
There were some desperately disappointing unemployment and employment numbers published for the UK economy today. Even taking due note of the need not to focus too much on one set of data the UK labour market looks to be weakening as fast as the autumn leaves are falling. The human and social cost of the high jobless figures is enormous and the macroeconomic effect of fewer people in work and paying taxes will dent further hopes of a solid recovery.
read more...»Unit 4 Macro: Unit Labour Costs and Inflation
Over many years the rate of change of unit labour costs (ULCs) has been a decent reliable indicator of inflationary pressures in the UK economy. Times when wage costs adjusted for productivity have grown quickly have often coincided with a rise in the annual rate of inflation - little wonder when payroll costs are a sizeable chunk of operating expenses for many businesses.
But in the last couple of years we have seen a growing disconnect between unit labour cost inflation and the published figures for CPI.
read more...»Unit 2 Macro: UK suffers a weak recovery
AS macro students will be studying the economic cycle and following the struggles of many countries to sustain a recovery in demand, output and jobs after the 2008-09 recession. The well respected independent forecasting body, the National Institute (NIESR) has produced new data suggesting that the UK recovery is on course to be “the weakest of any since the end of the First World War”, with gross domestic product still 4pc below its pre-recession peak. The risks of a second recession (a double dip) look to be rising week by week especially when one looks at the consumer and business confidence data.
Here is a link to the NIESR report and also to BBC news coverage of their findings.
Changing Consumer Behaviour - Taxing Saturated Fat
The government in Denmark, has introduced additional taxes on foods which contain more than 2.5% saturated fat. It will add 25p on packets of butter, 8p on crisps.
This BBC news clip introduces this new fiscal measure.
read more...»Unit 4 Macro: IMF Flags up Risks of Double Dip
Here are some of the salient points from the gloomy World Economic Forecast from the IMF which argues that the global economy has entered a dangerous phase.
The IMF report highlights many of the vulnerabilities facing both developed and emerging economies. In Britain the media is emphasising a sizeable reduction in the forecast rate of growth for the UK for 2011 and 2012. Real GDP in the UK is likely to expand by just 1.1% in 2011 and 1.6% next year and the IMF economists say that there is a one in five chance of a double dip recession.
Weak growth is terrible news for the Chancellor who is hoping for a significant expansion of the private sector to offset fiscal cuts and to meet the targets for fiscal deficit reduction. It is also awful for prospects of a meaningful reduction in unemployment and prospects of tackling the structural issue of very high youth unemployment rates.
Incidentally that risk of a double-dip is thought to be much higher in the United States where the probability of a second recession following a partial recovery is put at 40%.
read more...»UK Macro: Risks of a Double Dip Recession
How close is the British economy to experiencing a double-dip recession? Many of the key macro-economic indicators are heading in a southerly direction - new orders, business and consumer confidence, real incomes, housing starts and the worst of the fiscal squeeze on the economy is yet to hit. For those teaching the economic cycle and also for students wanting to get a picture of where the economy is at this crucial time, I have put together a slide presentation on the risks of a double-dip recession together with a link for the PowerPoint download.
read more...»Unit 4 Macro: Evan Davis on Re-Balancing the Economy
Here is a terrific resource for teachers and students looking for an assessment of where the UK economy might be heading at a crucial stage of the economic cycle. BBC radio 4’s Today programme has three reports on the challenges facing the UK economy from Evan Davis. Here is the link to the main web page article from which the three short radio reports can be accessed.
Keynes vs Hayek - how to solve an economic crisis
As major economies are buffeted by crisis again, the excellent Keynes vs Hayek debate held at the LSE last month is thrown into ever sharper context. You can hear the 30-minute radio programme made from the debate here on BBC i-player, or download it as a podcast. There is also an article here introducing the opposing arguments, which students could use in September to analyse the changes to the global economic situation - no doubt there are still many twists and turns to come in the next month for them to work with.
Unit 2 Macro: Reducing Unemployment after a Recession
How quickly do people find new work after they have been made redundant and experienced a period of unemployment?
According to new research published in the May 2011 edition of the Economic Journal, only around one person in every ten unemployed in Britain finds fresh work within a month and nearly half of the extra unemployed created in the wake of an economic shock such as the fallout from the global financial crisis are still without a new job after six months.
If government economic policies and the labour market generally are failing to get people back into paid jobs the impact of a recession on unemployment rates can last for a substantial time period bringing with it increased economic and social costs.
read more...»The rising cost of the minimum standard of living
The Joseph Rowntree Foundation has just published its annual report into Minimum Income Standard for the UK, reported here by the BBC, and showing how much money is needed for an acceptable standard of living. They look at the effects of tax and benefits on the budgets for different family types to show the wage you need to earn in order to have enough to afford what ordinary members of the public (their definition) agree is needed to survive and take part in today’s society.
read more...»Rise in investment could kick start recovery
UK businesses are sitting on a pile of cash and need to loosen the purse strings and invest more according to new research from Ernst and Young. Their latest macroeconomic forecast for the UK can be found here.
