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
EU Economics: European Fiscal Austerity Measures
2009 and 2010 have been hugely difficult and painful years for many of the countries inside the currency union. A dangerous combination of deep recession, rising unemployment, a severe worsening of government finances, high public sector debts and the expectation that a period of fiscal austerity will hit living standards badly have all contributed to a sense of malaise for those countries that have entered monetary union.
read more...»UK Economy in Focus
Our regularly updated main macroeconomic presentation on developments in and prospects for the UK economy is now available. All of the data charts have been brought up to speed and the resource is available as a streamed presentation and also as a pdf handout Follow the links below:
UK economy streamed presentation
Available here
handout (3 slides + space for notes)
Available here
Follow the links below for a selection of recent revision presentations on macroeconomics
read more...»Using Google Docs - The Irish Financial Crisis
My Year 13 students have worked on a collaborative piece this week on the Irish financial and economic crisis. We considered the background to the crisis, why the UK is helping with the bail out and some of the consequences for the future stability of the Euro. The final version of the Google Doc is available to download here.
read more...»Krugman attacks the coalition’s fiscal policies
Paul Krugman is currently on a speaking tour and he has used his column in the New York Times to lay into the coalition government’s fiscal plans - confirmed this week with the spending review. Winner of the 2008 Nobel Prize in Economics, Krugman’s strong Keynesian foundations rarely take long to surface and this article is no exception. “The best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it. So is Britain on the road to a lost decade such as that suffered by Japan? Keep reading as many articles as you can on the stimulus v fiscal consolidation debate for it lies at the heart of so much that is important in macroeconomic policy-making at the moment.
Will the Bank use QE as a hangover cure?
Yesterday Mervyn King coined another acronym to describe the decade ahead - his assessment is that this will be the SOBER decade - “a decade of savings, orderly budgets, and equitable rebalancing”.Some analysts are seeing his speech last night, reported here by the BBC website, as a signal that the Bank of England are contemplating more quantitative easing in the near future.
The Governor of the Bank said that at present the amount of money in the economy was still “barely growing at all” - figures released by the Bank this morning show that seasonally adjusted provisional figures for ‘broad money’ in September are as follows: M4 decreased by £5.5 billion (0.3%), compared with an average monthly increase for the previous six months of £0.8 billion. The twelve-month growth rate fell to 0.9% from 1.9% in August. M4 lending decreased by £0.7 billion (0.0%) in September. The twelve-month growth rate fell to 0.0% from 0.7% in August .
Last night the Governor said that it was a “key role” for the Bank to provide stimulus when the economy was in need, so the judgement will depend on how great that need is, and which are the greatest risks facing us - inflation, or lack of growth.
Economist Public Debt Clock
One to have ticking away on your screen in the classroom? The Economist web site has launched a new interactive global debt chart - dont have nightmares
IMF signs off on UK’s fiscal plans
The IMF signed off on George Osborne’s fiscal deficit plans today.
The Fund praised the government’s bold strategy to eliminate the deficit within five years. The deficit reduction plan “greatly reduces the risk of a costly loss of confidence in fiscal sustainability and will help rebalance the economy,” the concluding statement of the mission said.
It welcomed the early action on the deficit and the weight given to spending cuts rather than tax increases.
A2 Macro - Economic Growth Charts
We started our teaching this year by looking at issues related to measuring living standards and now we are moving onto aspects of the causes and consequences of economic growth.
I like to put growth into some kind of context by drawing on recent UK cyclical data and growth information for a range of other countries. I have attached a brief powerpoint of such charts with this blog which may be of some use for colleagues.
One of the interesting trends for many OECD countries is that estimated trend growth (the % change in potentail) GDP has fallen sharply in recent years. Indeed for Spain and Ireland, trend growth estimates have dropped into negative territory. Mo’s recent blog on hysteresis links in part to why this is happening.
Download the A2 Macro Growth Charts
Economic_Growth_Charts.pptx
U.S recession
The U.S. recession will probably be the longest since World War Two and could worsen without heavy government spending, according to a closely-watched survey of economists released on Saturday. Read more here…
What shape is a recession
A hat tip to Michael Owen for spotting this ‘recession related’ article from the BBC news magazine.
The shape of recession data
How do you decide how bad a recession really is, and whether it is worse, or less painful, than the last one? In the BBC Magazine Michael Blastland has taken six indicators, and mapped them all on a web to show the relative shape of the last three recessions. In the article about the technique he describes the difficulties of choosing the most appropriate data points in order to get a useful comparison. The indicators he has used are related to figures giving the most extreme points reached in each of the last three recessions:
top to bottom percentage fall in GDP;
peak repossessions as a proportion of mortgaged properties;
peak quarterly unemployment rate;
peak annual business liquidations as a proportion of companies on the active register;
peak annual public sector borrowing as a proportion of GDP;
worst annual change in real disposable income per head.
However, he makes the point that any number of different indicators could be used, depending on the particular area of interest that you wanted to compare. It would be possible to ask students to choose the indicators that they found the most relevant and draw their own recession webs, using data from any number of sources, and to justify their choice before they analyse the results of their work.
