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?
Articles
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 MarketNews.com (29/9/10)
Data
Business and Consumer Surveys The Directorate General for Economics and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- Do you think economic sentiment or economic confidence is a worthwhile concept for economists and policy-makers to analyse?
- 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.
- 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?
With the full impact of the fiscal austerity measures yet to come, the fall in unemployment revealed in the latest ONS labour market release is probably a lull before the storm. Nonetheless, in the three months to July unemployment fell by 8,000 to 2.467 million, while the rate of unemployment – the number of people unemployed expressed as a percentage of those economically active – fell from 7.9% from 7.8%. But, within the ONS release we again saw an increase in the number of people who are long-term unemployed.
The number of people aged 16 or over who have been unemployed for at least 12 months stood at 797,000 in the three months to July. This represents an increase of 15,000 over the previous 3 months. While the pace of increase appears to have slowed – the number had risen by 100,000 in the three months to April – the pool of people who can be described as long-term unemployed is undoubtedly of much concern. To put this number into perspective, it means that of the 2.467 million people unemployed 32.3% have been so for at least a year. In effect, one-third of the pool of unemployed can now be thought of as long-term unemployed.
Of the long-term unemployed, 547,000 or 69% are male. This is the highest number of males described as long-term unemployed since the three months to May 1997 – the month when the Labour government of Tony Blair came to power. But, the historical context for female long-term unemployment is even bleaker. A further increase of 4,000 over the 3 months to July means that the number of females who are long-term unemployed has risen to 250,000. The last time long-term female unemployment was higher than this was in the three months to September 1995.
An obvious concern with the expectation that the total unemployment figure will grow in the not too distant future is that the number of long-term unemployed people will carry on growing. Of course, this not only has unfortunate implications for these individuals but for society and the economy more generally. Consequently, it raises some important and very difficult economic and social policy questions. One important economic question, for instance, is how we tackle the erosion of human capital as more and more individuals are divorced for longer and longer from the labour market. An erosion of human capital affects individuals and society not only in the present, but in the future too.
Articles
UK unemployment falls by 0.1 pct to 7.8 pct Associated Press (16/9/10)
Wasteland: Europe stalked by spectre of mass unemployment Independent, Alistair Dawber (16/9/10)
Job fears despite employment rise Telegraph, Angela Monaghan (16/9/10)
Part-time jobs fuel record rise in employment Express, Macer Hall (16/9/10)
UK unemployment falls to 2.47 million BBC News (15/9/10)
Data
Latest on employment and unemployment Office for National Statistics (15/9/10)
Labour Market Statistics, September 2010 Office for National Statistics (15/9/10)
Labour market data Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- If the overall number of unemployed people is falling why is the number of long-term unemployed rising?
- The current unemployment rate is 7.8%. But, what do we mean by the unemployment rate?
- Draw up a list of the problems that you think arise out of long-term unemployment.
- Use your list to draw up a series of potential policies to tackle these problems.
- Why do some economists think the current fall in unemployment is a ‘lull before the storm’? What impact might this have on the number of people long-term unemployed?
You may have heard that house prices are stalling. August’s house price numbers from the Nationwide Building Society revealed that the average UK house price fell by 0.9% which came on the back of a 0.5% fall in July. The Nationwide talks of an ‘unwinding of the demand-supply imbalance that drove up prices for much of the last year’. It seems that the house price rises last year have, over recent months, induced additional supply by encouraging home-owners to put their property on the market. Unfortunately, there are indications that housing demand has weakened during 2010 though, of course, this gives buyers a greater degree of bargaining power.
But, you might wonder how we can get a handle on the strength of housing demand. Well, one particularly useful piece of information in assessing housing demand is the number of mortgage approvals for purchasing property. After all, there are not many of us that can reach into our back-pocket to find the £166,507 that the Nationwide estimates is needed to buy the average UK property.
If we look at Table A5.4 from August’s edition of Monetary and Financial Statistics, which is published by the Bank of England, we find that the number of mortgage approvals for house purchase in July was 48,722. Now, this was marginally up on the 48,562 in June, but, of more significance is the fact that July’s number was over 8% lower than in July 2009 when approval numbers stood at 53,126. Indeed, this number was to rise further through 2009, hitting 59,117 in November. This indicates a strengthening of housing demand at the time and helps us to appreciate why house prices rebounded last year.
But, the start of 2010 was to see mortgage approval numbers fall away and they have essentially flatlined over recent months at between 48,000 and 50,000. This time the numbers indicate a weakening of housing demand and so help to explain why house price growth has seemingly ceased and gone into reverse.
