Category: Economics for Business: Ch 32

Preliminary figures for Quarter 2 UK GDP suggest that the UK economy has been declining faster than many had expected. Does this mean that the recession in the UK will be more prolonged, or can we expect a return to growth by the end of the year? How much does the outcome depend on policy decisions taken now and what should be done in terms of quantitative easing and other policy measures?

The answers to these questions depend to some extent on the reliability of the figures, which, after all, are only preliminary estimates. Past estimates have tended to understate the level of output and growth, but could the latest estimates understate the depth of the recession? The following articles look at the figures and their implications for policy. The two articles from The Economist look at the global context.

UK economy continues to contract BBC News (24/7/09)
Recession Britain Guardian (24/7/09)
‘Shocking’ GDP figures raise fears of long road to recovery Herald (25/7/09)
Hopes of early end to recession dashed Independent (25/7/09)
Treasury defiant on growth despite gloom over GDP Times Online (26/7/09)
UK GDP: What the economists say Guardian (24/7/09)
Hamish McRae: The GDP figures were profoundly gloomy … but they were wrong Independent (26/7/09)
The shrinking economy BBC News, Stephanomics (24/7/09)
Here comes August, the cruellest month of all Observer (26/7/09)
Rebalancing global growth: a long way to go Economist (23/7/09)
Unpredictable tides Economist (23/7/09)
Gross domestic product, Preliminary estimate, 2nd quarter 2009 Office for National Statistics, Statistical Bulletin (24/7/09)
Gross domestic product, Preliminary estimate, 4th quarter 2008 Office for National Statistics, Statistical Bulletin (24/7/09)

Questions

  1. What factors will determine whether the UK economy starts to growth again by the end of 2009?
  2. Plot the quarterly growth rate of GDP from 2007 Q1. Plot two lines on the same graph: one from the 2008 Q4 estimates and one from the 2009 Q2 estimates (see last two links above). How would you explain the discrepancies between the figures?
  3. What policy measures would you recommend to the Bank of England and the government in the light of the GDP estimates?
  4. ’The deeper and longer the recession, the more will potential (as well as actual) output fall.’ Do you agree with this statement? Explain your answer.
  5. Referring to the two Economist articles, what conditions are necessary for sustained long-term economic growth?

Recent evidence from the Institute of Economic and Social Research shows that the UK economy grew in April and May and that 2009 Quarter 2 figures will also show a rise in output. Although annual growth in GDP will still be negative, as the previous three quarters were all negative, recent growth suggests that the recession might have ‘bottomed out’ and that recovery is beginning.

Of course, it’s early days to tell whether these are real ‘green shoots’ or whether the economy will slide back into negative growth once more, but confidence is returning. One sign of this is the recent appreciation of sterling (see). The following articles look the rise of the pound, why it is occurring and whether the green shoots will flourish or wither.

Pound hits 2009 high against euro BBC News (11/6/09)
Sterling: what’s the outlook now? Telegraph (11/6/09)
Sterling hits year’s high versus euro ThisIsMoney (11/6/09)
Sterling leaves euro in its wake on hopes of UK recovery The Herald (11/6/09)
Jeremy Warner: Recession may be over but not the pain Independent (11/6/09)
Taking stock of the different economic signals Times Online (11/6/09)

Questions

  1. Why has the pound been appreciating?
  2. What are the implications of an appreciation of the pound for the UK economy?
  3. Why is the dollar likely to fall as the prospects for the world economy brighten?
  4. What evidence is there that the UK economy is now beginning to recover? What will determine whether or not the recovery will be sustained?

With the world economy in recession, major exporting countries are suffering more than many, especially exporters of high-quality manufactured products, many of which have a high income elasticity of demand. Germany, the world’s largest exporter, has been particularly hard hit. In the year to April 2009, the value of German exports fell by 28.7 per cent. The following articles look at the data and some of the explanations.

