Cycling generated £2.9 billion for the UK economy in 2010 – a rise of 28% over 2009. This amounts to an average ‘Gross Cycling Product’ of £233 for each of Britain’s 12½ million cyclists. What is more, the figures are likely to continue growing rapidly in future years. This is the central finding of the LSE report, The British Cycling Economy, authored by Dr Alexander Grous, a productivity and innovation specialist at the Centre of Economic Performance (CEP) at the London School of Economics.
The major benefits to the economy from cycling include the sale of cycles and accessories, cycle maintenance, the generation of wages and tax revenues from 23,000 people employed directly in bicycle manufacture, sales, distribution and the maintenance of cycling infrastructure. There are also health benefits. These are partly the direct benefits to the economy of fewer days taken in sick leave by cyclists (a contribution of £128 million in 2010) and partly the health and well-being benefits to the individual and the saving on healthcare expenditure.
But are enough people being encouraged to get on their bikes? What are the major incentives for people to cycle? The report identifies the following:
• Cycling being made both segment- and gender-neutral, appealing to the widest number of user groups, across all ages and genders;
• Coordinated and preferential traffic signals that facilitate faster and safer journeys;
• ‘Short cut’ routes in dense urban areas and capital cities that join arterial road routes;
• Traffic calming initiatives that include road narrowing and speed restrictions that range from 30km/h to ‘walking speeds’;
• Extensive parking and in some areas, designated women-only spaces with CCTV and enhanced lighting;
• Established bike rental schemes;
• Long-running training programmes for children;
• The prevalence of strict ‘liability laws’ that assume a car driver is responsible in the event of a collision between a car and a cyclist.
Read the following articles and report and then consider, as an economist, how the benefits and costs should be analysed and what policy implications might follow.
Articles
Wheels of fortune: how cycling became a £3bn-a-year industry Independent, Tim Hume (22/8/11)
Cycling worth £3bn a year to UK economy, says LSE study Guardian (21/8/11)
Cycling industry gives economy £3bn boost BBC News (22/8/11)
Growth in cycling ‘boosting economy’, says LSE BBC News (22/8/11)
Britain Gets Back On Its Bike British Cycling (22/8/11)
‘Gross Cycling Product’ worth £2.9bn to UK economy says LSE Road.cc (22/8/11)
Report
The British Cycling Economy: ‘Gross Cycling Product’ Report LSE, Dr Alexander Grous
Questions
- How is the figure of £2.9bn derived? Explain whether it is a ‘value-added’ figure?
- Which of the benefits can be regarded as externalities?
- Are there any external costs from cycling? If so, what are they and how might they be minimised?
- How might incentives be changed in order to encourage more people to cycle?
- Assume that you are a government or local authority considering whether or not to increase investment in cycle paths. What factors would you take into consideration in order to make a socially efficient decision?
I found myself singing this morning which I have to admit is not the most pleasant experience for those in ear-shot. I was singing to the tune of ‘love is all around us’. But rather than the words of the song performed by the Troggs in the late 1960s and by Wet Wet Wet in the 1990s, I found myself singing ‘debt is all around us’. It could easily have been the sub-conscious effect of the headlines relating to government debt (also known as national debt). But, actually it was the effect of having looked at my latest credit card statement and noting the impact that my summer holiday had had on my financial position! Relaxation, so it seems, doesn’t come cheap. With this in mind, I have just taken a look at the latest bank of England figures on British household debt. You can do the same by going to the Bank of England’s statistical release lending to individuals.
The latest figures reveal that at the end of June 2011 households in Britain had a stock of debt of £1.451 trillion. Now this is a big number – not far short of the economy’s annual Gross Domestic Product. But, interestingly, this is its lowest level in three years. Indeed, over the past twelve months the stock of household debt has fallen by £6 billion. This is the result of the sector’s repayment of unsecured debt, such as credit card debt and overdrafts. The stock of unsecured debt has fallen by £8.2 billion or 3.8% over the past year to stand at £209.7 billion.
The remaining £1.241 trillion of household debt is secured debt which is debt secured against property. The stock of secured debt has risen by £2.16 billion over the last 12 months, but this equates to a rise of less than 0.2%. In fact, further evidence from the Bank of England reveals that households are not only looking to reduce their exposure to unsecured debt but to pay off mortgage debt too. You might wonder how this might be occurring given that the stock of mortgage debt has risen, albeit only slightly. The answer lies in the growth of housing investment relative to that of mortgage debt. Housing investment relates, in the main, to the purchase of brand new homes and to major home improvements. As our population grows and the housing stock expands and as we spend money on improving our existing housing stock we acquire more mortgage debt. Bank of England figures show that housing investment has been greater than new secured lending. Consequently, the additions to the stock of lending have been less than housing investment. This gives rise to negative housing equity withdrawal, i.e. negative HEW.
