According to the first estimates by the Office for National Statistics, real UK GDP rose by 0.5% in the first quarter of 2011. In the House of Commons, David Cameron claimed that “it’s clearly a success the economy is growing”, while Ed Balls, Shadow Chancellor, countered this by stating that the economy “flat-lined in the last six months with no growth at all”.
So who is right? According to the statistics both are, in the sense that the economy grew by 0.5% in the first quarter of 2011 after shrinking by 0.5% in the fourth quarter of 2010. But what bigger picture do the figures paint? Is the economy now in recovery mode? Or is the fact that growth is so small a sign that the economy is still fragile? Could it easily dip back into recession as the tax increases and government expenditure cuts begin to bite?
And what of the policy implications? Do the latest figures make a rise in Bank Rate more or less likely in the near future? And how will the figures impact on confidence? Are they more or less likely to stimulate investment? Will consumers feel more confident that recovery is under way and their jobs are therefore more secure?
The following articles assess the situation and look ahead at the prospects for the UK economy.
Articles
UK economy ‘on a plateau’ as 0.5pc GDP rise disappoints The Telegraph, Emma Rowley and Philip Aldrick (28/4/11)
GDP figures: Cameron accused of complacency over economy Guardian, Hélène Mulholland (27/4/11)
Low growth figure suggests economy is stagnating – at best Independent, Sean O’Grady (28/4/11)
A matter of interpretation but nobody’s happy at the latest news Scotsman, Terry Murden (28/4/11)
UK economy grows by 0.5% in first quarter of 2011 BBC News (27/4/11)
Britain ‘on the edge of a double dip recession’ The Telegraph, Philip Aldrick (27/4/11)
British GDP grows by 0.5 per cent Channel 4 News, Faisal Islam (27/4/11)
GDP: Slow but not stagnant BBC News blogs: Stephanomics, Stephanie Flanders (27/4/11)
GDP figures: Despite meagre growth, we must hold our nerve The Telegraph (27/4/11)
The economic gamble looks ever more reckless Independent (28/4/11)
If George Osborne thinks this is the road to recovery, he needs a new satnav Guardian, Heather Stewart (27/4/11)
GDP figures: the verdict Guardian, Michael Burke, Eamonn Butler, Frances O’Grady, Ian Brinkley (27/4/11)
UK GDP grows 0.5pc: reaction The Telegraph, various commentators (27/4/11)
Data
GDP growth ONS
GDP preliminary estimates ONS
Forecasts for Output, Prices and Jobs The Economist
Forecasts for the UK economy: a comparison of independent forecasts HM Treasury
Questions
- What are the causes of short-term economic growth?
- Why has UK growth been lower than that of most other developed economies?
- What are the arguments for and against the government using fiscal policy at the current time to increase aggregate demand?
- Why has the construction sector performed so badly while the manufacturing sector has performed relatively well?
- How might the growth figures impact on consumer and business confidence? Why is this difficult to predict?
- What impact are the growth figures likely to have on interest rate decisions by the Bank of England’s Monetary Policy Committee?
In January 2011, Chinese growth accelerated to 9.8% as industrial production and retails sales picked up. As the second largest economy, this very high growth is hardly surprising, but it has caused concern for another key macroeconomic variable: inflation. Figures show that inflation climbed to 5.2% in March from a year before and the billionaire investor George Soros has said it is ‘somewhat out of control’. High property and food prices have contributed to high and rising inflation and this has led to the government implementing tightening measures within the economy.
In March, growth in property prices did finally begin to slow, according to the survey by the National Bureau of Statistics. Prices of new built homes had risen in 49 out of 70 Chinese cities in March from the previous months, but this was down from 56 cities in February. A property tax has also been implemented in cities like Shanghai and the minimum down payment required for second-home buyers has risen in a bid to prevent speculative buying. Bank reserve requirements have also been increased for the fourth time, after an increase in the interest rate at the beginning of April. The required reserve ratio for China’s biggest banks has now risen to 20.5%.
The situation in China is not the only country causing concern. Inflation in emerging markets is a growing concern, especially for the richer nations. The Singaporean finance minister, Tharman Shanmugaratnam, said:
“When inflation goes up in emerging markets, it’s not just an emerging market problem, it’s a global inflation and possibly interest rate problem … We have learned from painful experience in the past few years that nothing is isolated and that risk in one region rapidly gets transmitted to the rest of the world.”
He has said that inflation in emerging markets needs addressing to ensure that it does not begin to threaten the economic recovery of other leading economies. The following articles consider the latest Chinese developments.
