AS Macro: Macroeconomic Performance
Macroeconomic performance refers to an assessment of how well a country is doing in reaching key objectives of government policy. The main aim of policy is usually an improvement in the real standard of living for their population. The term ‘real’ means that we have taken into account the effects of rising prices so that we get a better picture of how many goods and services we can afford to buy and consume.
Macroeconomic policy is not solely concerned with living standards. The bigger picture would take into account some of the following:
read more...»Housing and the British Economy
Here are some charts of recent developments in the UK housing market and some revision notes on the impact of the housing recession on macroeconomic performance
read more...»AS Macro Revision: Consumer Borrowing
Most of us at some time need to borrow money to finance spending. From taking out a mortgage or using a student loan and making frequent use of bank credit cards, borrowing is a normal feature of life and not necessarily something to be worried about. What matters is whether building up debt is sustainable – in other words, can those who rely on debt pay it back? Huge levels of borrowing and an inevitable surge in household debt were features of the long period of growth that came to an end in 2008. Now the British economy is being held back by a historically high level of consumer debt - and you thought that it was the British government stuck in the deepest debt trap?
read more...»Warnings of hysteresis for the EU economy
This is an updated blog post on the topic of hysteresis in the EU economy. The recession and financial crisis may lead to a permanent loss in potential economic output and a slower trend rate of growth in the future according to a study by the European Commission. The fall in potential GDP will be an example of hysteresis effects across the European economy and the cyclical downturn in output and jobs creates long term damage.
read more...»Sterling and Exports - The Importance of Time Lags
Roger Bootle has an excellent article on the lagged effects of a competitive exchange rate in today’s Telegraph. One of his arguments is that the default behaviour of many UK exporters is to take higher profit margins from their overseas sales rather than cutting their prices to boost export volumes. Crucially the impact of a lower currency takes time to show through in the international trade data and this is partly because switching production to countries where the exchange rate is favourable cannot happen overnight .... read this paragraph:
“Where export prices are not cut, this does not necessarily mean that the weaker currency will do no good. It is rather that the benefit will take longer to come through. In response to higher profit margins, firms will have more incentive to sell abroad. In the economic textbooks, selling abroad, or switching from European to Asia markets, is simply a matter of pressing a button. In reality it isn’t like this; sales networks have to be established, modifications to the products or services made; foreign relationships built up. These things do not happen overnight.”
The article reminds us that a more competitive exchange rate helps to re-balance the economy at a time of domestic weakness. But that the benefits of a weaker pound have been diluted by
(i) Supply-side weakness in UK industries (e.g. a lack of some aspects of non-price competitiveness)
(ii) Low demand in key export markets - not least the European Union
(iii) Longer than expected time lags between a fall in the currency and a pick up in export sales
Many exporters have also been held back by problems in accessing trade credit - few importers pay in advance for goods and services sold overseas!
More of the Roger Bootle article can be found here: The competitive pound is one of the few things we have got going for us
Greek’s shadow economy and institutions
Economic institutions matter! From the credibility of central banks to the roles played by legal systems in upholding property rights and the need for a functioning system of government in collecting tax revenues and making sure that each dollar or euro or pound of state spending is money fairly well spent. I enjoyed reading Tyler Cowen’s piece in the New York Times today - among many others he senses that an eventual default and departure from the Euro is probably the best approach that greek can take.
The budget crisis facing Greece boils down to excessively high levels of government spending and a failure to collect sufficient tax income. This comes as no surprise when we discover the size of Greece’s shadow economy.
“Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent.”
Britain at risk of Japan-style deflation
So warns MPC member Adam Posen - whose remarks at a speech at the LSE are reported in the Telegraph. It is worth flagging up three of the specific difficulties facing the UK according to the Posen view
1/ The heavy reliance on foreign investors as a source of funding for the UK fiscal deficit
2/ Britain’s small manufacturing sector - currently rebounding quite well - but not of a sufficient size to make a really big difference to prospects of a recovery
3/ Continued weakness and fragility in the UK banking system - where deeply risk averse behaviour and continued de-leveraging is “undermining companies’ abilities to raise funds” prompting many businesses to hoard cash rather than invest.
