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Posts Tagged ‘consumer confidence’

Is there a Plan B for the UK economy?

The government’s plan for the UK economy is well known. Reduce the public-sector deficit to restore confidence and get the economy going again. The deficit will be reduced mainly by government spending cuts but also by tax increases, including a rise in VAT from 17.5% to 20% on 1 January 2011. Reductions in public-sector demand will be more than offset by a rise in private-sector demand.

But what if private-sector demand does not increase sufficiently? With a fall in government expenditure, reduced public-sector employment and higher taxes, the danger is that demand for private-sector output may actually fall. And this is not helped by a decline in both consumer and business confidence (see, for example, Nationwide Consumer Confidence Index). What is more, consumer borrowing has been falling (see Consumer borrowing falls again) as people seek to reduce their debt, fearing an uncertain future.

So does the government have a ‘Plan B’ to stimulate the economy if it seems to be moving back into recession? Or will it be ‘cuts, come what may’? The Financial Times (see link below) has revealed that senior civil servants have indeed been considering possible stimulus measures if a return to recession seems likely.

Over in Threadneedle Street, there has been a debate in the Bank of England’s Monetary Policy Committee over whether an additional round of quantitative easing may be necessary. So far, the MPC has rejected this approach, but one member, Adam Posen, has strongly advocated stimulating demand (see The UK inflation outlook if this time isn’t different, arguing that the current high inflation is the result of temporary cost-push factors and is not indicative of excessively strong demand.

So should there be a Plan B? And if so, what should it look like?

Gus O’Donnell’s economic ‘Plan B’ emerges BBC News, Nick Robinson (14/12/10)
Sir Gus O’Donnell asks ministers to consider possible stimulus measures Financial Times, Jim Pickard (14/12/10) (includes link to article by Philip Stephens)
Gus O’Donnell urges Treasury to prepare ‘Plan B’ for economy Guardian, Patrick Wintour and Nicholas Watt (14/12/10)
Unemployment, and that ‘Plan B’ BBC News blogs, Stephanomics, Stephanie Flanders (15/12/10)
Inflation wars (cont’d) BBC News blogs, Stephanomics, Stephanie Flanders (16/12/10)
Don’t overreact to UK inflation – Bank’s Posen Reuters, Patrick Graham (16/12/10)
Bank of England’s Adam Posen calls for more quantitative easing The Telegraph, Philip Aldrick and Emma Rowley (29/9/10)
Don’t overreact to above-target UK inflation rate, cautions Posen Herald Scotland, Ian McConnell (17/12/10)
Posen calls for calm as inflation fears rise Independent, Sean O’Grady (17/12/10)

OECD Economic Outlook OECD (see, in particular, Tables 1, 18, 27, 28 and 32)
Forecasts for the UK economy HM Treasury
UK Economic Outlook PricewaterhouseCoopers
Employment and Unemployment ONS
Inflation Report Bank of England


  1. What are likely to be the most important factors in determining the level of aggregate demand in the coming months?
  2. What are the dangers of (a) not having a Plan B and (b) having and publishing a Plan B?
  3. Why is inflation currently above target? What is likely to happen to inflation over the coming months?
  4. What are the arguments for and against having another round of quantitative easing?
  5. What else could the Bank of England do to stimulate a flagging economy?
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British gloom, German cheer: Survey confirms fragility of UK economic sentiment

Towards the end of each month the European Commission for Economic and Financial Affairs publishes its economic sentiment index for each EU country, including the UK, along with average scores for the EU and for the countries using the euro. September’s release showed sentiment in the UK amongst consumers and businesses to have weakened more than in any other EU country. The index fell from a score of 102.3 to 100.2, where 100 represents an equal number of optimistic and pessimistic responses.