It remains to be seen how the balance between housing demand and supply will ‘play out’ over the remainder of the year. Will, for instance, some properties be taken off the market in response to this weaker demand? Could housing demand weaken further in response to economic conditions or to economic uncertainty? The answers to these questions will help to determine that all important balance between housing demand and supply. But, by monitoring the mortgage approval numbers we have a ready-made barometer on the strength of housing demand. Feel free to see which way the barometer needle swings in future!
Articles
UK mortgage approval rise but total lending weakest since March Telegraph (31/8/10)
House prices set to slump even further as home loans stay scarce Independent, Sean O’Grady (1/10/10)
Housing market ‘faces double dip’ Press Association (31/8/10)
UK mortgage approvals beat estimates as banks make more funds available Bloomberg, Scott Hamilton (31/8/10)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- What variables do you think are important in affecting the level of housing demand?
- What variables do you think are important in affecting the level of housing supply?
- Using a demand-supply diagram illustrate how shifts in housing demand and/or supply may have affected house prices (i) during 2009 and (ii) during 2010.
- What would you expect to happen to the strength of housing demand in the coming months? How will this impact on house prices?
Later this afternoon I’ll be going down to watch my beloved Leicester City. Our first home match drew a crowd of just over 21,500. This was perhaps a little disappointing for the first home match of the season. Normally, supporters’ spirits are high are the start of the season, we all go down to the ground with renewed optimism, and so ‘first match’ crowds are high. But, this year a number had not come along and the problem was not confined to my club. Just down the road in Coventry, their first match against fellow Midlanders Derby County drew a crowd of only a little over 13,000. While this match was televised by SKY, the attendance is likely to have disappointed many at this historic club. Up by the River Tees, Midllesbrough’s first home match drew a record low league crowd of 14,633 and led manager Gordon Strachan to blame poor crowds on the recession. But, while some clubs are struggling to get supporters through the turnstiles, others seemed rather more immune from the affects of the economic climate. Manchester United’s first home match drew a near-capacity 75,221, despite being a televised match on a Monday night, while Arsenal’s first home match against newly promoted Blackpool drew a capacity crowd of 60,032.
These contrasting experiences amongst football clubs raise some important questions about the nature of demand for attending football matches. Perhaps a good place to start for any chief executive thinking about the demand for their club’s matches is to actually step back and consider about how supporters derive satisfaction from attending matches. This satisfaction from consuming something is also known by economists as ‘utility’. In understanding how supporters derive utility clubs may gain some really useful information when pricing season tickets or match-day tickets.
Well, let’s start with me! I am a fox (a Leicester supporter) through and through and so it’s about an emotional attachment. I was first taken down to Filbert Street by Grandfather in the early 1980s. We were soundly beaten on the day by Notts County on the day. But, while I was gutted, I was supporting my team! I derive a lot of my satisfaction from supporting my home-town team. I guess that makes me what we might term a ‘core supporter’. It’s important for clubs to have a sense of their core support because these are likely to be supporters who are least sensitive to pricing. In other words, this group of supporters is more likely to exhibit a price inelastic demand.
So, a happy chief executive of a football club is likely to be one with a sizeable core support. Another way of looking at this, which is not always popular amongst football traditionalists, is to think of a football club as a brand. A popular, sought-after brand gives the supplier a greater degree of power over pricing. The greater the attachment to the brand the greater the power to set price. While for me the attachment comes from the geography of my birth, for others the attachment comes from being associated with success. This helps to explain the attachment of so many supporters to what we refer to as ‘the big clubs’. Therefore, success can help generate supporter-attachment which can therefore be ‘priced-in’ by clubs when determining the pricing structure for matches and season tickets.
But, not everybody is attached to a team out of loyalty to their town or city or because of its success. For others, the utility from attending matches could come from a variety of sources. A ‘floating supporter’ is therefore likely to be more choosey and pricing needs to try and take this into account. For these supporters it might be a question of who the two teams on show are on a particular day. This helps, in part, to understand why local derbies are generally well attended – but why they are also relatively expensive to attend. It might also be the case that particular matches allow supporters to see a ‘superstar’. If a certain player or club is in town then prices at the turnstiles are likely to reflect this.
What we have suggested here is that in beginning to understand the demand for attending football matches, clubs need to build up a profile of their supporters and their potential supporters. We have focused on how supporters derive satisfaction from watching football and how this affects what they are willing to pay. Yet they need to do more than this, including building up a profile of the economic, social and geographic demographics of supporters. As Gordon Strachan points out, supporters are not immune to economic conditions and football clubs can’t be either. Therefore, clubs will also need to have a sense of how income-sensitive is the demand for attending their matches. The economic climate means that many in football, especially those at clubs involved in setting prices, may need to give considerable thought to the demand function for attending live football matches. May be an economist really could help in the board rooms of many football clubs. While I may not make the board room at the Walkers Stadium later, I will be in the crowd!
