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A timely report from the OECD on the long term difficulties of getting low skilled youths into regular full-time and part-time employment in the UK. Despite the favourable labour market trends of recent years, the employment prospects of youth workers leaving school and college with limited academic and vocational qualifications have actually deteriorated. In 2007, the unemployment rate of 16 to 24 year olds was 14.4% in Britain, up from 11% in 2002 and employment rates among 16 to 24 year olds fell to 55.9% in 2007 from 60.9% in 2002. Little wonder that some parts of the media have described a ‘lost generation’ many of whom remain persistently in workless households, drifting into the informal economy.
The OECD report - which urges the UK government to intervene with ‘vigorous action to help them with education and training and with job-search support’ is available here and here is a BBC report on the publication.
The OPEC website carries a very clear chart which helps to explain variations in the price of gasoline in different countries. In the UK for example over 60 per cent of the cost of a litre of fuel is due to indirect taxation applied by thr British Government. In a sense, high taxes have helped to insulate motorists from some of the dramatic increases in world oil prices - but the contrast with the USA is remarkable. Here is the chart and also the related publication: Who gets what from imported oil?
This article in the Financial Times is a good example of how a fall in demand and activity in one industry can have negative multiplier effects on related industries up and down the supply chain. Barratt Developments has announced that it is laying off twenty per cent of its workers and that “job cuts across the industry could reach 60,000 out of 300,000 people employed directly and indirectly in the sector. - The Chief Executive is quoted as saying that there would be a “secondary effect on the supply chain, comprising kitchen companies, solicitors, mortgage advisers, estate agents and so on,”
The Guardian: “Barratt cuts 1,200 jobs to cope with housing slump”
The maverick economist Willem Buiter argues that $500 for a barrel of oil is not out of the realms of possibility.
“Once global growth returns to its underlying trend, however, say three or four years from now, I expect the relentless upward march of commodity prices, including oil, gas and agricultural commodities, to continue. The reason is simple. Global demand growth is heavily biased towards energy-intensive production and consumption in emerging markets.”
Such price spikes necessarily bring about huge shifts in the balance of economic power at least in the short term towards energy producing countries and would entail most (but not all) of the rich developed world adjusting to a sharp fall in real income. But by the time prices reach such levels, the incentives for conservation and investment in energy efficiency will have become over-powering.
The fact that we are at least considering prices for oil of almost unbelievable heights is indicative of how the world is changing before our eyes.
In Business Week, Steve Levine questions whether the Saudi’s have the capacity to boost their sustainable supply to anything close to 12.5 million barrels a day
Clive Crook’s excellent blog asks whether the US economy’s growth potential will be harmed by a forecast that “Over the coming years, baby-boomers departing from the labour force will have better educational qualifications than the younger workers replacing them. If the ultimate source of an economy’s ability to grow and prosper is its human capital, the US is in trouble.”
Is there an equivalent study available for the UK?
One of my students, newly retired from the school Economics department, is venturing across China to experience first hand, the manifestion of China’s phenomenal economic growth - not to mention having a lot of fun too! Judging from his excellent blog from his journey across India last year, it should be a great read. Here is his travelogue / blog.
Just a 2% fall this month - equivalent to £800 a week. The 6.1% drop over the past 12 months is the highest recorded by the Halifax, Britain’s biggest mortgage lender since March 1993 and compares with a 3.8% annual fall in May. I remember during the housing boom, the talk at supper parties would be of arriving home from work having seen your property rise in value by more than you had earned in your job. Now that property prices are on the slide, the reverse is often true!
Martin Ellis, Chief Economist of the Halifax is quoted as saying ““A strong labour market, low interest rates and a shortage of new houses underpin housing valuations. Our research shows that the labour market is the key driver of the housing market. Employment is at a record high.”
So now all eyes are turned on the labour market for signs of a downturn in employment. There have been plenty of high profile job losses this week - but there tends to be an asymmetry in the news coverage - new jobs created rarely hit the headlines.
Forget the cheap jokes about their daily coverage of the inflation numbers on page 3 ..... just occasionally the Sun leads with an Economics-related front page and the 9th of July was one of those days! Britain on the brink of recession! Things must be bad!
