Contraction in employment is what matters
Last Sunday I asked whether the downturn in the labour market could become a jobs rout? The release of the latest jobs figures for the UK economy confirms what we probably already know - that the economy is already in a recession and that 2009 will be a very difficult year for businesses across the length and breadth of the country.
The media have played heavily on the unemployment figures including a rise in excess of 150,000 over the last three months in the LFS measure. But to my mind what is more significant is that total employment looks to have turned a corner - a cross-over if you will between the number of new jobs being created (most of which never make the news headlines) and the redundancies and jobs lost from plant closures which are the staple of the regional news broadcasts.
In the last recession, total employment fell by two and a half million. And in a flexible labour market and when credit is not easily available to keep a business running in difficult times, the time lag between the rate of GDP growth slowing and jobs being lost is shortened considerably. Officially annual GDP growth remains positive but already the numbers of short term unemployed (out of work for less than six months) is rising at a steep rate.
Fewer jobs, less vacancies, worsening job expectations and fragile job security. For a generation used to persistently low unemployment, a heightened awareness of just how weak the jobs market is likely to become is likely to impart another negative shock to confidence and demand - similar to the housing market collapse. Will we see thousands of Britons looking for work overseas? And will a slackening of demand for people in the UK have a further impact on the net flow of migrant workers from Eastern Europe and beyond?
I have attached a fresh PowerPoint file incorporating today’s employment data.
Confidence as a public good
Roger Bootle is on excellent form this morning. His book from a few years ago ‘Money for Nothing’ is worth returning to as a salutory warning of the risks of an economy hooked on borrowing expectations of double digit returns from an age of cheap money.
“Confidence in the financial system is a public good and collective action, backed by the enormous financial resources of the state, is the only answer. It is like defence or public health…..The fall in house prices, and now the huge falls in equity prices, will deflate wealth and result in lower spending. Real incomes are falling. Moreover, even if the banking crisis is staunched, confidence in the financial system has been shattered. This will breed a mood of caution among both individuals and businesses.”
The Rate Cut - In Charts
A day early the Bank of England has cut interest rates along with six other central banks. Policy rates in the UK are now at 4.5%. The reduction is less than many wanted - myself included. The severity of the downturn in the real economy will only become apparent in the new three to six months by which time the Bank will have had to move again (and again).
Anyway - for those who might be referring to the rate cut decision in their lessons tomorrow - I have put together a selection of ten updated charts linking interest rates to consumer and business confidence, economic growth, the sterling exchange rate, LIBOR and the mortgage market. I hope they might be useful for display or for handouts.
PowerPoint Chart File
UK_Interest_Rate_Cut.ppt
Monday’s Economics Reading
A selection of comment and analysis articles:
Roger Bootle writing in the Telegraph says that the time for caution on behalf of the MPC is long gone.
The Bank of England risks taking interest rate caution to the point of recklessness
Anatole Kaletsky has another go at Hank Paulson
It is essential to prevent a loss of confidence in banks
An FT editorial argues the case for the Chinese government to step up fiscal spending and boost domestic consumption as the global economic slowdown deepens
China must step up spending
Stephen King writing in the Independent calls for concerted and decisive action to prevent a banking collapse and a depression
Roosevelt’s lesson… a decisive act to break the psychology of depression
Tim Harford takes a different slant on the credit crunch and delves deeper into the concept of moral hazard - it is unavoidable?
Time to drop the baggage that comes with moral hazard
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...»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...»Manufacturing reaches a cliff
Here is a telling sign that confidence in UK manufacturing industry is ebbing away at an alarming rate. The latest Purchasing Managers Index doesn’t normally figure in the AS or A2 economics course - but the numbers for orders from buyers in industry look horrendous. A figure for the PMI of below 50 is said to herald a contraction in demand and output. The latest data shows sentiment and expected demand at its lowest levels for many a long year - indeed the weakest data on orders since the survey was created in 1992 - a recession year for the UK economy. I have tracked the PMI against manufacturing output for each month since 1992.