More here from the Independent
The Realities and Relevance of Japan’s Great Recession - slides and transcripts are available here
A2 Economics Revision - Data Description Revision on Fiscal Deficits
Here is another example of some macro-economic data that you might be asked to interpret in an A2 AQA data response exam paper
“Using the extract, identify two significant features of the changes in the fiscal balance for the USA and the UK over the period shown by the data” (5 marks)
read more...»EU Economics: - Europe the weak link in the world economy.
A link to an excellent and thought-provoking article by Paul Mason from BBC Newsnight on the implications of the Greek/Euro Zone crisis. He argues that the ripping up of the Euro Zone fiscal rule book and the eventual bail out of the Greek economy shifts the risks to taxpayers in Northern Europe.
“In the 27 member states of the EU, it is France, Germany, Italy and the UK which bear the risk of southern European default. That is to say, the taxpayers of northern Europe. And, as members of the IMF, the industrialised countries of Europe are additionally exposed to the Fund’s €250bn loan.” Stage Three of the financial crisis - hallmarked by an age of austerity poses severe social and political risks across the continent.
In a related feature Professor Joe Stiglitz is interviewed here by BBC World and argues that imposing fiscal austerity by european governments risks plunging Europe into a second recession.
The end of Newcastle Brown Ale brewing on Tyneside
An iconic drink whose sales in the USA out-strip demand in local pubs and clubs - the Federation Brewery in Gateshead has brewed its last barrel of Newcastle Brown Ale as production transfers to Tadcaster in Yorkshire! It could be a useful micro-example of structural unemployment in the regional labour market. The good news is that Newcastle Brown Ale will now be produced less than three miles from Tutor2u’s Head Office! On a good day and with the wind in the right direction, the head wafts of Brown Ale malts may well find their way into our building!
Ireland’s GNP and the Debt Crisis
Despite well publicised attempts to tackle an alarmingly high fiscal deficit, Ireland still has a budget shortfall in excess of ten per cent of national income and a high accumulated national debt measured as a percentage of GDP. But the true situation may be much worse. Low corporate taxes encouraged sizeable inflows of FDI especially from North America, the result being that Ireland’s GDP is much larger than her GNP - a better measure of the national income generated by Irish-owned economic assets. Government borrowing measured against GNP is very large indeed. And Ireland along with countries such as Greece, Portugal and Spain is mired in the classic debt-growth trap - how can it achieve fiscal austerity when national output and real incomes are falling.
Simon Johnson is strong on this issue today - the dangers of sovereign debt
“Debt overhangs hurt growth for many reasons: business is nervous that taxes will go up in the near future, the cost of credit is high throughout society, and social turmoil looms because continued austere policies are needed to reduce the debt.”
Japanese economy - exports up but debt squeeze tightens
Here are two useful update articles on some of the issues facing the Japanese economy.
First, the BBC reports on an IMF study that urges the Japanese to take immediate steps to cut their national debt which “at nearly 230% of GDP, is the highest of any industrialised nation.” The IMF believes that economic growth is sufficiently robust at present to take some of the tough fiscal consolidation measures needed. (In contrast to the situation in the UK?). Second, a report that finds that Japanese exports are providing a kick-start to hopes of a recovery in GDP as “emerging Asian markets such as China have been driving Japan’s economy.” Faster growth will be key to Japan breaking free from the latest bout of consumer price deflation.
The UK too is hoping for an export-led recovery in the second half of 2010 and well into 2011 but a dark cloud on the horizon are fears that financial turbulence in the Euro Zone will cause the Euro Zone economy to fall back into recession and the pound to appreciate against the Euro - both factors would hit British exporters looking to grow sales in a region that accounts for well over fifty per cent of our trade in goods and services.
Labour shortages in a recession
Despite unemployment being over 2.5 million (using the labour force survey) the British economy still suffers from labour shortages. These may become a constraint on the recovery as output and employment picks up. The CBI have published a new report on structural weaknesses in the labour market - reported here by the BBC.