Airlines will be included in the EU carbon emissions trading scheme and this BBC video provides a good introduction to the issue. All airlines flying into and out of the EU, including non-European carriers, will be included as part of the Emission Trading Scheme, and would have to pay for 15 per cent of their emissions permits from 2012. Will the Americans be persuaded to move towards a global agreement on aviation emissions? How will demand be affected by the expected Euro 2 to Euro 9 increase in the price per passenger for short haul flights?
Forget a third runway at Heathrow, we need another Terminal at St Pancras! That is the message from Carl Mortished in his world business briefing in the Times this week. Demand for hi-speed rail services is soaring as people desert short-haul flights in response to the fuel surcharges and hassle of getting through security. Traffic growth on Eurostar has increased by over a fifth in the first quarter of 2008 and revenues are up by more than 25%. Consumers are realising the advantages of travelling by hi-speed rail for cities 600 miles or less apart. His article is here:
Those of us who are getting a bit long in the tooth tend to regard events of say a decade ago as pretty recent - so the eleven years that have passed since the Bank of England was made independent seem to have come and gone in a flash! The departure from the ERM in 1992 (can you remember what you were doing that night?) and the end of the dot-com boom also fit into that category for this author!
But for our new students who begin their study of economics in September, these landmark, perhaps watershed events are a dim and very distant memory if at all. I was reminded of this when reading the excellent Guardian editorial today “From boom to doom and gloom”. which ends up calling for the fiscal rules to be relaxed in the current fall out from the credit crunch.
When we start teaching again in September the economic picture will most likely have worsened somewhat ... I must remind myself to build up a collection of newspaper front page headlines in case students have forgotten to order papers for the beach! - but for most 16 and 17 year olds, all they have ever known is a growing economy and low inflation.
“Had our teenager taken an interest in economic affairs (although he or she would surely have something better to think about, like the new Will Smith film) they would know the economy was in big trouble. Yet that 16-year-old would only just have been born the last time there was a single quarter of falling national income. All they would have ever known was a growing economy.”
Macroeconomics has suddenly got a whoel lot more interesting again and it will be fascinating to hear what our students think of the best ideas and prescriptions for managing our way through 2009 - which promises to be a very difficult year for the economy.
John Moylan presented this excellent piece on the BBC news tonight reflecting on the BCC survey but also looking at two businesses Acme Whistles in Birmingham and a removals firm in the west midlands for signs of the descent into a recession. An excellent av to show perhaps at the start of next term.
The BBC website provides a handy guide to the meaning of a recession.
Stephen King has been pushing hard the view that central bankers in developed countries (with the possible exception of the ECB which last week raised interest rates) have been too slow to react to the seismic change in the balance of power in the world economy. He has read the copious minutes of the monthly meetings of the US Fed and the Bank of England and has found rather scant reference to any of the economic developments in emerging markets. The world is changing and perhaps our monetary policymakers are not giving sufficient weight to the likelehood that commodity prices will remain much higher than their forecasts risking embedding a worsening trade-off between economic growth and inflation.
“The biggest single economic problem facing the developed world is the deteriorating trade-off between growth and inflation. This is happening primarily because of the impact of strong emerging economic expansion on global commodity prices ............China has become the world’s most important marginal consumer of energy in recent years. It now consumes more energy than the whole of the European Union and isn’t too far behind the US. If China’s economy overheats, it’s no longer an internal Chinese prob-lem: through global commodity markets, China’s overheating becomes a problem for the rest of us as well.”
Almost four million people now pay income tax on their earnings at forty per cent compared to just over two million when Gordon Brown became Chancellor. Hundreds of thousands of middle-income taxpayers are now paying some of their income at the top rate because income tax allowances have not risen as fast as wages over the last decade. This is known as fiscal drag. This tax year (2008-09), the basic Personal Allowance - or tax-free amount - is £5,435. Taxable income is charged at 20% for incomes between £1 to £36,000 and then at the top rate of 40% for any earned income above that. On average, higher rate taxpayers each contributed £22,400 to the government’s finances last year.
