UK Recession and Business Capacity - Teacher Presentation
This streamed presentation provides a snapshot of the latest economic data on UK business capacity. The slump in output in the British economy has left many businesses and industries with a huge amount of spare capacity and the negative output gap is expected to grow beyond 6% of GDP in 2010 according to the OECD. A high level of spare capacity (or productive slack) has important consequences for jobs, inflationary pressures, planned investment and business profits.
Launch interactive presentation on Recession & Capacity
Download pdf handout of slides
Downturn Drives Hotel Rack Rates Lower
Here is a super short article from BBC news on the impact that the recession has had on average hotel room rates in different locations across the UK. Demand and supply side factors impact on room rates in specific towns and cities. More detailed information can be found from this press release from Hotels.com.
“UK hotel prices fell 16% on average making the first six months of the year a great time to staycation. Prices in London were down 12% to £101 on average, in Bournemouth by 14% to £66 on average and in Southampton by 33% to £57 on average.”
It might be worth having a discussion about the reasons for these regional price variations:
Bath £111
London £101
Edinburgh £91
Jersey £90
York £86
Blackpool £59
Southampton £57
Plymouth £57
Nottingham £53
Aggregate Demand and the UK Economic Cycle
Here is our latest streamed presentation on the UK economy - aggregate demand and the cycle - as we search for evidence of possible turning points in the cycle. This is part of our set of macroeconomic chart room presentations - click on related links for more.
The charts cover:
Components of aggregate demand
Growth of Real GDP
Path of UK GDP since 1970
Growth and unemployment
Output gap
Output gap and unemployment
Output gap and real GDP
Output gap and CPI inflation
GDP and GNP
The Stock Cycle
Businesses operating at full capacity
Hopefully a useful resource for colleagues teaching the economic cycle and shocks
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.
CAPEX under pressure as spare capacity grows
The recession is creating a growing amount of spare productive capacity across many different markets and industries. From container ships to hotels and from steel plants to airlines, the fall in demand has lowered capacity utilisation and put a big squeeze on profits. That pressure on profit margins comes not just from weaker revenues. Keep in mind that many businesses have a large fixed cost component such as the overhead costs of operating a network. Thus when output is contracting, the average fixed costs of production increase.
Declining demand and rising productive slack inevitably cause a fall in planned investment spending - economists term this a negative accelerator effect. BBC news reports that British Airways is cutting capital spending in response to the slump in demand and mounting losses. “The airline said it had cut spending by 20% to £580m ($952m) from £725m, and had lengthened its schedule of orders for 12 Airbus A380 aircraft.”
Further evidence for the reverse accelerator affect comes from Japan where Japanese firms cut their capital spending by a record level in the first quarter of 2009. In contrast Stagecoach is increasing investment in a fleet of greener buses.
Q&A: What do we need to know about output gaps?
Q&A: What do we need to know about output gaps?
For AS level (the AQA board)
“An understanding of potentially inflationary, positive, and potentially defl ationary, negative, output gaps is also expected in the context of the economic cycle. Candidates should understand that positive output gaps occur when actual GDP is above the productive potential of the economy, and negative output gaps occur when actual GDP is below the economy’s productive potential.”
read more...»Revision - Linking Output Gap to other Macro Issues
How much spare capacity does an economy have to meet a rise in demand? How close is an economy to operating at its productive potential? These sorts of questions link to an important concept – the output gap. The output gap is the difference between the actual level of national output and its potential level and is usually expressed as a percentage of the level of potential output. In this revision blog we link the output gap to aspects of macroeconomic performance.
read more...»Spare Capacity in Manufacturing
Spare capacity is a term that makes increasingly frequent appearances in AS macro multiple choice and data response questions. A survey from the British Chambers of Commerce finds that only 20% of manufacturing firms are operating at full-tilt whereas 40% of service sector businesses report that they are close to their capacity levels.
Spare capacity rises when orders and demand tails off leaving under-utilised capital and labour resources. We have seen this in the steep contraction in production in new housebuilding and in car manufacturing and this inevitably has knock-on effects for supply-chain businesses.
Operating below capacity can lead to a rise in the average fixed costs of production and therefore put pressure on profit margins. Little wonder that many manufacturing businesses have moved towards short-time working and have mothballed some of their production capacity.
This BBC Midlands news article covers a march for jobs in the West Midlands
Not so heavy laden
Shipping has taken a major hit because of the recession and this piece to camera from Adam Mynott of the BBC taken at the port of Rotterdam is superb on the challenges facing the shipping industry and the risks of a bloodbath for some of the smaller container businesses. I used to play hockey with Adam when he played at Harrogate HC - great to see a former team mate continuing to do so well at the BBC
Taking up the slack
A super piece here on the US economy from the New York Times which links in with the concept of the output gap and the time lags between an economic recovery starting and when we might expect to see growth and jobs return at a reasonable speed.
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