UK Economy

Gordon’s economic history lesson

It cannot have been easy or much fun for the man. Gordon Brown’s appearance on the Andrew Marr show this morning was supposed to have been the start of the big fight-back after the appalling drubbing that he suffered at the polls on Thursday and Friday. But the garbled mixture of reassurance and platitudes about the government ‘feeling our pain’ was distinctly underwhelming. I winced ahfl way through the interview when Brown claimed that the last Labour government inherited high inflation from the Conservatives. This is simply not true. I applaud his decision to give independence to the Bank of England in May 1997, but low and (relatively) stable inflation did not appear miraculously when Blair walked into Number 10 that year - consumer price inflation (the government’s chosen emasure, but not one that most of us now look at with much credence) was already low for some years before 1997 as our chart shows. Inflation targets (introduced in the UK in 1992 after our departure from the ERM) and a favourable mix of disinflationary economic shocks, globalisation and the strong exchange rate combined to give Brown and his Treasury team an inheritance of low inflation when they came to power. Perhaps it was the stress that caused Brown to make such a shocking mistake in his attempt to teach us all a little economic history?

Haulier closes down

This ninety second video clip from BBC news is a short but powerful clip to show when discussing the effects of rising fuel prices on the profitability of a business - no bells and whistles, just a face to face interview with the owner of a haulage firm who has decided to quite because of the cost of diesel and his inability to pass on costs to consumers, the result, 21 redundancies and a firesale of the assets of the business.

Housing recession or inflation - take your pick!

Which would you rather face: a recession and house price crash or years of soaring seventies-style inflation? In normal circumstances, the Bank would have already cut the official interest rate far and fast, hoping lenders would follow suit. Two options; one nasty dilemma for the Bank of England. Edmund Conway examines the issues in today’s Telegraph.

I was listening to a talk from a city economist a couple of nights ago - it was superb, the first time I felt I really understood the underlying dynamics of the sub-prime crisis and the consequences of securitisation! One of the aspects that came out of the wider discussion was that several of the powerful forces that have driven house prices higher in recent years are now in reverse gear - namely:

A rise in real mortgage rates brought about by the credit crunch
A tightening of mortgage supply - partly reversing the process of financial innovation in mortgage products
Signs of a reversal of the high level of inward migration
and
Evidence that the lack of supply is now having less of a bearing on house prices as a better balance between demand and supply is achieved.

Revision: China and the UK Economy

Events and developments in one country inevitably have spill-over effects onto others. Your economics revision should consider some of these inter-relationships wherever possible. It will certainly help your analysis and evaluation. In this revision note we look at China

Revision note:
Revision_China_Effect.pdf

Cheaper sterling to the rescue?

For some time now I have been arguing that the media should be paying more attention to the exchange rate when considering the propsects for the UK economy over the coming months. A cheaper currency acts as a boost to exports and aggregate demand and can be a very useful stabiliser in an economy weakening from the fall-out from the credit crunch. There are naturally risks from a sharp downward movement in the exchange rate, not least the impact on the prices of imported products and possible flow-through effects on cost and price inflation. But taken as a whole, a lower exchange rate is what the UK economy needs at the moment - and we are getting it! Charles Bean, Chief Economist of the Bank of England made clear reference to this in an important speech in London today - it is available to download here from the Bank of England website. I have picked out one paragraph in particular which focuses on the exchange rate and compares the impact of cuts in interest rates with currency depreciations.

Revision: Recessions

“What’s the difference between a recession and a depression? A recession is when your neighbour loses their job; a depression is when you lose yours.”

Darling tries some moral suasion

Darling and Brown appear to be getting seriously worried. Darling was handed an explosive legacy by Brown when he took over the reins of Number 10 last summer and his early months as Chancellor have been dogged by the emerging financial crisis and by mounting media and political pressure over his poor performance at the Treasury. His budget speech was just about the worst I have ever heard in twenty years of listening to them. Darling is reported as saying at a meeting of G7 Finance Ministers that present turbulence was “the biggest economic shock since the Great Depression.” This is pretty strong stuff - and I question the wisdom of coming out with such a loaded sound-bite.

Chart of the Day: Imported Inflation into the UK

Our chart for the day is linked to the news that the pound has fallen to an historic low against the Euro. One of the consequences of a depreciating currency is that the prices of many of the goods and services we import from overseas goes up potentially leading to a fresh burst of cost-push inflation.

Declan and Stephanie in Discussion

This is a really good BBC video clip - an informal discussion between Declan Curry and Stephanie Flanders on some of the policy dilemmas facing the Bank of England and the different strategies open to the monetary authorites for coping with the credit crunch. There is a lot in here hidden just beneath the surface of the discussion.

Interest rates, exchange rates and annual holidays

As expected, the Monetary Policy Committee of the Bank of England has cut the base rate by 0.25% today.