Pain in Spain - on the brink of depression
In our introductory AS macroeconomics we have discussed the differences between a cyclical recession and a depression. Much depends on the scale of the contraction in real national output from peak to trough of the cycle. This article from the Telegraph looks at a dire outlook for the Spanish economy which - not long ago - was one of the fastest growing countries in the European Union with a rising relative per capita income.
Quoting a report from Madrid research group RR de Acuña & Asociados, the peak to trough loss of GDP is likely to be more than 11%. “The group said Spain’s unemployment will peak at around 25pc, comparable to the worst chapter of the Great Depression......The construction sector will shrink from 18pc of GDP at the peak of the boom to around 5pc, making it unlikely that there will be any significant recovery before 2012. Even then growth will be “slow, weak, and fragile”.
A huge rise in the Spanish government’s budget deficit has left them little wriggle room for a fresh fiscal stimulus.
Spain and Ireland are frequently quoted as two EU countries whose property bubbles have been well and truly smashed with huge macroeconomic consequences. The slump in property represents a very large internal demand-side shock for a country heavily dependent on construction and also tourism for value-added measures of GDP.
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.
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...»Trying to turn the tide of deforestation
Deforestation brought about by excessive logging has contributed to greenhouse gas emissions and undermined the ecosystems and sustainability of local economies. Well managed and cultivated tree plantations create fruits, leaves, bark and roots, firewood, building materials and healthy trees also help maintain an area’s ecosystems by recycling nutrients, prevent erosion and maintain moderate water flows. Tree logging can clear land for arable farming and growing new crops - but a recent report in the journal Science found that the economic benefits were short term in nature.
read more...»BBC Video: Ireland in Recession
The Celtic Tiger is hurting and this six minute BBC Scotland Newsnight report looks at the challenges facing Ireland and what it might mean for independent smaller economies including Scotland. There is a focus on the imminent closure of the Dell manufacturing plant near Limerick (it is moving production to Poland) and the need to rebalance the economy after the collapse of the property and construction boom. Has the Irish economy suffered because of poor macroeconomic management or because it is simply a very small economy (producing just over 1% of EU GDP) which has been rocked by severe external economic shocks?
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...»
Revision: Consumer Borrowing
Most of us at some time in our lives need to borrow money to finance spending. From taking out a mortgage to making frequent use of bank credit cards, borrowing is a normal feature of life and not necessarily something to be worries about. What matter is whether building up debt is sustainable – in other words, can those who rely on debt pay it back? Credit means being able to buy now and pay later. The credit market for individuals is complex at the best of times and there is plenty of scope for individuals to end up in trouble if they borrow irresponsibly or are subject to mis-selling of loan products from the financial services industry.
read more...»Wimbledon serves up £55m in debenture sales
Perhaps it is the genuine prospect of Andy Murray being the first British winner since Virginia Wade in 1997? Or the certainty of more play as the new retractable roof comes into service. But demand for the new 5-year debentures for Wimbledon Centre Court is such that the Wimbledon authorities are confident enough to raise their prices from £23,150 in 2001 to £27,500 this time around. If, as expected, the debentures sell out the club will raise over £55 million in extra finance.
read more...»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
Bubble Behaviour
It is rare these days that I read a book from cover to cover in one fell swoop and, rather like the best essays from my pupils, either a book grabs me from the start or it all too easily finds its way onto the dusty shelves of my departmental library. John Calverley’s latest book ‘When Bubbles Burst, surviving the Financial Fallout’ has survived my in-built impatience and I recommend it to colleagues as one of the best books on the dramatic ending of the Great Stability and how the unravelling of financial and economic excess will affect our lives in the years to come.
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