New home price growth dips amid government tightening BBC News (18/4/11)
China growth may cool in boost for Wen’s inflation campaign Bloomberg Business (14/4/11)
China steps up inflation fight with bank reserves hike Independent, Nikhil Kumar (18/4/11)
China raises bank reserves again Reuters (17/4/11)
China’s economy ‘is just too hot’ says Peter Hoflich BBC News (18/4/10)
Top G20 economies face scrutiny over imbalances AFP, Paul Handley (16/4/11)
Inflation in China poses big threat to global trade Global Business, David Barboza (17/4/11)
Chinese inflation to slow to 4% by year-end: IMF AFP (17/4/11)
Chinese economic growth slows but inflation soars Guardian, Tania Branigan (15/4/11)
Questions
- What type of inflation is the Chinese economy experiencing? Explain your answer using a diagram.
- To what extent will the minimum payment on second homes and the property tax help reduce the growth in Chinese property prices?
- Why is there concern about high inflation in emerging markets and the impact it might have on other countries?
- How could the inflation in China hurt the economic recovery of countries such as the UK?
- How will the increase in the banks’ reserve requirements help inflation?
- Is high Chinese growth and high inflation the relationship you would expect to occur between these macroeconomic objectives? Explain your answer.
As the new tax year begins, many changes are taking place. In order to cut the large budget deficit, sacrifices have to be made by all. The tax and benefit changes could make households worse off by some £2bn this year – definitely not good news for those households already feeling the squeeze. However, the Coalition say that the poorest households will be made better off relative to the rich.
Personal allowance is increasing by £1,000, which is expected to benefit £800,000 people who will no longer pay any tax. At the same time, the 40% tax bracket is being reduced from £43,875 to £42,475, which will bring another 750,000 people into this higher tax bracket, bringing in much needed revenue for the government. Employee’s national insurance contributions will rise by 1% and according to Credit Action, this will leave households £200 worse off per year. Benefits do rise with inflation, but they are to be indexed against the CPI rather than the RPI. The RPI is usually higher and hence benefits will not increase by as much, again leaving some people worse off. Child benefit will be frozen for all and will then be removed for higher rate tax payers from 2013. According to the Treasury, it is the top 10% of households who will lose the most from these needed changes. However, as Justine Greening, the Economic Secretary to the Treasury said:
‘Labour left behind a complete mess with no plan to deal with it, apart from to run up more debts for the next generation to pay off.’
In order to cut the deficit, which stands at an estimated £146bn, spending must fall and tax revenue for the government must rise. The government argues that if cuts are not made today, even higher cuts will be necessary in the future and this will harm the poorest even more. Whilst the Treasury have accepted that there was a ‘marginal loss’ across the population, it is the highest earning households that will suffer the most.
Wednesday of woe as the taxman bites: Changes could leave you £600 worse off Daily Mail, Becky Barrow (6/4/11)
Benefit cuts: Labour warns of ‘Black Wednesday’ BBC News (6/4/11)
Tax and benefit changes: row over financial impact BBC News (6/4/11)
Black Wednesday will hig millions in tax changes and cuts Metro, John Higginson (5/4/11)
Taxman to take extra £750 from families this year Scotsman, Tom Peterkin and Jeff Salway (6/4/11)
Tax and welfare changes will hit women and children hardest, says Ed Balls Guardian, Helene Mullholland, Polly Curtis and Larry Elliott (6/4/11)
Black Wednesday for millions of British families Telegraph (6/4/11)
Majority of households ‘better off’ The Press Association (6/4/11)
Questions
- Where does the term ‘Black Wednesday’ come from?
- What is the likely impact of the 1% rise in NICs? Think about the income and substitution effects. Can you illustrate the effect using indifference analysis?
- Why are Labour arguing that women and children will be hit the hardest and the coalition arguing that it is the highest income households who will lose the most? Can both parties be right?
- What are the arguments (a) for and (b) against bringing in tax and benefit changes today rather than in a few years?
- How might these changes affect the economic recovery?
- Is it equitable that child benefit should eventually be removed from those paying the higher rates of income tax?
- Why has the government indexed benefit payments to rise in line with the CPI rather than the RPI?
On 28 November 2010, a deal was reached between the Irish government, the ECB, the IMF and other individual governments to bail out Ireland. The deal involved an €85bn package to bail out the collapsing Irish banks. Not all of the money went directly to the banks and the Irish government did set aside some of the loan. However, some of this money will now be required by four key lenders in Ireland, after a stress test by a group of independent experts found that the Republic of Ireland’s banks need another €24bn (that’s £21.2bn) to survive the continuing financial crisis. Allied Irish Banks require €13.5bn, Bank of Ireland €5.2bn, Irish Life €4bn and EBS a meager €1.5bn. The governor of the central bank, Professor Patrick Honohan said:
‘The new requirements are needed to restore market confidence, and ensure banks have enough capital to meet even the markets’ darkest estimates.’
