Unit 4 Macro: Savings and Banking to enhance Development
A hat tip to Patrick North from Crown Woods College for spotting this excellent article on growth and development strategies in Mozambique. The piece focuses on the efforts of Mozambique to increase participation in the banking system to boost savings, investment and ultimately growth and is a good illustration of the Harrod-Domar growth model.
Video resources on consumption and saving
I am teaching the determinants of consumption and saving with my AS Macro group and have been putting together a set of short video news reports on factors such as taxation, consumer confidence, house prices, expectations, interest rates and unemployment. My selection of video resources is provided below.
read more...»AS Macro Revision: Household Saving
In this revision blog we look at the economic significance of household saving. Saving has become a huge macroeconomic issue in the UK in recent years. There was a trend decline in the savings ratio during the late 1990s and for most of this decade and many have seen this as one of the reasons why the economy was at such high risk during the credit crunch. According to a recent news report, Britain entered the financial crisis and recession with the lowest savings rate since the Second World War, the second lowest of all major economies. The UK national household savings rate fell to a post-war low of -0.5% in January 2008. That compared with a peak of 13.4% in 1984.
read more...»A2 Economics Revision - Changing Pattern of Global Trade & Investment
This new streamed revision presentation guides students through some key evaluation points on the changing patterns in global trade & investment. Ideal for A2 revision.
Revision Presentation on the Changing Pattern of Global Trade & Investment
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 Has the era of macro economic stability been replaced by a new phase of macro economic uncertainty, slower growth and a recovery constrained by debt?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
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...»Focus on the BRICs
The following video clips from the FT focus on the so-called BRIC economies (coined by the Chief Economist at Goldman Sachs in 2001).
There are excellent to provide discussion points on why grouping the BRIC (Brazil, Russia, India, China) economies together is flawed, with the 4 countries being actually very different and the acronym BRIC no longer being appropriate, in its description of their experiences or their futures. They also discuss whether economic power has shifted from the US to the East.
Rising savings ratio does not herald a return of thrift
The UK household savings ratio continues to move higher. But it is unlikely this heralds a return to consistent savings behaviour by consumers. Instead it reflects - in the short term at least - a decision to cut spending and repay existing debts rather than a deliberate decision to accumulate financial wealth by locking money away in occupational pensions and other long-term savings instruments. Ian King has a good piece on this in the Times today. The nominal rates of return on most savings accounts have collapsed because of the steep cut in policy interest rates and millions have lost confidence in the financial services industry.
“A study published yesterday by AT Kearney, the management consultancy, revealed that 90 per cent of UK households have less than £50,000 in financial assets — including their defined contribution pensions — and average financial wealth of just £7,000.”
New data on the UK shows that household expenditure growth rose 0.1 per cent, although remains 3.3 per cent lower than the third quarter of 2008. The savings ratio — the gap between household income and spending, which is often used to repay debts or add to savings — soared to 8.6 per cent between July and September, the highest level since 1998.
More here and here Thrifty families accused of prolonging the recession
Aggregate Demand - Teacher Revision Presentation
Many thanks to Geoff for updating his popular revision presentation for AS students on Aggregate Demand
Launch interactive version
Download slides handout
Economics of Saving - Teacher Presentation
This revision presentation examines recent data on the extent of saving in the UK economy.
Launch interactive presentation on the Economics of Saving
Download printable pdf of slides
Explaining the Paradox of Thrift
Dugie Young looks at the paradox of thrift and its relevance to today’s financial and economic crisis.
read more...»A2 Economics Revision - External Shocks
We have created this PowerPoint for A2 Economics students who wish to update their understanding of external macroeconomic shocks and cyclical fluctuations.
Viewed streamed version of the presentation
Download SCORM-compliant VLE version (ZIP file)
Download printable pdf version
Debt repayment - a virtue or a curse?
This useful article from the BBC looks at debt, repayments and savings for individuals in the UK. In July UK households actually paid back more debt than they took out for the first time since the Bank of England started recording this data 16 years ago in 1993. At the end of that month total household savings amounted to £1.1 trillion, and total outstanding lending to individuals stood at £1.46 trillion (which is almost a trillion more than in 1993). Of this, £1.23 trillion was mortgage debt and £231m was other forms of consumer credit. Households are now starting to get the message about repaying that debt, with the average individual paying back £10 more than they borrowed in July – but the average personal debt standing at £24,000 is going to take an awful long time to pay back at £10 a month.
read more...»The Wealth Effect
Economists often mention something called the ‘wealth effect’ - referring to the link between the level of personal wealth and our decisions about how much to spend or save on goods and services. In our AS macro lesson today we were flagging up ideas about what causes a recession. Some of the causes are from overseas, for example the impact on banks and businesses from the fall out after the global credit crisis. But many of the root causes of a recession are home-made.
And it seems for the UK that people across every region have been hit by a sharp reduction in the value of household wealth.
The BBC reports that “in the course of 2008 alone, £815bn was knocked off the wealth of households in the UK.That amounted to an average of nearly £31,000 for every household in the UK.”
How is wealth stored (and accumulated?)
In property - there has been 9% cut in the market value of all residential property, from £4,077bn to £3,693bn
In pension funds and other investments - the financial assets of households, such as the value of pension funds and investments, also dropped by 9%, to £3,687bn
Asset prices have been falling - but the borrowing used to finance much of this does not go away
Net financial wealth adjusts household wealth for unpaid credit card bills and outstanding mortgage debt. This has fallen by 12% in the last year.
Little wonder that for many people the priority at the moment is to cut back on borrowing, increase saving and try to rebuild their ‘balance sheets’.
Much the same applies to the banking system too! Lenders are making it tougher to borrow and accumulating deposits of cash to give themselves a stronger ‘capital base’ for the years ahead.