In itself the score seems to suggest that there remains some degree of economic confidence here in the UK. So should we be concerned? Well, the direction of the sentiment index is very likely to be of some concern and something that policy-makers will be keeping a keen eye on. Furthemore, the direction of sentiment in the UK is contrary, perhaps surprisingly so you might think, to that in most EU countries. The EU-average score, for instance, rose from 103.1 to 103.4, its highest since March 2008. From this we can infer not only that more people in the survey are optimistic than pessimistic but also that sentiment is becoming more positive (slightly). In Germany the economic sentiment index rose between August and September from 111.2 to 113.2, its highest since February 1991, with sentiment rising across consumers and all sectors of business.

If we delve a little deeper into the UK sentiment figures we see that the weakening of economic confidence is greatest amongst retailers. To a large extent this reflects an erosion of the significant increase in sentiment reported by retailers in the summer months. It also appears to reflect something of a lagged response to the waning sentiment amongst consumers. The figures for consumer confidence showed a ‘bounce’ in confidence during the spring, but September’s consumer confidence level was the lowest since June 2009 when the economy was still in recession.

One of the tasks facing policy-makers and economists is to try to predict what these economic sentiment figures might mean for economic activity. In particular, to what extent do these figures have significance for the future decisions made by households and businesses? Surprisingly, relatively little column space is given to measures of confidence and to the EU’s Economic Sentiment Index in particular.

It’s probably fair to say too that, as economists, we are a long way from fully understanding the role that confidence plays in affecting individual behaviour or indeed the variables that impact on confidence. It was once suggested to me (Dean), for instance, that changes in UK consumer confidence might be closely related to changes in housing wealth. Further, we economists struggle to understand what these survey measures of economic confidence are actually capturing, since the surveys comprise a multitude of questions, which, in the case of consumers for instance, ask them to compare their current financial situation with that in the past as well as to predict how it will evolve over the coming months.

Despite our imperfect understanding of the role played by confidence and how we can measure it, there is considerable interest amongst policy-makers, economic think-tanks and economic forecasters. For example, earlier this week a statement following an IMF Mission to the UK indentified ‘sizeable’ downside risks to the UK economy’s recovery, including what it termed ‘the continued fragility of confidence’. Could the release just a few days later from the EU reporting a decline in economic sentiment in the UK be timely?

Eurozone optimism nears three-year high Financial Times, Ralph Atkins and David Oakley (29/9/10)
EU economic, business indicators improve again The Sofia Echo (29/9/10)
Eurozone Sept. economic sentiment strongest since 2008 RTT News (29/9/10)
EU September economic morale unexpectedly improves (29/9/10)

Business and Consumer Surveys The Directorate General for Economics and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society


  1. Do you think economic sentiment or economic confidence is a worthwhile concept for economists and policy-makers to analyse?
  2. Draw up a series of factors that you think might affect the economic sentiment amongst consumers. Are there any factors that might be peculiar to the UK? Then repeat the exercise for businesses.
  3. Why do you think there is a ‘fragility of confidence’ in the UK? What might explain the stronger confidence levels in other EU countries, such as Germany?
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Light at the end of the tunnel – or an oncoming train?

Economists are famous for disagreeing – as, of course, are politicians. And there is a lot of disagreement around at the moment. George Osborne is determined to cut Britain’s large public-sector deficit, and cut it quickly. This, argues the Coalition government and many economists, is necessary to maintain the UK’s AAA sovereign credit rating. This, in turn, will allow interest rates to be kept down and the international confidence will encourage investment. In short, the cut in aggregate demand by government would be more than compensated by a rise in aggregate demand elsewhere in the economy, and especially from investment and exports. By contrast, not cutting the deficit rapidly would undermine confidence. This would make it more expensive to borrow and would discourage inward investment.

Not so, say the opposition and many other economists. A contractionary fiscal policy will achieve just that – an economic contraction. In other words, there is a real danger of a double-dip recession. Far from encouraging investment, it will do just the opposite. Consumers, fearing falling incomes and rising unemployment, will cut back on spending. Businesses, fearing a fall in sales, will cut back on investment. Economic pessimism, and hence caution, will feed on themselves.