The Bank of England estimates that in Q1 of 2011 there was an increase in housing equity of £5.8 billion. Negative housing equity withdrawal (HEW), an injection of housing equity, has occurred every quarter since Q2 2008. Since then, the UK household sector has injected some £63.7 billion of housing equity. The opportunity cost of this injection is that by increasing equity in property households are using money that could have been used for consumption or for purchasing financial assets. The extent of this negative HEW over the past 12 quarters has been the equivalent to 2.2% of disposable income.
While my credit card may have ballooned this month, it would appear that the household sector is looking to reduce its debt exposure. I will be looking to do likewise!
Articles
Housing injection goes on BBC News (4/7/11)
Personal insolvencies rise Independent, Philip Whiterow (5/8/11)
Mortgage boom as homeowners cash in an try reduce debts Independent, Simeon Read (5/7/11)
Homeowners inject £5.8 billion of equity into property in first quarter Telegraph, Emma Rowley (5/7/11)
Housing equity injection continues Guardian, Hilary Osborne (4/7/11)
Data
Lending to individuals statistical release Bank of England
Housing equity withdrawal (HEW) statistical release Bank of England
Questions
- Illustrate with examples what is meant by secured and unsecured debt.
- What factors might help to explain the longer-term growth in secured and unsecured debt over recent decades?
- What factors might help to explain the more recent patterns in secured and unsecured debt?
- What do you understand by the term housing equity withdrawal?
- What is meant by negative HEW?
- What factors might help to explain the negative HEW observed for the past twelve quarters?
- What implications might there be for economic growth of negative housing equity withdrawal (HEW)?
Just how large is the UK economy and how rapidly is it growing? These were questions we asked, back at the turn of the year, in Getting real with GDP when reviewing economic data for the third quarter of 2010. We update this blog in light of the latest Quarterly National Accounts release from the Office for National Statistics.
The latest Quarterly National Accounts release estimates the value of our economy’s output during Q1 of 2011 at £375.3 million. When measured across the latest four quarters, i.e. from the start of Q2 2010 to the end of Q1 2011, the total value of our economy’s output was £1.472 trillion. Across calendar year 2010 the UK’s GDP is estimated to have been £1.455 trillion.
When analysed in terms of the total expenditure on the goods and services produced in the latest four quarters, household final consumption contributed £931 billion of Gross Domestic Product. In other words, household expenditure over these four quarters was equivalent to 63% of GDP, almost exactly in line with its average since 1948. This demonstrates the importance of spending by households for short-term economic growth. Households help to shape the business cycle.
Another important expenditure-component of GDP is gross capital formation. This is capital expenditure by the private and public sector and is estimated to have been £219.6 billion over the latest four quarters, equivalent to 15% of GDP. As well as affecting current levels of GDP, gross capital formation also affects our economy’s potential output. In other words, changes in capital expenditure can impact both on the demand-side and the supply-side of the economy. Interestingly, the long-term average share for gross capital formation in GDP is around 18% and so about 3 percentage points higher than is currently the case.
So far we have looked at the level of economic activity measured at current prices. But, what about the rate at which the economy is growing? When analysing the rate of economic growth economists look at GDP at constant prices. By doing this economists can infer whether the volume of output has increased. This is important because in the presence of price rises, an increase in the value of output could occur even if the volume of output remained unchanged or actually fell. For instance, in 1974 the volume of output or real GDP fell by 1.3%, but because the average price of our domestic output – the GDP deflator – rose by 14.9%, GDP measured at current prices rose by nearly 13.4%.
The latest ONS figures show that in the first quarter of 2011 real GDP grew by 0.5% (nominal GDP grew by 1.7%). This follows a 0.5% fall in real GDP the final quarter of 2010 (nominal GDP grew by 1.2%). Compared with Q1 2010, the volume of output of the UK economy in Q1 2011 is estimated to have grown by 1.6%.
Exports were the fastest growing component of aggregate demand in Q1, rising in real terms by 2.4%, while import volumes decreased by 2.4%. Export volumes in Q1 were 9.3% higher than a year earlier. In contrast, capital expenditures contracted sharply in the first quarter, falling by 4.2%. This follows on the back of a 0.6% fall in the final quarter of last year. This has reversed much of the strong capital expenditure growth seen during the earlier part of 2010.