There has been a shift in the share of total factor incomes flowing to workers and a corresponding rise in the share of profits in GDP (by factor income). Ernst and Young find that wages and salaries in the UK fell from 46.5% of GDP to 45.3% last year, while the share of non-financial company profits increased from 15.9% to 16.2%. The non-financial company financial surplus increased from £56 billion to £71 billion, almost 5% of GDP helped by a fall in interest payments on debt and a sharp fall in dividend payments.
For economists at Ernst and Young, the cash mountain provides a big opportunity for the UK economy. They are urging companies either to step up capital spending commitments including creating extra capacity to export products. Or return surplus cash to shareholders through bigger dividends. The Ernst and Young forecast shows business investment in the UK increasing by 12.3 % this year and another 14.1% in 2012. With housing investment slowly recovering, this easily outweighs the effect of lower public sector investment, pushing total investment up by 5.7% this year and 8.1% in 2012.
Higher investment provides a boost to aggregate demand and also the economy’s productive capacity. And a rise in exports will help to re-balance the economy. For cash to be committed to investment projects requires sufficient business confidence and this is where the Keynesian idea of animal spirits becomes so important to where the UK economy is heading over the next year or two.
read more...»UK Economy at a Glance April 2011
Here is an updated word document covering many of the key UK macroeconomic indicators - focusing on aggregate demand, growth, inflation, the labour market, fiscal and monetary policy, trade and exchange rates. It provides a summary of the data from 2009-2011(forecast) and provides brief comments on each - designed as a revision aid for students taking their AS and A2 Economics papers this summer. The document can be downloaded using these links:
A2 Macro: Back to Roubini - a Year On!
Almost a year ago I headed to the LSE to hear Nouriel Roubini launch a new book “Crisis Economics”. The notes that I took at the time are reprised below and reading through them again, I am struck by just how accurate the Roubini assessment was of where the next phase of the financial and economic crisis would move. Many of the remarks are relavant to students preparing for the OCR F585 paper for June 2011 and also for other A2 macro students wanting some evaluative comments on the international economic crisis.
I have repeated my comments from the May 2010 blog and they appear below. There has been some minor editing and I have supplemented the blog with some charts drawn from the team at Timetric.
read more...»A virtuous circle of recovery - Paul Krugman
A hat tip to Larry Spence for flagging up this super piece from Paul Krugamn in the New York Times. His focus is on the dynamics of an economic recovery and the risks of fiscal austerity tipping the US back into recession.
“As families have repaired their finances, they have increased their spending; as consumer demand has started to revive, businesses have become more willing to invest; and all this has led to an expanding economy, which further improves families’ financial situation…....... The clear and present danger to recovery, however, comes from politics — specifically, the demand from House Republicans that the government immediately slash spending on infant nutrition, disease control, clean water and more.”
More here on How to Kill a Recovery
read more...»David Smith on Shifting Sands in the Global Economy
David Smith from the Sunday Times was on fine form in his talk to the Global Economy Student Enrichment event at Fulham yesterday. I have some brief notes below on some of his key themes and the pdf version of his presentation can be downloaded from the link at the bottom of the blog
read more...»Youth Unemployment in the UK
Many students and teachers will be looking at the issue of rising unemployment in the UK at the moment - focusing on the causes of effects of a high number out of work and also the effectiveness of different strategies for getting people back in a job. Youth unemployment is an especially important structural problem in the labour market and new figures find that nearly one young person in five is unemployed. Indeed 260,000 under-16s live in homes where nobody has ever worked. Here are five links to supporting resources including news articles, background comment pieces and videos.
read more...»Economics Q&A: Will the rise in VAT harm the UK’s economic performance?
On January 4th 2011, the standard rate of value added tax (VAT) jumped from 17.5% to 20%. For the first time, the UK VAT rate is now the same as the basic rate of income tax! Prime Minister David Cameron has stated publicly that the rise in VAT is likely to be permanent rather than temporary. The UK economy will thus have to adjust to this higher rate but what are some of the possible macroeconomic consequences?
read more...»Economics Q&A: Why might Europe’s weaker economies struggle to grow in the next few years?
A starting point to this question is to discuss what “weaker EU countries” might mean. We can use some of the conventional indicators of macro performance to help us namely:
1. Slow or negative economic growth
2. Rising unemployment and falling employment rates
3. Deteriorating public sector finances and higher government debt
4. Relatively high inflation or perhaps an economy experiencing a period of deflation
5. A high deficit in trade in goods and services
Other indicators might be used to identify weaknesses in performance - for example:
1. Relatively low labour productivity
2. A falling share of global trade
3. Rising yields on long term government bond issues
4. Weaknesses in non-price competitiveness
