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.
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.
What happens when the hose pipe is turned off?
I paid my annual visit to the Edinburgh Fringe last week. The Book Festival provides a welcome antidote to a heavy diet of comedy, live music and theatre and I popped in to hear Larry Elliot (Guardian) Dan Atkinson (Mail on Sunday) Philip Augar (Author) and Paul Mason (BBC Newsnight’s Economics Editor). The first meeting with Elliot and Atkinson was pretty dire, but Paul Mason and Philip Augar were both on excellent form on Tuesday morning. Paul Mason in particular offered some vibrant insights into what is happening both in the United States and also in China.
In the USA you can still buy ‘snag-tooth’ properties in Detroit for less than $1000 using your credit card. Snag-tooth properties is a term coined to describe housing estates targeted by sub-prime lenders where there are huge numbers of boarded up and semi-derelict repossessed houses waiting for a buyer. It was Paul Mason’s luck to be in Detroit and then New York at the epicentre of the drama surrounding the collapse of Lehman Bros a year ago. His book Meltdown is a terrific read and one I am putting on my reading list for our new group of sixth form economists.
Both Augar and Mason doubt whether the evidence of a rebound in activity in the leading economies can be sustained as we head into 2010. The extraordinary macroeconomic policy response involving huge rises in government borrowing, bail-outs and scrappage schemes, ultra-low policy interest rates and extended quanititative easing must inevitably provide a boost to short term production. But the growing evidence that the commercial banks are largely hoarding the extra deposits created by QE is evidence that the banks have not sufficiently re-capitalised or cleaned up their act. A failure to fix the banks is limiting the impact of the monetary stimulus and small businesses across the country are finding lending conditions tightening and paying upwards of twenty times the policy rate.
Interest rates are likely to remain low for a long time to come - UK base rates may stay below 1% throughout the whole of 2010 - but a fiscal retrenchment is inevitable and it threatens to undermine the strength of any recovery. The government borrowing figures are horrendous within a short space of time the cost of servicing a national debt in excess of £1 trillion will take up to 10 per cent of tax revenues.
Philip Augar: Chasing Alpha: How Reckless Growth and Unchecked Ambition Ruined the City’s Golden Decade
Paul Mason: Meltdown: The End of the Age of Greed
Tentative signs of a pulse in the housing market
Whisper it quietly but there are some signs of a turning point in sentiment, lending, activity and price levels in the UK residential housing market after a very difficult eighteen months. There is a chance that average price levels might end the year slightly higher than they started. Here is a brief selection of charts that offer a modicum of optimism and an incentive for me to spend some of August looking for a good value property on the Northumberland coast!
read more...»Economics Snapshot - EU Migrants in the UK Labour Market
Migrants from EU Accession Countries
2004-08
Average age 26.5
*1/3rd have been in higher education
*90% employment rate whilst in the UK
*Hourly wage of £6.80 compared to UK average of £11.90
*12% claimed benefits or tax credits
*6.5% lived in social housing
Source: Centre for Research and Analysis of Migration at UCL
Housing the global economic crisis
Lecture slides from the recent Housing Markets and the Global Financial Crisis presentation at the LSE are available here
Revision: Deflation in Residential and Commercial Property
Background:
There has been a period of steep and sustained deflation in the average prices of property in the UK. Commercial property is 40% down from the July 2007 peak and residential property is - on average - down by 20% since the peak in the autumn of 2007. Land Securities, Britain’s largest real estate company has just revealed a £4.7bn fall in the value of its investments. It’s retail properties fell in value by 37 per cent and fared only slightly worse than its stock of London offices, which were down by 34 per cent. The commercial property sector is suffering from a slump in demand and sharp rise in vacancy rates. Housebuilders have made big cut-backs to the number of new homes being built. Both commercial and residential property markets are experiencing excess supply.
read more...»
Policy Failure - Rising Inequality
Labour’s long-term aim of abolishing child poverty and scaling back the depths of relative poverty among Britain’s poorest households looks to be falling apart judging from the latest official statistics on the number of families living below average income.
The data finds that the number of people living in poverty has climbed to 11 million by March 2008, a rise of 300,000 since 2006. And nearly a quarter of a million working adults fell below the poverty line last year - the line being families living on less than sixty per cent of median income adjusted for household size. According to the Institute of Fiscal Studies, inequality (or relative poverty - for it amounts to the same thing) has risen to its highest level since 1961. The Gini Coefficient, a measure of income inequality, is now at its highest level since the IFS began compiling figures in 1961
And this before the true effects of the recession on poverty start to show through in published figures.
The core facts are these:
In 2008-08 median income was £393 per week and mean income was £487 per week. (Students should be able to explain the difference!)