The stress test focused on an assumption of a ‘cumulative collapse’ in property prices by 62%, together with rising unemployment. Following this, the Irish Finance Minister announced the government’s intention to take a majority stake in all of the major lenders. The Irish banks have been told they need to reduce the net loans on their balance sheets by some €71bn (£63bn) by the end of 2013. This process of deleveraging is likely to generate further losses, as many loans and assets will be sold for less than their true value. The causes of this ongoing financial crisis can still be traced back to the weakness within the Irish economy and more specifically to mortgage accounts being in arrears following the property market bubble that burst. A key question will be whether this second bail-out is sufficient to restore much needed confidence in the economy and particularly in the banking sector. The articles below consider this ongoing crisis.
Irish hope it is second time lucky for bail-out Telegraph, Harry Wilson (1/4/11)
Irish Bank needs extra €24bn euros to survive BBC News (31/3/11)
Ireland forced into new £21bn bailout by debt crisis Guardian, Larry Elliott and Jill Treanor (31/3/11)
The hole in Ireland’s banks is £21bn BBC News Blogs: Peston’s Picks, Robert Peston (31/3/11)
ECB has given Ireland serious commitment Reuters (1/4/11)
Ireland banking crisis: is the worst really over? Guardian: Ireland Business Blog, Lisa O’Carroll (1/4/11)
Ireland: a dead cert for default Guardian, Larry Elliott (1/4/11)
Timeline: Ireland’s string of bank bailouts Reuters (31/3/11)
Questions
- What is the process of deleveraging? Why is likely to lead to more losses for Ireland’s banks?
- What are the causes of the financial crisis in Ireland? How do they differ from financial crises around the world?
- What are the arguments for and against bailing out the Irish banks?
- Will this second bailout halt the possible contagion to other Eurozone and EU members?
- If this second bailout proves insufficient, should there be further intervention in the Irish economy?
Gross Domestic Product (GDP) is a measure of the total value of goods and services produced in the domestic economy. It gives us an idea about whether national output is growing or falling and by how much. A recession represents a period of 2 consecutive quarters where economic growth is negative. Following the quarters of declining growth, the UK economy slowly began to pick up, but in the final quarter of 2010, economic growth once again turned negative. Data first showed a decline of 0.5%, which was then revised down to 0.6%. However, the most recent data from the ONS has put the decline in economic growth back to just 0.5% and the snow we experienced is supposedly to blame. Still a decline, but not as much as previously thought.
What does this mean for the economy? It might be better than previously thought, but it does little to change the economic outlook for the economy. Furthermore, the UK’s position remains relatively weak compared to other nations. As Chris Williamson from Markit said:
“The decline [in growth] overstates the weakness in the economy, reflecting the bad weather at the end of last year, but is nevertheless still a dire reading compared to the UK’s peers.”
The UK also saw a declining trade balance in the final quarter of 2010 to £27bn, showing that the UK was importing more than it was exporting. This was the second biggest deficit since the second quarter of 2009. Whilst the data for growth is a little better, the key for the UK economy will be what happens in Q1 of 2011, especially given that inflation is so far above the target. In order to get inflation back to its 2% target, interest rates need to rise, but this may put the economic recovery in jeopardy. The key is likely to be confidence. If confidence returns to the economy, aggregate demand may begin to rise and put the economy back on track to achieve its 1.5% forecast rate of growth.
UK GDP less bad than forecast at end-2010, Q1 key Reuters (29/3/11)
UK GDP figures show smaller fall BBC News (29/3/11)
UK GDP shrinks by less than expected: reaction Telegraph (29/3/11)
UK growth figures: what the economists say Guardian (29/3/11)
Disposable income falls by 0.8% The Press Association (29/3/11)
British economy shrank 0.5% in fourth quarter Associated Press (29/3/11)
UK GDP figures revised higher The Economy News (29/3/11)
Questions
- What is GDP? Is it a good measure of the standard of living in a country?
- To what extent does the revised figure change the economic outlook for the UK economy?
- How do you think the Monetary Policy Committee will be affected in their decision on changing interest rates, given this new GDP data?
- What factors are worsening the UK’s relative to other countries who also suffered from the recession?
- How were financial and currency markets affected by the revised GDP data? Was it expected?