So who are right? The first two blogs by Stephanie Flanders, the BBC’s Economics Editor, look at the arguments on both sides. The third attempts to sum up. The other articles continue the debate. For example, the link to The Economist contains several contributions from commentators on either side of the debate. See also the earlier posting on this site, The ‘paradox of cuts’.

The case for Mr Osborne’s austerity BBC News Blogs, Stephanomics, Stephanie Flanders (7/9/10)
The case against Mr Osborne’s austerity BBC News Blogs, Stephanomics, Stephanie Flanders (8/9/10)
Austerity plans: Where do you stand? BBC News Blogs, Stephanomics, Stephanie Flanders (10/9/10)
Are current deficit reduction plans likely to boost growth? The Economist debates, various invited guests
Debt and growth revisited Vox, Carmen M. Reinhart and Kenneth Rogoff (11/8/10)
Leading article: Mr Osborne should prepare a Plan B Independent (13/9/10)
Shock fall in UK retail sales adds to fears of double-dip recession Guardian, Larry Elliott (16/9/10)
Chancellor accused of £100bn economic growth gamble by Compass Guardian, Larry Elliott (18/9/10)
Double-dip recession: bulls and bears diverge over future economic prospects Guardian, Phillip Inman (16/9/10)
Speech by Mervyn King to TUC Congress TUC (15/9/10)
Barber, Blanchflower and the fake debate on double dip The Spectator, Ed Howker (14/9/10)

Confidence data
Consumer confidence Nationwide
ICAEW / Grant Thornton UK Business Confidence Monitor (BCM) ICAEW
Business and Consumer Surveys Economic and Financial Affairs, European Commission


  1. Summarise the arguments for the Coalition government’s programme of rapidly reducing the public-sector deficit.
  2. Summarise the arguments against the Coalition government’s programme of rapidly reducing the public-sector deficit.
  3. What factors are likely to determine whether there will be a double-dip recession as a result of the austerity programme?
  4. Why is it very hard to predict the effects of the austerity programme?
  5. How effective is an expansionary monetary policy likely to be in the context of a tightening fiscal policy?
  6. How important are other countries’ macroeconomic policies in determining the success of George Osborne’s policies?
  7. How similar to or different from other recessions has the recent one been? What are the policy implications of these similarities/differences?
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Summer sun can’t stop confidence cloud from growing

The sun may have been shining of late across the UK, but there are increasing signs that economic sentiment is deteriorating, more especially amongst consumers. The EU’s economic sentiment index for the UK fell for the first time since November of last year and is now just a little below its long-run average.

The EU’s economic sentiment index is a composite indicator of confidence in that it captures confidence levels amongst both consumers and businesses. While overall sentiment actually increased in each month from December of last year through to this May, the decline in consumer confidence in the UK is now well established having fallen each month since March.

We might expect the falls in consumer confidence to be reflecting the prevailing economic environment and, in particular, the increasing number of people unemployed. However, since the sentiment survey contains forward-looking questions too, it may be that declining consumer sentiment reflects concerns amongst households about the impact of fiscal consolidation measures. These consumer expectations could be important in affecting consumer behaviour today. It could be very important to track consumer confidence in the coming months, especially in light of the measures announced in the Budget of 22 June (which occurred after June’s polling of consumers) and subsequent announcements too.

Interestingly, declining levels of consumer confidence in the UK had until June been offset by rising confidence amongst businesses. However, confidence across most sectors of industry deteriorated in June. In particular, confidence amongst manufacturers fell back very sharply. Bucking the trend were businesses in the service sector who reported feeling more confident than at any time since March 2008. However, given waning sentiment elsewhere, one would expect this to be relatively short-lived.

The profile of the average economic sentiment indicator across all 27 member states of the EU is broadly similar to that for the UK. It exhibits a sharp and continuous rise from the historic lows of the indicator recorded in March 2009, but fell back, although very slightly, in June. The improvement in sentiment amongst business has been especially marked. Sentiment too had been improving amongst consumers, but recent evidence points to consumer confidence easing, although not quite to the extent seen here in the UK.