“Despite the recession, nearly half of employers said they were already having difficulty recruiting staff with skills in science, technology, engineering and maths, with manufacturers and science-related businesses finding it hardest to find staff.”
This raises important questions about skills gaps in the economy and also the proposal to put an annual cap on inward migration. What happens if the cap has been reached and a business cannot fulfill a key export order for want of getting the vital workers they need? Are caps on labour migration a root cause of government failure?
As my chart shows, the regular survey of recruitment difficulties from the British Chamber of Commerce finds that the percentage of manufacturing and service sector businesses reporting problems in getting the workers they need has dropped during the recession, but remains appreciably above the level seen at the end of the last downturn in the early 1990s.
The Financial Crisis and Beyond
Modern economies run on credit and so the collapse in confidence and lending within the international financial system in 2007-09 was bound to bring about a series of after-shocks to global demand, trade and jobs. In this sense, the economic and political crisis in Greece represents a stark example of the ripple effects of the credit crunch as we edge our way forward in an age of instability.
This to me was the key theme running through David Smith’s talk at the Keynes Society on Thursday night. Followers of David’s columns in the Sunday Times will appreciate his unerring ability to capture the essence of what really matters in the economics and business domain. In his presentation David’s narrative provided a tremendously clear overview of the background to the crisis, the shape of the inevitable recession that followed. And, more pertinently, prospects for the UK economy in 2011 and beyond.
read more...»AS / A2 Revision - Where Next for the UK Economy?
Students wanting to demonstrate up-to-date understanding of the UK economy should find this streamed revision presentation really useful. It was delivered by Geoff at our AS & A2 Economics workshops in London & Manchester. It provides a comprehensive coverage of recent developments in the UK economy and highlights some potential downsides and upsides as the economy attempts to sustain a recovery during 2010 and 2011. Has the era of macro economic stability been replaced by a new phase of macro economic uncertainty, slower growth and a recovery constrained by debt? Or are there grounds for being more optimistic about the near-term future for the British economy?
Revision Presentation on the UK Economy
Business profits and the recession
In previous economic recessions in Britain, the profits of businesses large and small have taken a big hit and have contributed to sizeable and damaging cut-backs in employment.
One of the interesting features of the most recent downturn (in which GDP has fallen by more than 6 per cent) is that corporate profitability has been resilient in the face of a contracting economy.
Yes there have been many high profile causalities notably in retailing and financial services. But the overall picture is that profits have stayed quite high. There are appear to be several reasons
read more...»Issues and Prospects for the UK Economy in 2010
Here are some notes from a presentation on some current issues affecting the UK economy - suitable I hope for AS and A2 macroeconomics courses and students preparing for their June 2010 papers.
We will make the full presentation available late and this blog post links to many of our other recent blogs on UK and global macroeconomic issues.
read more...»Capacity utilisation
Capacity utilisation is a macroeconomic term that is now commonly used in AS macro exam questions. It measures how much of the productive potential of the economy is being used at a given point in an economic cycle. Capacity utilisation falls during a recession because of falling aggregate demand for goods and services. The result is that scarce resources of land, labour and capital are not being used to their full extent.
read more...»Animal Spirits
Animal spirits refers to the state of confidence or pessimism held by consumers and businesses. Expectations for the future inevitably influence decisions made today about how much consumers are prepared to spend or save and the willingness of businesses to commit funds towards capital investment in their chosen markets.
read more...»Lessons for the UK from the Irish Recession
Stephanie Flanders offers this timely and well-judged piece from the Irish Republic about how the former celtic-tiger ecoonmy has adjusted to the painful medicine of fiscal austerity after their deep economic recession. She asks what lessons there might be for the political parties fighting the UK election.
UK Economy in 2010 - Essential Revision Presentation
Many thanks to Geoff for producing this superb 51-slide analysis and evaluation of the prospects for the UK Economy in 2010. Updated to 25 March 2010 with the latest available data.
read more...»Nissan turns over a new Leaf
This is a hugely important announcement and boost for the North east economy whose long term future must be built on competitive advantages in the emerging low-carbon industries of tomorrow. The decision to manufacture the lithium-iron batteries used in the Leaf electric cars is the key to the employment creation effects of the new investment by Nissan. Note too the role played by government financial support. The investment is backed by a £20.7m government grant and up to £220m from the European Investment Bank.