The Times covered Fiscal Drag in an article a few years ago ... still relevant today
Having enjoyed one of the strongest labour market records among fellow EU member nations over the last decade, the UK has slipped to 10th place in the rankings for unemployment using the standardised ILO measure (i.e. the labour force survey measure in the UK). Five of Europe’s new member states now have unemployment rates below that of the UK. The club med countries continue to dominate the lower reaches of the table.read more...»
Richard Thaler, the author of Nudge, is featured in an interview with David Smith in the Sunday Times. Here is the link
Political leaders line up to learn new art of persuasion and a book review by Bryan Appleyard
From Wrexham to Eastbourne and in virtually every part of the country, the demand for allotment space is rising much faster than local councils can supply. The economics of having your own allotment land have changed significantly in the last few years. Allotments peaked in popularity in the immediate post-war years as people looked to grow their own food and drag themselves out of the restrictions of rationing. But gradually the number of allotments declined as the food availabilty improved, real prices fell and the number of supermarketsexpanded. By the 1980s using an allotment was widely regarded as the preserve of the ‘Good Life’ crowd and those in retirement wanting a way to pass the time.
But now the combined effect of rising food prices, growing concerns over the environmental effecs of food miles and demand for locally-grown organic produce has prompted a fresh wave of demand for scarce allotment space.read more...»
Ambrose Evans-Pritchard is on good form in the Telegraph today looking at how the spike in oil prices is theatening the very basis of the Asian trade model. In a world where distance now costs money - ever-rising freight charges are acting like an import tariff for countries whose export-led growth has been built on mass volume manufacturing and the ability to transport these products in huge bulk around the world’s shipping lanes at a relatively low cost.
“The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete. Asia’s intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin. Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded….........globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.”
Caterers, care homes and constructin firms will be among those interested to hear that the BBC reports that the EU Commission has unveiled plans to allow EU states to lower VAT rates for local service businesses, including restaurants and builders. Currently the minimum standard rate of VAT in the EU is 15%, although there are many exemptions. This would be a good example to use when discussing the effects of VAT on market supply for different goods and services in the AS micro course. The Guardian reports that “Zero-rated goods, such as children’s clothes in Britain, will be unaffected.”
It is a potent cocktail
Collapsing mortgage supply
Sharp fall in demand for home loans
A significant decline in average house prices with the prospect of more to come
Distressed homebuilders announcing very large job losses
A precipitous fall in land values raising fears of bankruptcy among some of our leading home-builders
The tipping point has been well and truly reached .... this housing recession is going to be very deep and - in the absence of some favourable external headwinds or imaginative and decisive policy intervention from a government that has long since lost momentum and credibility - the knock-on effects on the wider economy are likely to be widespread.
Homebuilders face disastrous £3bn landslide
Falling into the abyss?
Is the UK economy headed for a recession?
The Telegraph (Roger Bootle)
The signs of a recession are all here
Should you choose to go first or second in a penalty shoot-out? Or serve first rather than receive in a grudge tennis match? Tim Harford has a neat piece in today’s Financial Times which unearths some research which seems to suggest a fairly decisive advantage for teams that win the toss of a coin and opt to take the first shot in a shoot-out! Unless of course they crack under the pressure!
Freight ships are one of the best examples I know of a service whose demand is derived from the simple need among exporters and importers to transport their products around the world. So when the global economy changes gear and the chill-winds created by record high oil prices and a slowdown in consumer spending start to bite, it is more or less inevitable that the major shipping businesses will feel the pinch.
The Telegraph carries a report on this today. Ships are leaving Asian ports not full to to capacity a sign perhaps that the increased costs of shipping products is starting to limit demand for freight services.
Apparently the index to watch out for is the Baltic Dry Bulk Index - a measure of commodity-shipping costs - and this bell-weather measure has fallen sharply in recent days hinting of a shift in the balance between supply capacity and demand for ships to move the major raw materials by sea.
Too much freight capacity in the industry? Or a really important lead indicator that 2009 will be a really tough year for the global economy?read more...»