The Gini coefficient rose to 0.36 in 2007-08 - the highest recorded figure since 1961
In 2007/08, there were 2.9 million children living in UK households with below 60 per cent of contemporary median net disposable household income - one child in five lives in a family operating below the poverty line. Britain has one of the highest incidences of child poverty in the European Union
In 2007/08, there were 5.6 million working-age adults living in UK households with below 60 per cent of contemporary median net disposable household income Before Housing Costs, and 7.5 million After Housing Costs.
In 2007/08, there were 2.5 million pensioners living in UK households with below 60 per cent of contemporary median net disposable household income Before Housing Costs, and 2.0 million After Housing Costs.
In 2007/08, there were 11.0 million people living in households with below 60 per cent of contemporary median net disposable household income Before Housing Costs (BHC), and 13.5 million After Housing Costs (AHC).
More here
Guardian: Child poverty reduction halted by recession
Telegraph: Gap between rich and poor grows to record levels, official figures show
After the storm
A more balanced recovery
Whisper it quietly but there are cautious grounds for believing that an economic recovery when it finally arrives might be more sustainable and balanced than the unbalanced expansion in the years running up to the recession. As in the years following our emergence from the slump of 1990-92, the British economy is likely to see a phase of growth which is less dependent on household consumption and government spending and where the export sector might lead the way. Even manufacturing industry - whose share of value added in national output has been on a long-term downward trajectory - may enjoy something of a renaissance.
Despite historically low interest rates and the short term relief of a decline in global food prices, household spending is likely to be subdued because of
Rising unemployment - the claimant count is set to rise above 2 million and the labour force survey measure above 3 million
Households will have to continue paring back their debts and building up savings balances, especially those caught in the negative equity trap
Many workers will experience wage freezes or pay cuts and disposable incomes will be hit by rising taxation and a fall in bonuses and overtime payments
Credit will remain hard to come by - keep in mind that, dejavascript:promptTag("link");spite policy interest rates of 0.5%, unsecured interest rates on bank loans, overdrafts and on credit cards have become more expensive. Many banks have not passed on in full the effects of recent interest rate cuts
It will take time for consumer confidence to rebound especially if there is a delayed and muted recovery in the housing market. Expectations and trust have taken a battering
In his latest Deloitte Economic Review Roger Bootle considers what shape a recovery might take.
The key to his analysis is the delayed effects of the 25-30 per cent depreciation of sterling on a trade weighted basis. The benefits of a more competitive exchange rate have been muted because of the downturn in global GDP and trade - falling real incomes and spending in our major export markets have outweighed the substitution effect of cheaper prices for British exported goods and services. But this turn round eventually.
Whilst financial services are likely to remain in the doldrums, Bootle points to other industries well placed to reap the rewards of a lower pound - tourism, biotechnology, education and health services, businesses serving large-scale environmental projects, architecture and advertising. These are areas in which we are well served and have a revealed competitive advantage to judge from the balance of payments statistics.
Higher exports and a pick up in capital investment - these are the twin pillars needed for balanced recovery after the storm.
Revision presentation - UK Housing Market 2009
This updated revision presentation profiles the UK housing market considers the links between the housing market and the UK economy. Asset prices have become hugely important in driving macroeconomic activity - although policy makers in the Treasury and the Bank of England have probably made serious errors in allowing the property bubble to go on for too long before that asset price bubble burst in spectacular fashion.
Launch interactive presentation on UK housing market
Most Popular Topic Tags on the Economics Blog
recession, demand, economics, unemployment, price, prices, inflation, investment, costs, profit, downturn, trade, supply, debt, confidence, euro, gdp, competition, employment, capacity, production, risk, china, oil, incentives, exports, housing, expectations, pay, manufacturing, sterling, food, profits, property, tutor2u, mortgage, globalisation, banks, revision, slowdown, borrowing, usa, retailers, emissions, airlines, deflation, innovation, dollar, supermarkets, entrepreneur, efficiency, monopsony, elasticity, aqa, welfare, consumption, economist, productivity, saving, keynes, wealth, opec, depression, moodle, depreciation, jobs, credit crunch, competitiveness, cars, google, stocks, infrastructure, economic cycle, environmental, strategy, tim harford, externalities, carbon, vle, subsidy, evaluation, eu, management, losses, protectionism, spare capacity, inequality, environment, poverty, monopoly, bank of england, construction, behavioural, macroeconomics, output gap, budget deficit, carbon