There are, of course, some notable national trends in sentiment across EU countries. It will come as little surprise to know that in Greece the economic sentiment indicator has, in recent months, been at historic lows. If you are looking for countries where sentiment is above average, then perhaps try, amongst others, Austria, Denmark, Finland and Germany!

Euro economic sentiment near-static RTE (29/6/10)
Eurozone confidence unchanged Bloomberg Business Week, Associated Press (29/6/10)
Eurozone economic sentiment picks up Financial Times, Stanley Pignal (29/6/10)
FTSE loses more than 3% as Wall Street slides on confidence data Guardian (Market Forces Blog) (29/6/10)
How long can the housing market avoid a crash? Independent, Sean O’Grady (30/6/10) (Article stresses link between confidence and the housing market)

Business and Consumer Surveys The Directorate General for Economics and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society


  1. Think about your confidence in your own financial situation. Draw up a list of those factors that might affect this confidence. How might this list change if you were thinking about the level of confidence across all consumers?
  2. Why might confidence amongst UK consumers have been falling well before that amongst businesses? Do you think such divergences can persist for any length of time?
  3. What factors do you think might be particularly important in affecting the sentiment amongst consumers and businesses in the weeks and months ahead?
  4. Imagine that you are given a choice of plotting a chart over time of the economic sentiment indicator and either the level of real GDP or the rate of growth in real GDP. Which plot would you go for and why?
  5. Perhaps the key question of all! Do you think economists can learn anything from tracking the patterns in economic sentiment?
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Confidence levels continue to surprise – but for how long?

The economic sentiment indicator for April 2010 published by the European Commission continues to show confidence in the UK economy rising. The UK experience mirrors that across the European Union. The increase in the level of confidence in the UK economy seen in April, as measured by responses to questions posed to businesses and consumers, was the fifth consecutive monthly rise in sentiment.

There is, however, something of a divergence between the moods of UK businesses and consumers. Consumer confidence fell very slightly in April, which follows on from a small fall in March. These falls might reflect some uncertainty amongst consumers induced by the UK general election and, in particular, the extent of future fiscal tightening. In contrast, general business confidence rose in April, especially in the construction and manufacturing sectors.

Nonetheless, confidence is considerably higher across both consumers and businesses than it was a year ago. The increase has been of such magnitude that the economic sentiment indicator has now been above its long-run average for two months in a row. We would perhaps be rather naïve to expect this trend to continue, not least because of the financial rebuilding that households, banks, business and, of course, government will be pursuing. Therefore, it will be fascinating to see how enduring the current levels of confidence are and whether the slight weakening in sentiment amongst UK consumers is a sign of things to come.

Euro-zone economic sentiment rises in April MarketWatch, William Watts (29/4/10)
EU economic, business sentiment indicators ‘improving’ – poll Sofia Echo, Clive Leviev-Sawyer (29/4/10)
Euro economic sentiment up in April France24, AFP (29/4/10)

Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society


  1. Why might the trends in business and consumer confidence be diverging?
  2. What do you think economists can learn from tracking the patterns in economic sentiment?
  3. What factors do you think are likely to impact on the sentiment amongst consumers and businesses in the months ahead?
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Stay happy: the economy might depend on it!

So how are you feeling? Is now a good time to shop? Or, is it perhaps time to put money aside for that rainy day? Well, these types of questions capture the essence of what we might label as ‘sentiment’ or ‘confidence’. Polling organisations each month undertake surveys to try to measure sentiment amongst consumers and businesses. In doing so, they ask questions relating to, amongst other things, perceptions as to the current and future states of the economy, the labour market and finances. The responses to these individual questions are then combined to give an overall indicator which, it is then hoped, can be used to track sentiment over time. Two widely reported surveys of sentiment are the EU economic sentiment indicator and the Nationwide Building Society consumer confidence indicator.

