UK Economy

Minus one quarter of one percent

As expected, the MPC has cut the UK base rate from 5.50% to 5.25% today. In the context of rising energy and food prices, this sends a mixed message to observers. Why would the Bank allow an expansionary monetary policy in the context of rising inflationary pressure?

Time Lags

With attention focused on changes in base rate today, Hamish McRae , writing in The Independent, looks at longer-term prospects for the world economy.

He argues that growth from BRIC and similar economies will maintain growth this year, but the real test for the world economy in coping with slowing demand in Europe and the USA will come in 2009.

Only another 30 minutes to the base rate decision - which appears to already be a foregone conclusion?

Interest rate cuts do work!

In all likelihood the Bank of England will cut interest rates today at the end of the monthly meeting. The MPC has not been as proactive as the United States Federal Reserve in aggressively easing monetary policy but a reduction in the cost of borrowed money will act as a stabilizer for confidence and demand as the economy softens. It is at times like this that we need to remind ourselves of how cuts in interest rates work their way through the economy. And also to remember that base rate changes do work even if, this time around, the policy-makers may have to do a little more than in the past to smooth the extent of cyclical volatility. Monetary policy is not yet impotent!

Fixing or Floating

In our A2 macroeconomics lesson today we were discussing the economics of fixed and floating exchange rates. The UK economy has operated with a floating exchange rate system since September 1992 and our forced departure from the exchange rate mechanism. It was an event of huge political as well as economic importance, ushering in a new system of inflation targeting and (ultimately) the granting of independence for the Bank of England. Leaving the external value of the currency to market forces does have risks, but at the moment the trends in the sterling exchange rate might well have a positive influence on the direction of the economy during a difficult 2008. 

Is the ghost of negative equity returning?

Dropping the phrase ‘negative equity’ into conversation at a dinner party is likely to lead to immediate social pariah status. Our memories are dulled by time, but less than fifteen years ago, over a million and a half households in the UK felt the chill wind of a housing recession which left them with properties worth less than their unpaid mortgage debt. Whisper it quietly but the ghost of negative equity is making a comeback.

Housing Market Tea Leaves

Judging the mood of the British housing market is never easy not least because there is a torrent of information every month that tries to capture the latest moves in average prices, property transactions, asking prices and expectations and confidence among buyers and sellers.

Hometrack issued data today that said that property prices in England and Wales fell for a fourth consecutive month in January. This took the annual rate of house price inflation to its lowest in 19 months. The Head of Research attributed this to a fall-back in confidence among would-be home buyers. One indicator of the strength of activity in the market is the length of time it takes to sell a property. Hometrack estimate that this has now reached a seven year high.

Sterling’s fall may be good news

The fall in the value of sterling could provide a timely boost for Britain’s manufacturing sector

Sterling falls against the Euro

The fall in the value of sterling against the Euro is an important macroeconomic development. No one factor explains the scale of the depreciation but part of the fall is due to expectations of lower interest rates by the Bank of England and also a slowdown in the inflow of international money that, in recent years, has come in to help finance the UK housing boom.

Over 55% of Britain’s trade is with fellow members of the European union so a change in the exchange rate against the Euro potentially has significant effects on the volume of goods and services traded between the UK and our European partners.

David Smith writes about this in his latest Sunday Times article - also available in his blog.

One aspect I hadn’t thought about when discussing the exchange rate in class today was the possible impact on the incentives for migrant workers to come to Britain to work. But the bigger picture I feel is that this could give a shot in the arm for what is left of UK manufacturing industry - exporting to the EU will become more profitable, I hope our export sectors can respond quickly.

Evan Davis at the Keynes Society

Upper School was packed on Thursday night for a meeting of the Keynes society, this week’s speaker was Evan Davis, the BBC economics correspondent and presenter of the popular TV show “Dragons Den”.

A gifted communicator on the economy

Upper School was packed on Thursday night for a meeting of the Keynes society, this week’s speaker was Evan Davis, the BBC economics correspondent and presenter of the popular TV show “Dragons Den”.

Evan Davis gave a personal overview of the current economic cycle and said that there were innate cyclical mood swings in all modern economies. History repeats itself and the recent property bubble is no exception since rapidly rising prices justify expectations and drive demand higher still leading to an overshooting of the market.

The latest macroeconomic cycle has last over ten years and has been lengthened by two key forces, firstly the internet and secondly the emergence of China as the world’s dominant manufacturer of goods. The result has been deflation in the prices of many of the goods we buy – from iPods to DVD players, from clothing to furniture. But we have also seen a significant rise in the prices of many services such as restaurant meals and the fees charged by plumbers and decorators.

Chinese deflation is now coming to an end as the prices of commodities are surging throughout the world. The result is that interest rates have had to rise and this has put the squeeze on those who have borrowed huge sums to enter the property market. A housing slowdown or a recession is inevitable and this will be an important factor behind the coming downturn.

A recession or a slump is not all bad news for the economy needs to re-balance itself not least in terms of people raising the amount that they save. The recent fall in the value of sterling against the Euro and the US dollar may be the saving grace for the British economy during this downturn, since a lower exchange rate will boost exports and give manufacturing industry a welcome boost.

We were yet again fortunate to listen to a speaker who is extremely well informed of current affairs as well as possessing a talent for speaking engagingly and informatively. It was also pleasing to see a number of students from other schools in attendance, as well as our own, demonstrating a shared enthusiasm to benefit from the experience of a well-regarded public figure, an enjoyable evening was had by all.

The next meeting of the Keynes Society is on Thursday 7 February when our speaker will be Mr Jim O’Neill, Chief Global Economist at Goldman Sachs. On Thursday 21st February, the speaker is Mr James Caan from Dragon’s Den.

Britain slips to 6th largest economy

A fall in the external value of the pound against the Euro is mainly responsible for the UK slipping to 6th place in the global league table for size of economy as measured by GDP. This is reported in today's Financial Times.

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UK Economy Sails into Choppy Waters

2008 marks my twentieth year teaching Economics and, for most of that time, students of macroeconomics have learnt their trade during a period of remarkable stability. After emerging from a painful recession in the early 1990s, the British economy has enjoyed a long run of low inflation, steady growth, more people in work and improving standards of living. Property prices have soared and share valuation, save for the bear market after the collapse of the dot.com bubble, have performed well.