Unemployment figures for the UK have been going in the wrong direction for some time. With consumer expenditure, investment and hence aggregate demand remaining low, job creation has been severely lacking. However, 2 pieces of news have emerged in the last couple of days, which as David Cameron said was ‘a massive confidence boost for the UK economy’. Tesco and Nissan have both announced the creation of thousands of new jobs.
Over the next 2 years, Tesco has said that it will create 20,000 new jobs through store improvement and the opening of new stores. Whilst it is not clear how many will be full-time, part-time or apprenticeship placements, it still represents net job creation. This huge investment represents what many are calling a ‘fight-back’ from Tesco, who issued its first profit warning in 20 years, following weak Christmas trading. That announcement slashed their shares by over £5bn and is perhaps partly responsible for this planned investment.
Despite this good news, criticisms have emerged that the major supermarkets are simply inflating the job creation figures and that the actual number of new jobs will be significantly less than the 20,000 suggested. This follows allegations made towards Asda, who claimed to have created 30,000 jobs. However, evidence from records at Companies House suggests that new job creation by the company was closer to 7,000. Whatever the true figure, it still means new jobs, which can only help UK unemployment data.
In addition to this, Nissan has also announced that it will be creating 2,000 new jobs, as it begins production on a new model at its Sunderland factory. The jobs will be created as part of a £125m investment, including a £9.3m grant from the government. This is especially good news, given the area where many of these jobs will emerge. The North East is a region that has been hit particularly hard by the recession and the grant from the government has come from its regional growth fund. Nissan has said that even in hard economic times, it is possible to sell cars, as long as they are competitively priced. Neither of the plans discussed above will create jobs immediately, but perhaps the key is that it creates confidence, which is a rarity in the UK with the current economic situation. The following articles consider these job creation plans and their wider implications.
Tesco plans to create 20,000 UK jobs over 2 years BBC News (5/3/12)
Tesco to create 20,000 jobs in UK fight-back Telegraph, Jamie Dunkley (6/3/12)
Tesco’s UK boss defends ‘new jobs’ claims Sky News (5/3/12)
Tesco to freshen up with 20,000 new staff Financial Times, Andrea Felsted (5/3/12)
Now Tesco creates 20,000 jobs – with pay Independent (9/5/11)
Nissan to build new car in Sunderland BBC News (6/3/12)
Nissan pledges 2,000 new jobs at North East plant Sky News, Gerard Tubb (6/3/12)
Nissan Invitation compact car set to create 2,000 jobs Telegraph, Roland Gribben and David Millward (6/3/12)
Nissan to create 2,000 new jobs by building compact car in Sunderland Guardian, Dan Milmo(6/3/12)
Questions
- Explain the process by which net job creation should provide a boost to the economy.
- Will these new jobs have any impact on the government’s budget deficit?
- Why is there concern that the supermarkets are inflating the employment creation figures?
- What type of unemployment has been created by the recession? Why have certain areas, such as the North East been affected so badly by the recession and austerity measures?
- Which factors could have led to Tesco’s weaker trading figures towards then end of 2011? Why did this lead to a £5bn loss in the value of the group’s shares?
- Nissan has said that cars can be sold as long as they are competitively priced. To what extent do you think price is the main competitive weapon in the market for cars and in the supermarket industry?
Advertising is a costly venture, but for firms in a highly competitive market it can be essential for success. During the recession, many firms had to make a variety of cut backs and reduced advertising for many was one of the key areas to go.
However, one of the leading advertising companies – WPP – has posted significant profits this year, which are up by some 18.5%, reaching £1.008bn. According to Sir Martin Sorrell, a key factor in this success is that many firms, whilst not looking to increase their market share, have felt the need to continue advertising, simply to maintain their existing market share. This has become especially important in growing markets, as competition has become more and more intense.
This new is not only good for the company in question, but also for the UK economy, as the firm has said that it will be moving its headquarters back from Ireland to the UK. This is assuming that legislation is passed concerning the taxation of profits earned abroad. If this relocation does go ahead, it could mean the creation of many more jobs in the UK and a boost to tax revenues, both of which are crucial for the UK economy. As Sir Martin Sorrell said:
‘I am delighted to say that the last remaining issues I think have been removed subject to legislation being introduced in Parliament. We will be coming back subject to shareholder approval’.