The figures will put increasing pressure on the Bank of England to cut interest rates in a week’s time by 0.25% or perhaps 0.5% - indeed it may move on interest rates as part of a concerted attempt by the central banks of the EU, the UK and the USA to bolster business and consumer confidence.
PMI data in PowerPoint
Hamish McRae on the return of credit rationing
One of our most gifted business and financial communicators peers beyond the murky uncertainty of recent days to consider a world where those banks who survive the crisis are much more circumspect about how much they are prepared to lend.
“So people who are deemed bad risks, such as the self-employed and people in flashy professions, will find it harder to get a mortgage. Have a bad credit record and that will be a shut-out. First-time buyers will have to have saved for a 10 per cent deposit, or more. Small companies will find it more difficult to raise capital. Start-ups will find it harder to get going. Big companies, even profitable ones, will have to pare back their investment plans and cut their staff levels. Everything will slow down as a result.”
This is not a return to the dark ages although the prospects of a wholesale nationalisation of the bad debts of the banking system cannot totally be ruled out. But a world where credit is both harder to obtain and more expensive will come as a shock to the millions of consumers weaned on easy lending with minimum checks and balances applied. The danger is not that consumers have to become more prudent in their spending and borrowing habits, rather that small and medium sized businesses will have their ambitions curtailed by a new credit squeeze. There are already signs of a sharp downturn in planned investment spending.
A negative savings ratio - the first since 1958!
Much has been written about the financial squeeze facing millions of households in the UK. Disposable income has come under pressure from rising utility and food bills and an increase in the overall burden of tax. Just how steep this squeeze has been is shown by revised figures from the Statistics Commission on the household savings ratio – the percentage of disposable income that is saved rather than spent.
read more...»Samuelson on the bankruptcy of modern economics
Bob Samuelson argues that policy-makers are groping in the dark from hour to hour because modern macroeconomics doesn’t have sufficient tools for us to deal with the kinds of financial instability we are witnessing at the moment.
“What we are witnessing, in the broadest sense, is the bankruptcy of modern economics. Its conceit has been that we had solved the problem of stability. Oh, there would be periodic recessions, but the prospects of a major economic collapse were negligible because we knew how the system worked and could take steps to prevent it. What’s been so unsettling about the present crisis is that it has not conformed to the standard model of business cycles and has not submitted to familiar textbook solutions.”
I liked Nigel cassidy’s video report on credit default swaps .... made it all very clear to me and my students. And John Moulton makes an appearance, an experienced industrialist and managing director of Alchemy who has an instinctive understanding of how financial irrationality and excess can hurt the real economy.
The Changing Pattern of Output
I have attached the chart in a PowerPoint file in case it might be of use as a teaching handout for student annotations and calculations. More detailed statistics on UK national output can be found from the Statistics Commission.
PowerPoint Chart
David Smith
The Party is over for Shrinking Financial Sector (Sunday Times)
Millions fear being made redundant
A hat tip to my colleague Tom Allen for spotting this excellent macro article in the Guardian.
Jobless set to top two million as the UK economy heads for meltdown
As one company after another lays off its workers, Tim Webb, Heather Stewart and Nick Mathiason report on the crisis faced by struggling British households.
There is no doubt that millions of people have genuine fears of being made redundant. I read of one survey this week which put the figure at fifteen million. Concerns over job security are not always borne out by reality, but they deepen the sense of economic gloom and are likely to lead to further cutbacks in non-essential consumer spending.
Chart
unemployment_expectations.ppt
Rock fall was symptom of wider malaise
One year on from the collapse of Northern Rock, the fall out from the financial distress is proving to be much deeper and persistent than most people expected. The Financial Times is running a special series of articles on the Northern Rock twelve months on ... well worth dipping into especially for A2 students wanting to understand more about how the credit crunch has impacted on the UK. Here is Chris Giles from the FT:
“What seemed last September to be a nasty, but limited, financial crisis morphed into a global downturn that has repeatedly buffeted the economy with three interlinked hammer blows: a deep financial crisis in advanced economies on both sides of the Atlantic; a commodity boom squeezing real incomes; and a housing crash in those economies with the most precarious property markets. Britain is also having to deal with an exchange rate tumble as steep as that of 1992, when sterling was unceremoniously ejected from the European exchange rate mechanism.”