The Nationwide’s indicator focuses solely on households. Its sentiment figure for March suggests that the gains in confidence amongst households enjoyed in the first couple of months of this year have been lost. In other words, the decline in March was significant enough not only to wipe out the effect of the typical ‘January bounce’ seen in most measures of sentiment but also the further rise that occurred in February. Nonetheless, consumer sentiment remains above the levels seen through much of 2008 and 2009 amidst the economic downturn.

The European Union’s economic sentiment index measures sentiment across both households and firms, although separate indicators are available for households and for different sectors of industry. Figures are also available for each individual EU country as well as across the EU. 2009 saw a record low score in the UK for the economic sentiment index – a series which goes back to 1985. But in March 2010 the sentiment index was, perhaps surprisingly, above its long-term average. Interestingly, this reflects further strengthening in sentiment amongst businesses, while sentiment amongst consumers fell slightly in March after recent gains.

So what should we read into these sentiment indices? Well, firstly, consider the patterns in the sentiment scores. The sentiment indices rose markedly in the second half of last year and into the beginning of this year, although sentiment amongst households may have now weakened while continuing to rise amongst firms. Now, secondly, consider these patterns alongside evidence which shows that economic sentiment indices tend to track the direction of economic growth. So last year, the rise in both the EU and Nationwide sentiment indices was indeed mirrored by improvements in the rate of economic growth with initially smaller contractions followed by positive growth in the final quarter.

One of the advantages of these sentiment measures is their timeliness. The first provisional estimate of growth in Q1 2010 is not available until the end of this month and, of course, is then subject to revision. But, if we reflect on the sentiment measures, the fact that sentiment appears no weaker across the first quarter of this year as a whole and, when measured across both households and firms, may actually be higher, indicates that the growth number for the first quarter of this year may not be too different from the 0.4% growth recorded in Q4 2009. Stay cheerful!

Consumer confidence has sharpest fall this recession The Times, Grainne Gilmore (15/4/10)
U.K. consumer confidence fell in March The Wall Street Journal, Paul Hannon (15/4/10)
Election drives down consumer confidence Sky News, Adam Arnold (15/4/10) )
Consumer morale suffers biggest fall since July 2008 Reuters UK (15/4/10)

Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society


  1. What factors do you think might influence sentiment or confidence amongst households?
  2. What factors might affect sentiment or confidence amongst businesses?
  3. In what ways do you think sentiment and economic activity might be connected?
  4. Some commentators are arguing that the general election might be impacting on consumer confidence. Why do you think this might be the case?
  5. If you were going to assess the economic sentiment of consumers or businesses, what sorts of questions do you think you might ask?
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The Christmas effect

Most businesses have suffered over the past year or so. Profits and sales have fallen, as the UK (and global) economy suffered from a recession that’s seen UK interest rates at 0.5%, unemployment rising and public debt at unprecedented levels. Christmas trading always sees a boost in sales and that’s just what’s happened for many businesses. Shoppers have responded to the doom and gloom of the past year by spending and making up for a hard year. Phrases such as “I decided to treat myself” became common on the news as reporters travelled to shopping centres across the UK. However, shops such as M&S and Next have warned that attempts by the government to reduce the public deficit could derail the consumer recovery.

These positive stories, whilst true, are a useful tool to help boost consumer confidence and keep expectations positive for the coming months. However, there are warnings that these figures shouldn’t be taken out of context. The economy is still in trouble and public debt has reached almost 60% of GDP. With cuts in government spending and rises in taxation expected, how much confidence should be taken from these positive signs in the retail sector? Only time will tell.