trading, steel, wages, japan, commodities, oligopoly, imports, currencies, bbc, stagflation, contestable, agflation, cpi, farming, newsnight, choices, skills, regulation, survey, taxes, government failure, itunes, minimum wage, lse, climate change, paul mason, population, intervention, keynes society, aviation, fiscal stimulus, amazon, single market, pricing, dan ariely, cartel, eton college, pollution, interest rates, shareholder, london, rationality, redundancies, market failure, rpi, mpc, shipping, behavioural economics, germany, robert peston, india, rsa, reputation, facebook, income elasticity, current account, stakeholders, brazil, coffee, savings, microsoft, monetary policy, crowding out, barriers to entry, collapse, multiplier effect, nationalisation, economies of scale, suppliers, price discrimination, uk economy, development, quiz, currency, quantitative easing, apple, surplus, labour market, tesco, free, behaviour, tragedy of the commons, opportunity cost, open source, vat, smoking, ireland, poverty trap, merger, growth, edinburgh, discrimination, ownership, global, cost benefit analysis, oecd, supply chain, shareholders, scarcity, balance of payments, petrol, liquidity, duopoly, iphone, trade deficit, starbucks, happiness, etonomics, scrappage, human capital, subsidies, capital, eurozone, immigration, takeover, paradox of thrift, exploitation, ecb, advertising, taxation, wiki, iceland, labour force survey, utility, wants, cost of living, brand, speculation, poland, blog, foreign exchange, spain, indirect tax, robert frank, northern rock, roger bootle, ocr economics, heathrow, hbos, animal spirits, hotels, freight, federal reserve, kaletsky, price war, information failure, crude oil, gini coefficient, transport, sony, creative destruction, leverage, migrants, us economy, fishing, waste, information, tax, government borrowing, milk, budget, eu enlargement, anchoring, obama, aggregate demand, entrepreneurship society, peter day, recovery, needs, forecast, european union, internet, discounting, real income, copper, deficit, public sector, contestability, nissan, companies, david smith, fairness, blogging, standard of living, aqa economics, martin wolf, renewable, labour mobility, twitter, sentiment, collusion, imf, accelerator effect, geoff riley, fair trade, pubs, income tax, obesity, guardian, consumer welfare, res, disposable income, corus, national debt, devaluation, consumer surplus, vacancies, tariff, global economy, broadband, sub-prime, joint venture, startups, vehicles, yuan, immobility, income elasticity of demand, edexcel economics, redundancy, tata, accelerator, walmart, relative poverty, youth unemployment, coal, tickets, cash, pensions, edmund conway, diesel, base rate, russia, liquidity trap, contestable market, marginal cost, external shocks, movies, stephanie flanders, libor, fixed costs, comparative advantage, allocative efficiency, training, satisficing, hot money, rory cellan-jones, status races, price mechanism, healthcare, deleveraging, congestion, economic efficiency, migration, veblen goods, credit, social entrepreneur, apprenticeships, hyperinflation, monopoly power, financial times, evan davis, automatic stabilisers, age structure, cyclical, king of shaves, ucas, reserve currency, ryanair, wheat, aldi, scotland, carbon tax, positional goods, drugs, deindustrialisation, ebea, stimulus, yahoo, organic growth, barclays, chris coleridge, pay cuts, liberalisation, equity, richard thaler, diseconomies of scale, royal mail, gillette, logging, tax burden, bonds, savings ratio, will king, pension, demography, structural, ocr, nhs, job losses, nelson thornes, house prices, cross elasticity, brics, redistribution, biofuel, footfall, british airways, paul krugman, schumpeter, slump, markets, green revolution, income distribution, price capping, the economist, eastern europe, logic of life, ft, contraction, enterprise, natural monopoly, health, general motors, research, o2, deforestation, enlargement, producer welfare, economic welfare, asda, supply-side, landfill, social costs, energy, long tail, jim o'neill, diane coyle, economax, profit margin, podcast, share prices, tariffs, external shock, hedge fund, students, fiscal drag, green shoots, ftse, philip allan, elasticity of supply, buy to let, market power, disincentives, ben bernanke, resources, retailing, trend growth, declan curry, nokia, undercover economist, hysteresis, price fixing, chris anderson, bric economies, dynamic efficiency, hamish mcrae, toyota, market structure, global business, john kay, fiscal policy, winners curse, zimbabwe, hedging, claimant count, compound interest, contestable markets, frictional, repossession, sustainability, public good, law of unintended consequences, royal economic society, economics teacher inset, probability, sustainable growth, cambridge, robert skidelsky, vertical integration, nairu, costa, rentokil, price regulation, business cycle, fairtrade, freemium, yields, national institute, oft, baltic dry index, moller centre, welfare benefits,All tags
ECONOMICS TEACHER RESOURCE NEWSLETTER
Join over 4,000 other Economics Teachers in the UK and around the world who receive the tutor2u Economics Resource Email newsletter. Get special offers, first news of latest resources, teaching ideas, conferences and workshops.
Recent Threads on the Economics Teacher Discussion Forums:
Posts in: General Economics Teaching
Good hotel in London for school trip
Competitive Markets
Diminishing Returns
Complementary goods - HELP Please!
URgent Help Needed
Equilibrium concept
The price of life
Extended Project Qualification
Economics course structure
Bank of England School Trip