WPP believes growth throughout 2012 will be high, due to events such as the Olympics and the US Presidential elections, together with its strength in emerging economies. At the moment, this all looks like good new for the UK and oh how it’s needed!
WPP profit up ahead of 2012 Olympics boost Reuters (1/3/12)
WPP’s Martin Sorrell says he is likely to move HQ back to London Guardian, Mark Sweney (1/3/12)
Olympics, Election to boost WPP Wall Street Journal, Kathy Gordon (1/3/12)
WPP breaks £1bn profit barrier Guardian, Mark Sweney (1/3/12)
WPP boosts dividend after strong year Financial Times, Tim Bradshaw and Mark Wembridge (1/3/12)
WPP profits reach record in 2011 BBC News (1/3/12)
Questions
- What is market share and how can it be calculated?.
- What is the purpose of advertising. Using a supply and demand diagram, illustrate the effect the advertising should have. Think about the position and the shape of the curves.
- Why is advertising an area that did see cut backs throughout the recession?
- Do you think that advertising is more important for firms in growing markets? Explain your answer.
- Why did WPP relocate to Ireland and what may bring it back to the UK?
- How have WPP’s dividend payments been affected by this latest profit information?
- During a recession, competition tends to become more intense. Why is this and what role does advertising play?
Petrol prices have been a bone of contention for some time. With household incomes remaining low and the cost of living rising, the fact that average petrol prices have reached their highest level of more than 1.37p per litre on average will undoubtedly put growing pressure on the approaching budget.
There have already been calls for the Chancellor to reduce fuel duty and with this latest data, the pressure will only mount. The problem is, if fuel duty does fall, so will tax revenues and as one of the Coalition’s key objectives has been to cut the budget deficit, this could pose further problems. Even the calls to cut VAT on fuel will also put a dent in the budget deficit.
Although everyone is undoubtedly feeling the effects of these higher prices, the key thing with petrol is its elasticity of demand. Whether the price of petrol was 0.90p or 1.37p per litre, I continue to buy the same amount. Therefore, for me, the price elasticity of demand for petrol is highly inelastic – at least between those prices. After all, if the price increase above say £3 per litre, I might think twice about driving to work!
So what has been driving this increase in prices? Petrol prices are hugely dependent on the cost of oil and on the demand for any product that uses fuel. With growing demand from countries like India and China, as they continue to develop and grow very quickly; the continuing concerns with Iran’s nuclear programme and the political problems in the Middle East, oil prices have been forced up. The future trend in prices will depend on many factors, not least whether or not there is any change in fuel duty in the 2012 budget and whether something like a regulator is introduced to monitor increases in fuel prices. This is definitely an area to pay close attention to in the coming months.
Petrol prices reach record high Independent, Peter Woodman (3/3/12)
Petrol prices hit record high with further rises expected Guardian, Hilary Osborne (2/3/12)
Appeak to regulate petrol prices This is South Wales (3/3/12)
Plea to slash duty as fuel costs soar to record high Scotsman, Alastair Dalton (3/3/12)
Petrol prices hit record high The Telegraph, David Millward (2/3/12)
Diesel prices predicted to reach 150p as petrol hits new record Guardian, Terry Macalister and Hilary Osborne (2/3/12)
Questions
- Which are the factors on the demand side that have pushed up the price of oil and hence petrol and diesel?
- What are the supply-side factors that are causing the rising price of fuel?
- Use a demand and supply diagram to illustrate the effects you have explained in the first two questions.
- In the blog, I mention that my price elasticity of demand is relatively inelastic between 2 given prices. What does this suggest about the shape of my demand curve for petrol? How does this shape affect prices following any change in demand or supply?
- Why is petrol a relatively price inelastic product?
- There have been calls for the government to cut VAT or reduce fuel duty. What are the arguments for and against these policies?
- How effective do you think a petrol price regulator would be?
It’s not the first retailer to go into administration and it won’t be the last, but the well-known high street retailer Peacocks will continue to trade for the foreseeable future thanks to Edinburgh Woolen Mill.