Online powers Shop Direct sales Financial Times, Esther Bintliff (6/1/10)
Poundland, House of Fraser and Co-op see sales rise BBC News (11/1/10)
Links of London see buoyant festive sales Telegraph, James Hall (5/1/10)
John Lewis reports bumper Christmas trading Retail Week, Jennifer Creevy (5/1/10)
New Look expects to build on strong Christmas London Evening Standard (7/1/10)
Christmas trade booming in City Star News Group, Alex de Vos (7/1/10)
Record trading for Cash Generator Manchester Evening News (7/1/10)
Sainsbury’s hails ‘strong’ Christmas trading BBC News (7/1/10)
Cautious M&S reports strong Christmas trade Times Online, Marcus Leroux and Robert Lindsay (6/1/10)
Asda reports ‘solid’ Christmas trading Guardian (6/1/10)


  1. Why are expectations important for the future of the British economy? Are the expectations rational or adaptive or a combination of the two?
  2. Are high Christmas sales really a sign that the economy is recovering? Discuss both sides of the argument. Will high sales now have an adverse effect on future trade in the UK?
  3. How will expected cuts in government spending affect sales in the retail sector?
  4. Tax rises are a possibility. How will this affect consumers and sales in the coming year? Think about the circular flow of income.
  5. If interest rates are increased in the coming months, trace through the likely effects in the goods market.
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Confident consumers?

A key determinant of the length of any phase of the business cycle is consumer confidence. If people have gloomy expectations and confidence of a recovery is low, then a recession that should have lasted 6 months ends up lasting for years. Companies don’t see an end to the recession and keep holding off on investment plans and the public don’t want to go out and start spending, because there’s no guarantee that the economy is on its way back up. The more you worry about your finances, the less likely you are to go out and start spending, even though that could be the stimulus that a shrinking economy needs.

According to the British Retail Consortium, consumer confidence in the UK is on its way back up and currently stands at an 18-month high – which doesn’t actually say much given the past 18-months!! Despite this, job worries still remain and this has been highlighted significantly in the past week, when Britain’s youngest person ever was made redundant: a 13-year old paper boy. Whilst consumer confidence is argued to be returning to the UK, consumer confidence has been going in the opposite direction in the USA, with further fears of job losses. US confidence had been improving but unexpectedly fell in October. Is that what the UK has to look forward to?

So, why is consumer confidence so important? How does it affect the length of recovery and what is expected to happen over the next few months? Read the articles below to find out more.

US consumer confidence takes hit BBC News (27/10/09)
Consumer confidence hits 18-month high The Independent, David Prosser (1/11/09)
Consumer confidence on the rise BBC News (2/11/09)
Confidence boost hints that worst of recession now over The Scotsman, Peter Ranscombe (2/11/09)
US Michigan Sentiment fell to 70.6 this month Bloomberg, Courtney Schlisserman (30/10/09)
Euro-zone Consumer confidence improves The Wall Street Journal, Ilona Billington and Roman Kessler (30/10/09)
Retailers set for a merry Christmas DIYWeek (2/11/09)
Job fears still remain despite biggest increase in consumer confidence in 18 months, says British Retail Consortium Liverpool Echo, Neil Hodgson (2/11/09)

Business and consumer surveys in each of the EU countries and in the EU as a whole can be found at:
Business and Consumer Surveys European Commission


  1. In what ways does consumer confidence affect economic growth?
  2. Are there likely to be any adverse consequences of consumer confidence returning to the market?
  3. What are some of the reasons for the unexpected fall in consumer confidence in the USA? Do you think a similar thing is likely to happen in the UK?
  4. Expectations are crucial in economics. What is the difference between adaptive and rational expectations? How do they affect adjustment to the short- and long-run equilibrium?
  5. Can anything be done to improve confidence or is it simply a case of leaving things as they are … and waiting?
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The contagion of pessimism – or optimism

Both business and consumer confidence are affected by the state of the economy. A recession, or even a slowdown in the economy, will make people worried for their jobs and future incomes and hence cut back on spending and either save more or reduce their debts. Similarly firms are likely to cut back on investment if they are pessimistic about the future. But both consumer demand and investment are components of aggregate demand. A cut in aggregate demand will drive the economy further into recession and cause even greater pessimism. In other words, there is a feedback loop. Recession causes pessimism and hence a fall in aggregate demand, which, in turn, worsens the recession.