The Australians may be making headway towards their own carbon emissions trading scheme with the publication of a new report from economist Ross Garnaut. Here is the link to the Garnaut Report web site. And this BBC news video provides coverage from the world’s driest continent.
British manufacturing industry perennially appears to move from one recessionary period to another. But although the sector as a whole has shrunk as a share of GDP and employment, we still have some world class manufacturing businesses out there often engaged in high-knowledge and high-value production - competing on quality and craftsmanship rather than mass volume. The decision this week by the UK government to build two new huge aircraft carriers is an important shot in the arm for a number of UK manufacturing firms and this BBC report says that seven UK-based firms have won contracts totalling £91.5m to build parts for the new carriers.
Corus, based in Scunthorpe, will get £65m to provide steel whilst five other English firms, in Dorset, Greater Manchester, Surrey, Suffolk and Lancashire, will build products ranging from control towers to landing aids. Corus ofcourse is now owned by the Indian conglomerate Tata!
But a good example of how government capital spending can have potentially large multiplier effects if the initial contracts are given to domestic businesses.
The Economist has a very relevant feature this week on the connection between countries running sizeable current account deficits on their balance of payments and movements in their exchange rate. The carry trade has been a factor in recent years acting to prevent exchange rate depreciations from helping some countries to adjust their current account deficits downwards but now some of the biggest deficit countries including the UK are experiencing notable exchange rate weakness.
“Current-account imbalances are once again exerting a powerful influence over currencies. The chart shows that the weakest currencies this year have been in countries with deficits, from Britain to South Africa.”
This is not to say that exchange rate depreciations on their own are sufficient to make much of a dent in the UK trade deficit for the root causes are supply-side in nature. But it will be interesting to see how much of an improvement we see in the UK trade figures over the next year or so as the combined effects of a sharp consumer slowdown and a weaker currency start to make an impact.
The Economist article is here
The red wine provided by Leith’s of London at the Business Studies conference yesterday went down very well at the end of a long week. And travelling home on the train I enjoyed reading this piece in the Economist on the health benefits of a couple of glasses of a decent red! Perhaps we should add red wine to the list of perceived merit goods! Part of the pleasure and benefit comes from anticipating the consumption of a good bottle. And behavioural economists would no doubt tell us that the private benefit is increased simply by thinking the red wine is expensive even if it isn’t! (The power of the placebo applied to wine lovers!).
The long overdue statue of Adam Smith was unveiled in Edinburgh yesterday. Here is the report from the BBC together with an appreciation from Dr Eamonn Butler, director of the Adam Smith Institute and the instigator of the project. The Scotsman also reports on the unveiling. I will take a closer look at the monument when I visit the Edinburgh Festival Fringe next month.
Larry Elliott offers a timely short piece on differences in the definition of a recession. Whilst Brooke Masters and Norma Cohen in the FT look at the economic tea leaves after a week when so many of our bell-weather businesses such as Marks and Spencer, John Lewis, Taylor Wimpey and Bradford & Bingley.reported bad news.
Ernst and Young have published a survey of household discretionary income for the UK over recent years. Their definition of this measure of income is the income available for spending after tax contributions and essential monthly household bills and they have found that the average household is now 15 percent worse off than it was five years ago. It is interesting that we see so many different surveys and alternatives measures of living costs and guides to living standards these days as confidence in the official data such as the CPI have lost credibility and support.read more...»
The Oxford English Dictionary has released the latest set of new words for June 2008 and the turbulence in global financial markets has made an impact! Business is also well represented in our ever-changing lexicon.read more...»
Denmark has become the first European nation to go into recession on July 1—economic output officially shrank for two quarters in a row. Known for its high taxes and expensive cost of living, Denmark was not alone in enjoying a property bubble over the last decade, but the boom is well and truly over and a combination of falling wealth, and real incomes eroded by the spiralling cost of living has contributed to the economy moving into recession territory.
Spain, Ireland and the UK dont look to be too far behind!
Here is a short report from the Guardian
Some stunningly good cartoons here in the Independent.
Tom White has been in China in the last few days and I recommend his post over at the Business Studies blog. Here is the link.