The Nissan car plant is the most productive in the European Union. The plant opened in 1984 and has so far built 5.6 million cars. It produced a third of all cars built in Britain in 2009. Digby Jones sings the praises of businesses such as Nissan in this super interview on the Politics programme a few days ago.
Is 70% of the world economy in a liquidity trap?
Paul Krugman expands on the nature of the liquidity trap and why more of the world economy might be in this situation than is commonly supposed. His opening paragraph raises an interesting question for A2 economists - does a liquidity trap encourage protectionist policies and heighten the risks of a period of prolonged de-globalisation?
“Being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense.”
PIGS or BRICS - which is most important for UK exports this year?
The PIGS - Portugal, Italy, Greece and Spain - are in economic turmoil and likely to experience weak growth in the near term. A contrast to the BRICs - Brazil, Russia, India and China - three of whom are already seeing a ramping up of their growth rates as the world economic cycle turns. But which group is more important for the UK export sector? Chris Giles from the Financial Times has the answer here and his blog provides a useful evaluation point for AS and A2 macroeconomics students.
Now and the 1930s - Great Blog
A hat tip to Diane Coyle for flagging up this superb blog update from Barry Eichengreen and Kevin O’Rourke comparing today’s global crisis to the Great Depression - fantastic for students of economic history.
Recession hits vulnerable low income families
Recessions have macroeconomic effects - a topical discussion at the moment is the impact of the slump on the UK economy’s productive capacity and underlying growth rate - but the effects on individuals, families and local groups can often be over-looked by the broader macroeconomic debates. This news article refers to new research highlighting the damage caused by the recession on younger people whose pay and jobs are vulnerable.
These groups
1/ Are at higher risk of having to accept cuts in their money and real wages
2/ Are more exposed to a reduction in working hours and therefore lower weekly gross incomes
3/ Many have a personal inflation rate higher than the published data for CPI and RPI
4/ Have higher levels of unsecured household debt on which interest rates have risen in recent years and not fallen
It also focuses on just how little people on below-average incomes can afford to save.
“More than half of people on low incomes have less than one month’s salary saved and 40pc are not saving into a pension, while 53pc have unsecured debts, averaging £5,200.”
More here: Younger workers hit hardest by the recesssion, says think tank
Kaletsky on the benefits of a weak pound
Anatole Kaletsky writes from Japan in today’s Times and discusses the benefits that flow from having a weaker exchange rate.
“A weak currency is something to be desired and encouraged during periods of recession, when employment output need additional stimulus. A strong currency, on the other hand, is desirable during boom periods, when economic activity needs to be restrained to prevent inflation. Right now, every big economy in the world, with the possible exception of China, needs extra stimulus — and therefore wants to have a weak currency. But that, of course, is impossible, since for every currency that weakens, another currency must go up.”
The conventional benefits are well explained in the article and there is reference to the Chairman of Komatsu who is now relieved that the UK did not join the Euro several years ago - but whose equipment can now be exported from their UK manufacturing base to the rest of the European Union at an ultra competitive price. UK financial services are also reaping the rewards of a weak sterling / dollar or euro rate since they bill their clients in dollars or euros but have a cost base in sterling (that is if they choose to remain in the UK!)
More here: Rejoice – the pound is down again
Intergenerational injustice?
Is the younger generation picking up the economic tab for the foolishness and extravagence of the baby-boom generation born in the 1940s and 1950s (and early 1960s!)? Justin Rowlatt from Newsnight has this fascinating report, one that raises important questions about inter-generational equity / fairness.
Trade as a stimulus for recovery
Pascal Lamy from the WTO has given a strong defence of the impact that trade can has as a stimulus for broader global economic recovery. World trade in goods and services has declined by 12% since the onset of the financial crisis but according to the WTO although there has been renewed claims of a return to protectionism, fears of a tsunami of import controls have - by and large - proved to be wide of the mark.
read more...»Capitalism - A Love Story
The new Michael Moore film is due for release in the UK soon
read more...»
