Google Wave: Trade deficits and surpluses
We were back on Wave last night considering some of the wider arguments surrounding persistent trade imbalances. Are trade imbalances a problem?
We are hoping that - as more Economics teachers migrate to Google Wave - we will be able to schedule collaborative sessions (typically lasting between 45 to 60 minutes) where we can generate ideas, arguments and perspectives in real time and support eachother’s teaching on chosen topics or issues.
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Stimulating Times
I was drawn to this very interesting graphic from the latest IMF report on the state of government (fiscal) finances in countries around the world.
read more...»13% fall in household wealth will shape any 2010 rebound
One key reason to expect a more subdued recovery from the downturn is that the household sector in the UK has suffered a huge negative wealth effect over the last couple of years. Asset values have fallen but outstanding debts have not and it is this imbalance that will shape the nature of any rebound in consumer demand for goods and services even though the cost of borrowing is at unusually low levels. The National Institute has done some research on the negative shift in personal sector wealth and it is reported in this article in the Telegraph.
Gloomy summary
Here is a summary of four reports posted on the Business and Economics sections of the BBC News website over the last few days. Be warned - none of them are particularly hopeful, the green shoots of summer giving way to autumn mists.
Explaining the Paradox of Thrift
Dugie Young looks at the paradox of thrift and its relevance to today’s financial and economic crisis.
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A2 Macro: Domestic and External Headwinds
As part of an introduction to a deeper analysis of economic cycles one of my A2 groups considered some of the domestic and external economic headwinds that will shape the next stage of the business cycle - not least the likely pattern of any recovery in activity. The aim of the exercise was to emphasise the importance of the inter-connected nature of modern economies. And also to reinforce the idea that policy decisions taken inside the UK economy can be blown off course by external shocks.
Here are some of the ideas
Domestic influences
Consumer expectations - about future changes in taxes, unemployment, house prices, real incomes
Business expectations - the state of confidence / pessimism about sales, costs, credit availability, cash-flow and profits
Scope for further monetary policy decisions - e.g. extension of quantitative easing, edge policy rates to zero
Fiscal policy changes - need to scale back borrowing, control G, likely sharp rise in the tax burden
Access to credit and the cost of borrowing - are the banks and other lenders sufficiently recapitalised to start lending?
External influences
Shape and strength of recovery in economies of our major trading partners
Ability of the global economy to coordinate a sustained recovery
Growing pressures for protectionism / economic nationalism
Volatile exchange rates
Volatile international commodity prices
Large swings in direction of foreign direct investment / international capital flows
It is really important for A2 macroeconomists to keep abreast of the news and develop a deeper awareness of what is happening and the mutliple inter-relationships between economic, financial and political forces. Are we in a substantially brighter position than six months ago? What causes turning points in cycles? The anniversary of the collapse of Lehman Bros is an opportune moment to take stock of where we are.
Some suggestions for reading
Telegraph: Too early to celebrate the end of the recession
Guardian: Recession is officially over, according to leading thinktank
The Times: House prices rise 0.8% to fuel rebound hopes
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
Emerging Leaner, Stronger, Fitter from the Recession
Hamish McRae considers how businesses are responding to the challenges of recession in his Economics Life piece in the Independent this morning. Drawing on a new report from management consultants Arthur D Little he considers some of the strategies that businesses are adopting given the special nature of this downturn. Improving hygiene, fitness and building muscle ahead of the recovery figure prominently and there is a fascinating graphic illustrating some of the priorities of firms at this unusual time.
“Businesses that do survive the present harsh climate will emerge in much better shape. All downturns speed up the process of structural change in the sense that things that were going to happen anyway happen much faster that they would have done. But the speed of this one has been so extreme that the world is cramming a decade of such change into a year or 18 months. As a result a lot of firms that still appear weak right now may emerge in rather good shape when demand returns.”
Improving hygiene: Actions to cope short-term with the implosion of confidence and collapse of demand e.g. rationalising operations and cutting overhead
costs, turning fixed costs into variable costs: 80-90 per cent of business respondents are giving these actions very high or high priority.
Fitness: Keeping talent on board is a very high or high priority for 82 per cent of respondents. Maintaining R&D and innovation expenditures is a very high or high priority for 67 per cent of respondents.
Muscle Building: preparing for the world to come beyond the downturn, for example building stronger relationships with regulators or a high priority to preparing for the low-carbon economy
Arthur D Little Prism magazine
Causes of a double-dip recession
To drive the economy out of recession requires extra demand but where is this demand coming from? Cuts in interest rates and a big fiscal stimulus in many countries (notably China and the United States) has helped to cushion the scale of the slump but sometimes despite tentative signs of green shoots, an economy can go into the second stage of a downturn, this is known as a double-dip recession. This can happen if the initial ‘kick’ of the fiscal and monetary stimulus starts to wear off.
This Newsnight video report by Paul Mason (recently returned from a lengthy period analysing the Chinese economy) features Martin Weale, Director of the NIESR and my old tutor at Cambridge who argues that Britain will have to get used to being 3 or 4 per cent poorer and expect a deterioration in public services with government spending cuts inevitable in the coming years.
There are signs that borrowing costs are starting to rise, particularly mortgage costs and loan and overdraft charges for businesses. This may undermine confidence and engender any green shoots.
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