In recent months, share prices have surged ahead and the FTSE-100 is now back above 5,000. There are signs too of a revival in the property market.
Will the wealth effect now start to prompt a recovery in demand for goods and services? Keep a keen eye on the housing market and the stock market.
Signs of a returning ‘feel good’ factor?
The search for green shoots goes on! There are some tentative signs that sentiment among consumers is beginning to rebound albeit from a very low level. Household saving is rising and the annual growth of consumer borrowing continues to slide - indeed in recent weeks the amount of consumer credit has started to fall for the first time since 1993. Personal borrowing fell by £600m in July 2009 - a figure that looks large but pails compared to the aggregate level of accumulated consumer debt.
Sentiment about our own financial situation is also improving. There is plenty that can go wrong from here, not least the impact of further hefty increases in unemployment and forthcoming tax rises. But the unprecedented macroeconomic policy stimulus has at least provided a floor to the collective collapse in consumer confidence that took hold a year or so ago.
The latest Nationwide consumer confidence indicators reinforces the idea that households are rebuilding their finances and are at least considering making a major purchase such as a new car or television. The car scrappage scheme has boosted new vehicle registrations and heavy price discounts and bundled offers (e.g. a new blu-ray player with each new TV) seems to have encouraged people into the audio-visual showrooms.
Consumer Spending and Saving in the UK Economy
The decisions of millions of households about how much to spend and save and (perhaps) borrow will largely dictate where the domestic economy goes in the next twelve months. Here is our latest macroeconomic snapshot, a streamed presentation on aspects of consumer spending and saving behaviour in the British economy over recent years.
The presentation covers the latest available data on:
Consumption and GDP growth
Consumption, GDP and Interest Rates
Durable Goods Spending
Consumer Confidence
Confidence and Policy Interest Rates
Consumer Borrowing
Borrowing and the Savings Ratio
Indicators of Consumer Sentiment
Spending and Real Disposable Income
FTSE 100 and UK House Prices
Personal Insolvency and Debt
Household Savings Ratio
Savings Ratio, Interest Rates and Unemployment
Savings Ratio for Selected Countries
Jeremy Warner on the Paradox of Thrift
The paradox of thrift is an important idea from Keynesian economics. Saving is regarded as positive for the economy, not least because it provides the funds to finance the capital investment needed to promote long-term growth. But if enough people start saving more at the same time, the result is a reduction on consumer demand and an even deeper recession. What is rational and virtuous for an individual might be damaging for the economy as a whole.
Jeremy Warner discusses the paradox of thrift in this article in the Telegraph.
‘Like Mr Micawber, Britain finds itself in a debtors’ prison’
The private sector of the UK economy is starting to rebuild its balance sheets by curbing spending and rebuilding saving. But one form of debt held by the private sector is being replaced by another - via enormous budget deficits. Government stimulus to the economy is needed to maintain demand and prevent an even more damaging recession. But the legacy of public sector debt will be around for many years to come.
Questions in Behavioural Economics - Saving More for Tomorrow
Joe Murdy writes on this question - Why do so many people fail to save for their future?
read more...»Tim Harford on Smarter Saving
It has always struck me as odd that borrowers regard monthly credit card bills offering a 12.5% APR as “cheap” whereas a long term savings deposit account paying 4% is regarded as derisory and unattractive. When it comes to savings behaviour smart decision-making can often fly straight out of the window.
The Undercover Economist Tim Harford has a super piece on smarter saving and behavioural economics in this edition of Parade magazine.
read more...»Savers must sacrifice liquidity for a return
One of the paradoxes of this recession is that savers - who by and large have been as far removed from causing the crisis as it is possible to be - have seen rates of return on individual accounts collapse.
With policy interest rates dropping close to the floor and likely to stay below 1% for possibly a year or more, the rate of return on liquid savings accounts is desperately poor. Indeed the real interest rate is negative. Bank of England figures show that the average interest rate on instant access accounts - including current accounts - was 0.15% at the end of April. Hence the need for savers to think long term about their savings options and search for better long term accounts offering a better fixed rate of interest.
It involves sacificing liquidity for a higher rate of return. In this sense, nothing has changed because there has always been an inverse relationship between liquidity and interest rates - but the problem facing millions of savers, many of whom risk falling into relative poverty because of the collapse in income from interest-bearing accounts is highlighted in this BBC article.
Thrifty days are here again
Just when we thought that saving had gone out of fashion for good, along comes a fresh set of numbers on the economy indicating that the British consumer is more than happy to start paring back their debts saving more of their incomes.
read more...»An economy on the brink
Britain stands on the brink of one of the deepest recessions since the end of World War Two. Real GDP in the UK fell by its highest amount for eighteen years in the 3rd quarter of 2008 and this marks only the early stages of the downward slide. Most of the really bad economic news - such as the banking collapses and the carnage on the high street in the weeks before Christmas - happened in the final quarter.
2009 will be the first downturn that the vast majority of students will ever have experienced and for many, the direct consequences of a sharp fall in output, profits, jobs and spending will be clear to see.
Naturally for economics students and teachers, the fall out from the global credit crunch and financial crisis will be an incredibly interesting time - the era of the Great Stability has come abruptly to an end and all bets seem to be off regarding the extent and depth of the next stage of the economic cycle. Expect the word recession to be increasingly replaced by the word slump as the forthcoming year unfolds. Indeed the R word may be swapped for the D word if the contraction becomes embedded.
read more...»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...»Collapse in savings points to a very rough ride
Karen Ward from HSBC flagged this quite startling new figure for the UK savings ratio in her excellent talk on the UK economy at the London Conference on Friday. According to the Guardian, “Consumers are running down their savings to maintain spending, with the household saving ratio more than halving from 3% to 1.1%, the lowest since 1959.”
read more...»