Spain, Germany and the UK to feel the chill winds of recession
The European Commission has produced a pessimistic economic forecast which predicts that three of Europe’s biggest economies will fall into technical recession during 2008.
read more...»A Chancellor who has lost confidence in himself
But Alistair Darling’s performance on The World at One yesterday was nothing short of pathetic. Rarely have I sat by a radio and listened to someone plagued by such nervousness and self-doubt, he stuttered his way through the interview and it was incredibly painful to listen to. His performance on BBC later on in the day was a touch better. But when the Chancellor cannot display confidence in his own abilities then there is something seriously amiss.
read more...»The falling pound - a bitter sweet development
Ordinarily a depreciation in the exchange rate ought to provide a welcome boost to the competitiveness of UK industries exposed to international trade - providing a useful cushion of extra demand at a time of economic weakness. But Roger Bootle’s analysis in his latest Deloitte Economic Review provides a timely and really useful piece of work for A2 students wanting to deepen their understanding of the impact of a lower exchange rate on output, trade, inflationary pressures, profits and jobs.
Bootle argues the the lower pound will help to re-balance the economy - but depreciation has come at an earlier stage of the economic slowdown than that seen in 1992, which came after a major recession. Accordingly, the inflationary dangers of a weaker exchange rate might appear to be greater this time - one of the reasons why the Monetary Policy Committee appears reluctant to cut interest rates.
Download the excellent Deloitte Review here.
How best to avoid the ‘D-words’
Much of the newsflow in recent months has been about the possible return of stagflation to western economies - with prices driven higher by a combination of rising energy and food prices allied to the risk of a wage-price spiral. But when asset price bubbles burst - as they are doing spectacularly in the US and UK property markets and elsewhere, the reduction in the value of wealth can expose big holes in personal balance sheets especially when millions of households have gorged themselves on borrowing.
read more...»
UK economy at recession’s door
Most students starting their economics courses this autumn have never known what it is like to live through a recession since the last time Britain went into a downturn was in the early 1990s. In fact, there have been only five recessions since the end of the Second World War: in 1974, 1975, 1980, 1981 and 1991.Is this all about to change? Yes.
read more...»Some Good Radio Programmes
Last week’s Analysis was on sport and considered whether we should invest so much in sport. Our success in the Olympics suggests that the investment has paid off in one way at least. But is investment in the 2012 London Olympics worthwhile? Listen by clicking on this link
On the same evening, Investigation looked at the reasons for high oil prices. Listen to this here
Our Food, Our Future is a short series looking at food production and prices. Some of the recent programmes can be found on the website and there is a useful slide show here:
BBC radio 4 analysis has an archive of past programmes.
Anatomy of previous UK recessions
Every recession is different - both in terms of the initial causes and also the differential impact that it has on consumers, businesses, industries and regions. Deutche Bank’s latest UK economic forecast is pretty gloomy - they are now pencilling in economic growth of just 1.2% in 2008 and 0.3% in 2009. House prices are now expected to fall 25% in nominal terms (35% in real terms) from peak to trough.
In their research they produce a rather natty chart showing how quarterly growth rates of the various output and expenditure components of GDP have behaved during previous UK recessions. On average the level of real national output declines by 0.7% for each quarter of a ‘technical recession’ - but capital investment tends to fall by much more - it might be worth asking students why this happens? Why - on the basis of previous experience - does the industrial sector seem to bear the brunt of recessionary conditions? Why does government spending continue to rise and that of the farm sector?
If a recession happens in 2008-09 - which industries are most likely to feel the full force of the decline in real activity? Presumably construction and financial services will be badly affected - from where I am sat in an Edinburgh hotel at the peak of the Festival season it looks like the tourism and leisure industry is also having a rough ride too!