The Economist features the ‘sinking’ British economy on their front cover this week. Over at the Telegraph, Edmund Conway writes about a risotto recession whilst in the Independent, the sage Hamish McRae reflects that most people who are harking back to the stagflation of the 1970s are not actually old enough to remember what it was like! And he argues that the world is better placed to withstand the current oil price shock than thirty years ago.
York Station this morning ...... and I just had enough time before jumping on a train bound for London KX to grab a coffee and a bar of chocolate from AMT coffee - the first national coffee chain in the UK to be 100% fairtrade. It was a great coffee at a fraction of the price I would have paid on the train itself or at Starbucks. AMT will become my default choice on future train and airline journeys. I recommend AMT to you all.
Today’s Big Question in the Independent is about the fading charm of Starbucks and one of the sections alerts us to the mystery of the short cappuccino which Tim Harford and others have written about in the past. There is a really good graphic that could be used in a classworksheet on competition in the retail coffee industry.
A double batch of new data on confidence among purchasing managers in manufacturing and services suggests that economic conditions in the UK are deteriorating quickly increasing the risks of a recession in the next twelve months. The Purchasing Managers survey’s headline index of overall conditions in the economy’s most crucial industries slumped to just 47.1 for last month. On a scale where any reading under 50 indicates contraction, this was the second month in a row that the numbers came in well below 50 and the downward slide is clearly apparent in our chart. Indeed this was the weakest reading on sentiment among buyers of raw mateials and components since the Autumn of 2001 and the immediate aftermath of the 9-11 attacks. Purchasing Managers data is often regarded as a lead indicator of turning points in the economic cycle.
Chancellor Alastair Darling offered us these brave words
““If we we don’t reduce our dependence on oil ... we will continue to expose ourselves to the uncertainty of the oil market…..It is important that we reduce our dependency far more quickly than perhaps people thought was necessary.”
It is a shame that the government has wasted over eleven years in producing a credible and coherent energy policy. I was chatting to a guy on the train down to London this morning. He had over twenty-five years experience in the energy industry, much of the latter part of his career was within the nuclear sector working as a senior engineer. He made a rather pertinent point that, once we realise that moving decisively to nuclear is inevitable, we will run into major shortages of the skilled personnel needed to construct the new nuclear power stations. Most of those required have long since retired from the industry and we will be dependent on nuclear engineers from the USA and far east Asia.
Anatole Kaletsky was on good form in the Times today writing about three market failures in the oil industry
1/ The huge gap between the marginal cost of producing oil and the marginal cost of supplying oil substitutes
2/ Monopoly power in the oil business - controlling the supply of oil - “there is nothing efficient about the level of prices set by the market”
3/ The ramping up of oil prices by institutional investors and the incentives to invest in oil exploration rather than much needed investment in non-oil new technologies
This eleven minute report from the Today programme is fasincating ... looking at real signals from construction, retailing and advertising. James Naughtie interviews M&S Chairman Sir Stuart Rose, Nick Edwards, of Construction News, and businessman Sir Martin Sorrell. All recessions are different but they all have a proximate cause… a tipping point when expectations change and both businesses and consumers change their behaviour and simply stop spending and producing as much as they had become accustomed to.
Here is a really interesting story for business economics students to follow in the weeks and months going forward. Starbucks has announced that it plans to close one store in 20 across its US branch network - meaning the loss of around 600 stores.read more...»
Another example of how consumers are starting to respond quite significantly to the surge in fuel costs. Experian has produced figures showing that the number of people visiting out-of-town retailers in June fell 5.8pc against the same period last year, compared with a 1.5pc fall in town centres. Average spend per head tends to be much larger for out-of-town shopping visits so the impact on like-for-like sales is going to hit retailers with a strong out-of-town presence pretty hard. But this is good news for the future of local high streets even though the chain supermarkets have been muscling in on this space with their convenience store formats. Great news too for online retailers?
“Experian said there were 282 non-food retail bankruptcies in the three months ended May, up almost 25 percent on the year and suggesting a “dramatic acceleration” in business failures.”