Articles
Boro boss Strachan blames recession for poor crowds BBC News (22/8/10)
Premier League fun for all – at a cost BBC Sport, Matt Slater’s Blog (27/8/10)
Inside football with Rob Tanner: Where have all the fans gone Leicester Mercury, Rob Tanner (27/8/10)
Questions
- What do you understand by term ‘utility’? Think of any two products or services and draw up a list of how you derive utility from them?
- What do you understand by the terms ‘price elasticity of demand’ and ‘income elasticity of demand’? Try applying these concepts to the demand to attend matches at any two football clubs that you might be aware of.
- Are football clubs price-takers or price-makers when determining match prices? Is this true of all clubs?
- Imagine that a club is promoted to the top league in its country for the first ever time. How will this affect the position and slope of its demand curve for season tickets?
Letter writing has, in many walks of life, rather gone out of fashion. For instance, many of us of a slightly older disposition remember how putting pen to paper was an important part of courtship and the building of relationships. Well, one modern-day couple who are getting very used to an exchange of letters is the Governor of the Bank of England and the Chancellor of the Exchequer. The latest inflation numbers from the Office for National Statistics show that the annual rate of CPI inflation for July was 3.1%. While the inflation rate is down from the 3.2% recorded in June it remains more than 1 percentage point above the government’s central inflation rate target of 2%. Consequently, Mervyn King will again be writing to the Chancellor to explain why this is the case.
Since the turn of the year, the annual rate of CPI inflation has, with the exception of February, been consistently above 3%. Even February was a narrow escape for the Governor because inflation came in at exactly 3%! Another way of putting the recent inflation record into perspective is to note that over the first seven months of 2010 the average annual rate of CPI inflation has been 3.3%.
The slight fall in July’s annual inflation rate is attributed, in part, to falls during July in the prices of second-hand cars and petrol whereas these prices were rising a year ago. Furthermore, the average price of clothing and footwear fell by some 4.9% between June and July of this year as compared with a fall of 3.2% in the same period a year ago. The result is that the annual rate of price deflation for clothing and footwear went from 1.4% in June to 3.1% in July.
Of course, within the basket of consumer goods price patterns can vary significantly. One significant upward pressure on July’s overall annual inflation rate was the price of food and non-alcoholic beverages, especially vegetables. The average price of food and non-alcoholic beverages rose by 1% between June and July which has seen the annual rate of price inflation for food and non-alcoholic beverages rise from 1.9% in June to 3.4% in July.
The fact that July shows inflation running in excess of 3% will surprise very few. In the latest Inflation Report the Bank of England reports that the Monetary Policy Committee’s view is that ‘the forthcoming increase in VAT was expected to keep CPI inflation above the 2% target until the end of 2011’. The Committee then expects what it describes as a ‘persistent margin of spare capacity’ to force inflation to fall back. But, the Committee also feels that the prospects for inflation are ‘highly uncertain’. Therefore, it is difficult to gauge just how many more letters will be passing across London between the Governor and the Chancellor in the coming months. Nonetheless, it would be probably be advisable for the Governor to make sure that he has a sufficient supply of postage stamps at his disposal, just in case!
Articles
UK inflation rate slows again in July BBC News (17/8/10)
Bank of England’s King forced to write another letter to Osborne as prices stay high Telegraph (17/8/10)
Inflation falls to 3.1% in July Financial Times, Daniel Pimlott (17/8/10)
Dearer food keeps inflation high UK Press Association (17/8/10)
Bank ‘surprised’ at inflation strength Independent, Russell Lynch (17/8/10)
Letters
Letter from the Governor to the Chancellor and the Chancellor’s reply Bank of England (17/8/10)
Data
Latest on inflation Office for National Statistics (17/8/10)
Consumer Price Indices, Statistical Bulletin, July 2010 Office for National Statistics (17/8/10)
Consumer Price Indices, Time Series Data Office for National Statistics
For CPI (Harmonised Index of Consumer Prices) data for EU countries, see:
HICP European Central Bank
Questions
- What does the Bank of England mean by a ‘persistent margin of spare capacity’? By what economic term is this phenomenon more commonly known?
- Why do you think the current rate of inflation is above target despite the spare capacity in the economy?
- Since the annual rate of CPI inflation remains in ‘letter-writing territory’ would you expect the Monetary Policy Committee to be raising interest rates some time soon? Explain your answer.
- What impact might the persistence of above-target inflation have for the public’s expectations of inflation?
- What impact can we expect the increase in the standard rate of VAT next January to have on the annual rate of CPI inflation? Is such an effect on the rate of inflation a permanent one?