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
Economic slowdown becomes steeper
This BBC news video is excellent at looking at some of the causes of the economic slowdown in the UK economy and features a brief cameo appearance by my old director of studies at university - Martin Weale from the National Institute. In a related article, the International Monetary Fund reports that the worst of the credit crunch is not yet over.
Its a confidence thing
A quick chart tour through some of the confidence and expectations surveys that seem to expand with increasing frequency. They all point to near-recession conditions but the official data on output, incomes and jobs will take longer to show through - hat tip to Edmund Conway for a good article on the newly released GDP data which shows that the economy is growing at its slowest rate for fifteen years and that was before the collapse in sentiment.
read more...»Darling’s Tough Love
Alister Darling’s interview in the Times today was revealing on several different levels. First for confirming that the Treasury is actively looking at altering the government’s own fiscal rules in time for the Pre-Budget statement in November. Second that Darling did not appreciate the extent of the negative fall-out on the real economy from the credit crunch - a crunch which has now reached Crunch 2.0 as it moves from the financial sector to manufacturing and services. And third that, given the parlous state of the government’s own finances - this year will be a particularly difficult one and tough choices will have to be made on spending priorities
”“So every chancellor has to be conscious of the fact that there’s a balance to be struck between how much you can spend, and how much people will say, ‘OK, if you’ve another pound to spend, remember me as well.”
A classic example of opportunity cost to use when the new term starts in September.
The dreadful public borrowing figures are reported here: public borrowing surges
Poverty Trap worsens
The soaring cost of child care is worsening the poverty trap according to a new report commissioned for the save the Children Fund in Scotland. More than one quarter of Scots parents on low incomes cannot work full time because of the cost of registered childcare which has risen by more than 10 per cent this year across most of the country. The average cost of child care in Britain during the holiday season is nearly £90 per week.
The Times has this article
“Joanne Brady, a single mother of two children from Glasgow, is unable to work because she loses more in means-tested child tax credits than she gains in income. “They take 20 per cent off for each child when you go to work. You still have to pay your housing, travel and lunches and it’s just not adequate.” Ms Brady, 27, is among the 28 per cent of parents with children under 18 and an income of less than £15,000.”
And the BBC also covers the report.
When costs are too much to bear
The news on UK inflation this week wasn’t good - it is difficult to find anything positive in seeing CPI inflation surge to an eleven year high of 3.8% and the RPI climbing to just under 5%. Little wonder that the government is getting more paranoid by the hour about the dangers of losing the battle on pay restraint as a wage price spiral takes hold.
The monthly inflation data tells us what has been happening to prices for a basket of goods and services - but to my mind what is more worrying is the data on input and output prices facing manufacturing businesses. My chart above shows just how steep has been the acceleration in inflation in the costs of imported foods and raw materials - costs are rising in excess of 20% pa for both categories. There comes a point when businesses simply have to raise their prices to avoid a calamitous fall in profits - and that point seems to have been reached. Manufacturing output prices are not rising at an annual rate of more than 10% and this “factory gate” inflation will flow through from wholesale to retail level in the space of a few weeks and months. If you want an early warning of why the inflation problem will not go away in 2009 - this one of the key indicators to watch.
Cross elasticity: Demand for new aircraft
Over twenty airlines have gone bust since the price of aviation fuel started to climb and the turbulence in the global aviation market is likely to lead to a fall in demand for new aircraft according to a report in today’s Times.
read more...»
Recession primer
Heather Stewart writing in the Observer draws parallels with previous recessions and suggests that vastly over-inflated private sector debt will be the main cause of a painful recession and a return to the boom and bust days of the 1980s and 1990s. Three useful A2 macro concepts work their way into her primer at the end of the article:
Correction - however much you thought your home was worth, you were wrong.
Deleveraging - banks that have made risky loans trying to get their finances back in order by lending less and asking for more cash from shareholders.
Spare capacity - that means higher unemployment, mothballed factories and empty shops and offices.
Soft landing for the labour market
Paul Mason’s superb blog “Idle Scrawl” on the Newsnight website asks whether the UK labour market will prove to be more resilient that expected in the face of a downturn.
read more...»