Macroeconomic Developments in the UK Economy - September 2010
Here is an updated version of the keynote tutor2u teacher presentation on key developments in the UK Economy…
read more...»Autumn leaves are falling for the global economy
The arrival of the Fall is often a time to take stock of where the global economy is heading and there have been several perceptive and fascinating blogs on this in recent days.
read more...»
Fears rise for a double dip over the pond
There are some very worrying signs for the United States today with the news that new home sales (for completed properties and those under construction) have dropped to to their lowest level for nearly 50 years. Dr Doom, Noruiel Roubini has tweeted that the risk of a double dip recession in advanced economies (comprising the USA, Japan, the Eurozone and the UK) has now risen to 40%.
The fall in new home sales is taken as a litmus test of weakening confidence and signs that the fiscal and monetary policy stimulus policies have started to run out of steam. Unemployment claims in the USA are up to 500K per month and a fresh descent into recession in the labouy-intensive US construction industry will give deeper deflationary pressure on the world’s largest economy. Since the start of the global financial crisis, US construction businesses have shed more than two million jobs.
In a related feature, Nouriel Roubini takes tea with the Economist and discusses some of the main systemic risks for the global economy.
The Stimulus Debate - Krugman versus Ferguson
If you are looking for an introduction to some of the key themes in the debate about how best macro policy should respond to the global financial crisis and the recession then this set of videos from Global Public Square could be pitch perfect. There are interviews with the Keynesian-leaning Paul Krugman and Niall Ferguson who buils the case for running small fiscal deficits.
Links to the videos are below
read more...»Credit squeeze - businesses rely more on factoring
A new report has found that the cost of borrowing money for small and medium size enterprises continues to rise as the economy struggles to sustain and meaningful recovery. Risk-averse banks have lifted borrowing interest rates and tightened the conditions on which loans are offered - a major bone of contention for businesses under threat of going under or perhaps looking for fresh funding to cover the cost of expansion.
Many are turning to factoring as an alternative to traditional loans and overdrafts. Under factoring a business chooses to pass on an existing invoice to a factoring company who pays a percentage of that invoice straightaway. The balance is received when an invoice is settled with the factoring company taking their own % cut and charging an administration / commission fee for handling a businesses’s credit management.
It is not cheap - but turning an invoice into cash immediately can be a lifeline. This BBC news report looks at the case of James Winnister who runs a security and fire installation business, and has to use factor invoicing to manage his cashflow.
King on the economy
The Guardian offers a good summary of the main issues arising from Mervyn King’s recent Inflation Report. There is a great little animation in the middle of this article to show how each month the Bank’s projected growth figures have always proven to be a little too optimistic and how they have deteriorated over the past couple of years.
read more...»Choppy times ahead
“Looking ahead, the UK economy is facing a major rebalancing away from private and public consumption and towards net exports. Achieving that rebalancing, while confronting these headwinds, is likely to mean a choppy recovery.” (Mervyn King on prospects for the UK economy over the next couple of years).
Details here of the Bank of England’s latest inflation forecasts.
But as Chris Giles pointed out in an article in the Financial Times earlier on this week:
“Despite having hundreds of economists working in the Bank, and the most sophisticated suite of economic models in the UK, the monetary policy committee’s forecasts since 1997 have achieved no better outcome than if the committee had simply predicted the average level for inflation and growth over the 13-year period”
Hat tip to Michael Owen for spotting this excellent FT analysis. FT audit casts doubt on Bank’s forecasts
Reasons to fear a jobless recovery
Will the UK labour market be able to generate enough new jobs to sustain the recovery? There are plenty of doubts surfacing at the moment and we might be finding ourselves on the cusp or yet another surge in structural unemployment. Here are some reasons why - despite our much vaunted flexible labour market - a jobless recovery is on the cards.
read more...»Consumer sentiment weakens as double dip looms
Swings in consumer confidence have often provided reliable evidence of short term turning points in economic activity. And there are growing fears of a double-dip recession for the UK with a raft of household surveys suggesting a weakening of sentiment about prospects for the economy.
read more...»Where next for the UK economy?
The Independent newspaper yesterday carried a pessimistic interview with the Chief Economist of the Bank of England (Spencer Dale) in which he commented on the risk of a “triple whammy” for the British economy - namely a dubious combination of anemic growth, rising inflation and much higher unemployment. The interview is available here. According to the piece “The economy, said Mr Dale, would not return to normal “for an awfully long time”.
Tough times ahead for sure but perhaps there are also grounds for optimism not least for manufacturing industries able to export their products to economies that are emerging from the downturn. And the latest (albeit provisional) data for UK GDP shows an economy much stronger than many people expected. The UK economy grew by 1.1% in the three months from April through to June - close to double the growth rate that was expected by the markets.
I have updated my keynote presentation on recent macroeconomic developments for the UK economy. This seventy-five slide presentation covers many of the main macro indicators and focuses on some of the risks and opportunities for Britain into the next crucial stage of the cycle.
read more...»Unit 2 Macro: How can supply-side policies help in a recession?
Recessions are often the result of negative demand-side shocks that hit real incomes of consumers and demand and profits for businesses. The consequences show through in higher unemployment, a fall in capital investment and an increasing rate of business failures. Most macroeconomic policies in a recession centre on boosting demand and confidence in a bid to generate a rebound in output, jobs and incomes within the circular flow.
What role can supply-side policies play during an economic downturn?
read more...»