The administrators were called in at the beginning of 2012, as Peacocks total debt reach £750 million and it was unable to restructure £240 million of this debt. Edinburgh Woollen Mill has bought the company out of administration, protecting 6000 jobs in the UK. However, at the same time more than 3000 workers will be made redundant, as 224 stores cease trading.
Throughout the recession, retailers across the UK have been struggling, as household incomes have remained low, causing consumer spending to fall. One of the administrators from KMPG, commented that:
‘This (the low consumer demand), combined with a surplus of stores and unsustainable capital structure, led to the business becoming financially unviable.’
The coming months will be crucial in determining whether more jobs are lost and if there are any further store closures. Much hinges on the ability of Edinburgh Woollen Mill to stabilize the financial performance of Peacocks and stimulate renewed customer demand. The following articles consider this take-over.
Peacocks closes 19 Ulster stores with 263 job losses Belfast Telegraph (23/2/12)
Peacocks Takeover: Edinburgh Woollen Mill buy retailer but 3,100 jobs lost BBC News (including video) (22/2/12)
Peacocks piqued by PIKs Guardian, Nils Pratley (22/2/12)
Edinburgh Woollen Mill buys Peacocks Independent, James Thompson (23/2/12)
Peacocks sold to Edinburgh Woollen Mill – KPMG The Wall Street Journal, Jessica Hodgson (23/2/12)
Questions
- Why has consumer demand in the retails sector fallen during the recession?
- What type of take-over would you classify this as?
- Who are Peacocks’ main competitors? In which market structure would you place the retail sector? Explain your answer.
- The Guardian article refers to the Management-buy-out of Peacocks in 2005. What is a management-buy-out? What were the problems associated with it?
- What are the problems that have been identified as causing Peacocks to go into administration?
- To what extent do you think the Management-buy-out of 2005 is the main reason why Peacocks has fallen into administration?
The housing market has long been seen as a crucial element in stimulating the British economy. For this reason various incentives had been introduced to encourage people to buy properties. (Click here for a PowerPoint of the chart.)
One such strategy was the stamp duty holiday. Stamp Duty Land Tax is paid by the purchaser of a property against a purchase price and the cost of it will rise through each price band. The stamp duty holiday meant that first-time buyers were free from the 1% stamp duty on homes that cost under £250,000. However, this holiday is due to end from March 2012, as according to the government, the holiday has been ineffective. Indeed, in the Autumn statement documents, the government said:
‘The government is publishing analysis showing that the stamp duty land tax relief for first-time buyers has been ineffective in increasing the number of first time buyers entering the market.’
The government has said that instead it will focus on other strategies that provide better value for money. Such schemes include a mortgage guarantee scheme and the FirstBuy scheme launched last year, both of which aim to help those struggling to finance the purchase of their first properties.
According to the Land Registry, property prices have fallen by over 1% over the past year, so fewer properties will face the stamp duty land tax, but this data does little to instill confidence in the housing market being the stimulus that the economy needs. By stimulating the housing market, construction jobs should be created and this in turn should create a much needed multiplier effect helping to boost other sectors within the economy. The following articles consider this latest development.
Stamp duty rush boosts January valuations Mortgage Strategy, Tessa Norman (11/2/12)
New deals for buyers as stamp duty holiday ends BBC News, Susannah Streeter (11/2/12)
Autumn Statement: Stamp duty concession to end BBC News (29/11/11)
First-time buyers boost mortgage market activity FT Adviser, Michael Trudeau (9/2/12)
When shared ownership turns sour Guardian, Rupert Jones (10/2/12)
Questions
- Why does the housing market play such a crucial role in the economy?
- What is the multiplier effect? How will new jobs in the construction industry help other sectors in the economy?
- Why has the stamp duty holiday been ‘ineffective’ in stimulating the housing market?
- How have the other schemes introduced by the government created incentives in the housing market?
- Why have January valuations improved? Use a demand and supply diagram to illustrate your explanation.
Unemployment figures for the UK have been going in the wrong direction for some time. With consumer expenditure, investment and hence aggregate demand remaining low, job creation has been severely lacking. However, 2 pieces of news have emerged in the last couple of days, which as David Cameron said was ‘a massive confidence boost for the UK economy’. Tesco and Nissan have both announced the creation of thousands of new jobs.