A similar process of feedback occurs in times of optimism. If the economy recovers, or is thought to be about to do so, the resulting optimism will cause people and firms to spend more. This rise in aggregate demand will help the process of recovery (see Accelerating the recession and Animal Spirits).

The following article by Robert Shiller, co-author of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, looks at the swing from pessimism to optimism over the past few months.

An Echo Chamber of Boom and Bust: Robert Schiller New York Times (29/8/09)
Efficient Market Hypothesis: True “Villain” of the Financial Crisis? The Market Oracle (26/8/09)

Monthly confidence indicators for the EU can be found at:
Business and Consumer Surveys: Time Series European Commission Directorate-General for Economic and Financial Affairs. (Each of the ‘en’ cells links to a zipped Excel file.)


  1. Explain why “confidence has rebounded so quickly in so many places” in recent weeks.
  2. Is Robert Shiller’s explanation of feedback loops consistent with the accelerator theory?
  3. In what circumstances do business and consumer psychology result in destabilising speculation and what causes turning points in the process? Why may such turning points be difficult to predict?
  4. Examine the monthly Economic Sentiment Indicator (ESI) for the UK from the ‘Business and Consumer Surveys: Time Series’ link above. You will need to refer to the final column in the Excel ESI Monthly worksheet (Column GV). Chart the movements in this indicator over the past three years. Also chart the quarterly growth in UK GDP over the same time period. You can find data from Economic and Labour Market Review (ONS), Data tables, Table 1.01, Column YBEZ. Is ESI a leading or a lagging indicator of GDP?
  5. What implications does Shiller’s analysis have for the management of the economy?
  6. Why may stock market movements not be a ‘random walk’?
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Recession ‘easing’ – or is it?

The global economy has been in a recession since December 2007, but have we now passed the worst of it? Whilst companies are still going bankrupt, unemployment is still rising, the housing market is still looking pretty gloomy and government debt surely can’t go up anymore, there are indications that we’ve reached the bottom of the recession. There are murmurs that the economy may start to recover towards of the end of the year.

But, of course, economics wouldn’t be economics if there wasn’t considerable disagreement. Many still believe that the worst is yet to come. According to the OECD, the recession is ‘near the bottom’. Yet, output in the UK is still set to decline by 4.3% in 2009, and by 2010 the budget deficit is predicted to have grown to 14%. Unemployment is at its highest since November 1996, but US consumer confidence is said to be rising and the pound is climbing. Read these articles and make up your mind about the state of the UK and global economy!!

Business and Consumer Surveys (After following link, click on chart) European Commission, Economic and Financial Affairs (29/6/09)
Pound climbs against euro as King sees signs recession easing Bloomberg, Lukanyo Mnyanda, Gavin Finch (20/6/09)
Bank says banking crisis easing BBC News (25/6/09)
First signs of optimism returning to some parts of financial services CBI PRess Release (29/6/09)
Darling and King agreed on tentative recovery Guardian, Ashley Seager (17/6/09)
Sharp contration for UK economy BBC News (30/6/09)
Housing market knocked by price falls Moneywise (22/6/09)
OECD says recession ‘near bottom’ BBC News, Steve Schifferes (24/6/09)
US Federal Reserve says recession is ‘easing’ Telegraph, James Quinn (24/6/09)
Public borrowing at record levels BBC News (18/6/09)
Leading index suggests recession easing (18/6/09)
US consumer confidence up in June BBC News (26/6/09)
Blow for housing market as prices fall The Independent, David Prosser (22/6/09)
Most UK businesses freeze pay as recession bites, CBI says Telegraph, Peter Taylor (23/6/09)


  1. What are the typical characteristics of a recession? Do the current statistics of the four main macroeconomic objectives fit in with what economic theory tells us?
  2. Which policies would governments normally implement to get a economy into the expansionary/recovery phase of the business cycle and how do they work?
  3. Why is consumer confidence so key to economic recovery?
  4. What type of banking regulation is needed to prevent a similar crisis happening again?
  5. Movements in the housing market are often seen as indicators of the state of the economy. Why is this?
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