“Suddenly, it is not the customer who matters; it is the supplier. The stuff that arrives at the factory loading bay is now expensive; shortages and logistical logjams are playing havoc and the company that sells you a vital commodity is digging in its heels, refusing to renew a long-term contract without a big price increase. It is time to start thinking about vertical integration. Owning every segment of the production process from metal mine to packaging plant is an unfashionable idea, but in some industries it is coming back with a vengeance.”
A really good piece here from Carl Mortished on the increasing importance to companies of having a great degree of control over their supply chains through vertical integration. There is another feature here in Forbes magazine about the shift towards vertical integration in the steel industry, and one here about Google and vertical integration.
High gasoline prices is having a classic cross-price elasticity of demand effect. Sales of bicycles, scooters and motorcycles are up. Sales of sport-utility vehicles are down as consumers respond to the changing real cost of getting about town using a motorcar.
Market demand for scooters is said to be soaring in many parts of the USA - here is a link to an article in the Dallas News. Pure economics and a certain nostalgia seem to be two driving forces behind the shift in the pattern of demand. And as sales of scooters rises, so too does the demand for complementary services such as motorcycle-safety courses and scooter riding equipment such as helmets, gloves and motorcycle jackets,
According to a fresh report from the Joseph Rowntree Foundation “According to members of the public, a single person in Britain today needs to earn at least £13,400 a year before tax to afford a basic but acceptable standard of living. The minimum income is above the official “poverty line” of 60% median income, for nearly all household groups. This shows that almost everybody classified as being in poverty has income too low to pay for a standard of living regarded as “adequate” by all members of the public who took part in this research.”
This research will be terrific to use in the classroom when teaching about living standards, positive and normative statements, and disagreements between people about what constitutes a modest but adequate income required to meet our daily needs and wants. Crucially it tries to identify how we should define a minimum income standard.
“A minimum standard of living in Britain today includes, but is more than just, food, clothes and shelter. It is about having what you need in order to have the opportunities and choices necessary to participate in society. The minimum seeks to exclude items that may be regarded as ‘aspirational’ – it is about fulfilling needs and not wants.”
The full copy of the research is available here in pdf format
The debate rages about who is responsible for the 100% increase in the price of a barrel of crude oil over the last year - speculators? fundamental supply and demand factors? Or a combination of influences on the market. Martin Feldstein’s article in the Wall Street Journal today is excellent in linking price volatility to the low price elasticity of demand and supply in the market in the short run.read more...»
Fred Bergsten, director of the Peterson Institute for International Economics writes about the de-coupling hypothesis in today’s Financial Times and how it is now working to improve the US trade position and reduce the risk of recession.read more...»
An important announcement yesterday in the contining battle between the EU and the airline industry over curbing CO2 emissions.read more...»
These are turbluent times for the economy - but the macroeconomic numbers of output, investment, jobs and pay are simply the aggegate of many thousands of decisions taken by individual businesses across the length nd breadth of the economy. How the UK economy emerges in the current downturn will depend crucially on the strategies adopted by the busines sector. It is a huge challenge - to make money and protect margins in a time when cost pressures are enormous, when demand might be slipping away and productivity growth is slowing down as capacity utilisation drops.read more...»
There will be many references to the stagflation of the 1970s as we head into dangerous times for inflation over the next year or so ... will inflation expectations take off and create havoc for the Bank of England as it seeks to bring inflatyion back into target range? Hw much of the renewed burst of inflation we are seeing at present is home-made and how much is coming from external forces over which we have little or no influence?
Three articles on the inflation issue were published today all of which are worth browsing:
Nick Stern - perhaps the most famous economist alive in the world today? His talk at the RES Annual Lecture in November 2007 was one of the highlights of my year and no doubt his diary is full for the enxt couple of years at least! Lord Stern of Brentford is quoted as saying that the cost of tackling climate change has increased significantly since the publication of the Stern Report in October 2006. Speaking at the launch of the Carbon Ratings Agency he is quoted in the Guardian as saying that said evidence that climate change was happening faster than had been previously thought meant that emissions needed to be reduced even more sharply. The rest of the Guardian article is here.