German exports in April 2009: –28.7% on April 2008 Destatis (9/6/09)
German exports plunge amid economic slowdown DW-World (9/6/09)
Weak German economic data dash early recovery hopes Monsters and Critics (9/6/09)
German industry output disappoints, falling 1.9 pct Guardian (9/6/09)
See also this video on the recession in the EU: EU recession ‘deeper than expected’ BBC News (15/5/09)

Questions

  1. Why have German exports fallen considerably more than German GDP? How can the accelerator theory help to explain the fall in German exports?
  2. If economic sentiment recovers in Germany, how will this affect (a) aggregate demand; (b) imports; (c) exports?
  3. Find out what has happened to the euro exchange rate index and assess whether movements in the euro have contributed to Germany’s export performance (see for example the Bank of England Statistical Interactive Database).

The following link is to a video charting the growth of China and the UK over the past 200 years and projecting forward to 2014. The video is from Gapminder, a site that allows you to compare countries’ performance in terms of a large range of economic and social indicators.

The introduction to this video states, “200 years ago, United Kingdom was a leading nation of the world – both in regard to health and economy. In this video, Hans Rosling details UK’s 200-year journey, to present time, and also shows that China, in the coming five years, will narrow the gap to UK faster than ever.”

Crisis narrows China–UK gap Hans Rosling, Gapminder (2/6/09)

Questions

  1. Why has the gap in GDP per head narrowed between the China and the UK?
  2. Why is the gap likely to narrow further over the next five years?
  3. Identify the factors that will determine how much the gap is likely to narrow in this period.

Every six months the OECD publishes its Economic Outlook. This gives annual (and some quarterly) macroeconomic data for each of the 30 OECD countries, for all 30 countries together and for the eurozone. There are 63 tables covering most of the major macroeconomic indicators, most going back 13 years with forecasts for the next two years. OECD Economic Outlook is normally published in June and December.

Similarly, every six months the European Commission’s Economic and Financial Affairs Directorate publishes its European Economy Statistical Annex. This gives annual data for 76 macroeconomic variables for each of the EU countries, plus the USA and Japan. Most of the tables go back to 1970 and forecast ahead for two years. There is also a separate publication, Economic Forecasts. The statistical appendix to this publication has 62 tables, again covering a range of macroeconomic data. The tables go back to 1992 and again forecast ahead for two years. There is a lot of useful commentary about the individual economies of the EU and other major economies, such as the USA, Japan, China and Russia. Both publications normally appear in May and November.

Another organisation to publish 6-monthly forecasts is the International Monetary Fund. The Statistical Appendix of the Word Economic Outlook (after clicking on this, go to link on right), normally published in April and October, gives macroeconomic data for most economies and regions of the world. Forecasts are made ahead for two years and for five years.

The state of the world economy was so severe in early 2009 and was deteriorating so rapidly that earlier forecasts proved far too optimistic. In early 2009, all three organisations published interim forecasts – the European Commission and the IMF in January and the OECD at the end of March. They painted a much bleaker picture than the forecasts published at the end of 2008. What will the next set of forecasts look like? Will they be even bleaker?

The following links take you to these interim forecasts and to articles commenting on them.

EU interim forecasts for 2009–2010: sharp downturn in growth European Commission, Directorate-General for Economic and Financial Affairs (19/1/09)
World Economic Outlook Update IMF (28/1/09)
OECD Interim Economic Outlook, March 2009 OECD (31/3/09)
Global economy set for worst fall since WWII Times Online (31/3/09)
UK economy: We still need to take our medicine Times Online (1/4/09)
OECD predicts 4.3% contraction in richest economies this year Irish Times (1/4/09)
Global Slump Seen Deepening The Wall Street Journal (1/4/09)
Glimmers of hope, forecasts of gloom The Economist (2/4/09)

Questions

  1. Compare the forecasts for GDP growth, unemployment, inflation and output gaps for some of the major economies made by the OECD at the end of March with those made by the European Commission and the IMF in January and with those made by all three organisations in the autumn of 2008. Why, do you think, are there such large divergences in the forecasts?
  2. For what reasons might the OECD March forecasts turn out to be (a) much too pessimistic; (b) much too optimistic?
  3. In the light of the forecasts, should countries adopt further strongly expansionary fiscal policies – something rejected at the G20 summit in Early April (see news item Saving the world)?