We finish by looking at the growth in household spending. In the first quarter of the year real household spending fell by 0.6%. This follows a 0.2 fall in Q4 2010 and zero growth in Q3 2010. This helps to explain some of the difficulties that particular retailers have faced of late. Some context to these disappointing consumption numbers is provided by patterns in household sector disposable income. The sector’s disposable income fell by 0.8% in Q1 2011 which follows on from a 0.9% fall in the last quarter of last year. The result of this is that the household sector’s real disposable income in Q1 2011 was 2.7% lower than in Q1 2010. This was the fastest annual rate of decline since the third quarter of 1977.
Articles
Household incomes sees biggest fall since 1977 BBC News (29/6/11)
UK service sector sees biggest fall for 15 months BBC News (28/6/11)
UK economic growth revised down BBC News (29/6/11)
Service sector output slumps Guardian, Phillip Inman (29/6/11)
Household raid savings as income squeezed Independent, Sean O’Grady (29/6/11)
Poor GDP numbers add pressure on Osborne Guardian, Phillip Inman (28/6/11)
UK economy suffers blow as tepid growth confirmed Telegraph (28/6/11)
Service sector slumps deals heavy blow to economic recovery hopes Scotsman, Natalie Thomas (30/6/11)
Data
Latest on GDP growth Office for National Statistics (28/6/11)
Quarterly National Accounts, 1st Quarter 2011 Office for National Statistics (28/6/11))
ONS Time Series 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
- What do you understand by the terms nominal GDP and real GDP?
- Can you think of any other contexts in which we might wish to distinguish between nominal and real changes?
- The following are the estimates of GDP at constant 2006 prices:
Q1 2011= £330.724bn, Q4 2010= £329.189bn, Q1 2010= £325.360bn Calculate both the quarterly rate of change and the annual rate of change for Q1 2011.
- What would happen to our estimates of the level of constant–price GDP in (3) if the base year for prices was 1996 rather than 2006? What if the base year was 2011? What would happen to the quarterly and annual growth rates you calculated in each case? Explain your answer.
- Explain how gross capital formation could have both demand-side and supply-side effects on the economy. How significant do you think such supply-side effects can be?
- How important for short-term economic growth do you think household spending is? What factors do you think will be important in affecting household spending in the months ahead?
- What factors do you think help to explain the 2.7% annual rate of decline reported in Q1 2011 in the household sector’s real disposable income?
- The real annual rate of decline in household spending reported in Q1 2011 was 0.5%. Would you have expected this percentage decline to have been the same as for real disposable income? Explain your answer.
The International Monetary Fund consists of 187 countries and is concerned with its members’ economic health. It promotes co-operation, economic stability and is also there to lend to those countries facing difficulties. The role of the IMF as a lender has come into question, as critics argue that the conditions placed on loans to countries can cause more problems than they solve, as the cause of the problems is not always identified. However, despite the criticisms and the current charges facing the former IMF Chief, the International Monetary Fund continues to play an important role in the global economic environment.
Many countries have used IMF credit and over the past two decades it has predominantly been the transition and the emerging market economies that have demanded the IMF’s resources. Whilst its lending did drop off in the mid 2000s, the global financial crisis of 2008/09 saw an increase in the demand for IMF funds from emerging economies to some $60 billion. In May 2010, we saw the IMF together with the EU put together a rescue package for Greece and it is now the turn of Egypt. The uprisings in Egypt put the stability of the economy in jeopardy, as investment declined, tax revenues decreased and the usually buoyant tourist industry started to struggle. Despite the efforts of the government to stabilise the economy, it remains short of cash and the IMF looks set to agree a loan deal of $3 billion (£1.8 billion). Egypt would have five years to repay the loan at an interest rate of 1.5%, after a three year ‘grace period’.
Other countries to receive loans include Ireland, Belarus, the Ukraine and Iceland, the latter of which owes the IMF $2,828.67 per person of its population. The UK has used the IMF back in 1976 and it may be something to look out for, depending on how our recovery continues. The following articles look at the IMF and its role in promoting global financial stability.
Articles
IMF to lend Egypt $3 bn: Ministry Associated Press (6/5/11)
IMF agrees $3bn financing deal with Egypt BBC News (5/6/11)
Timeline: Greece’s debt crisis Reuters (5/6/11)
Egypt strikes $3bn IMF deal to ‘re-launch’ economy Guardian, Jack Shenker (5/6/11)
The IMF versus the Arab Spring Guardian, Austin Mackell (25/5/11)
EU/IMF/ECB statement on Greek bailout Reuters (3/6/11)
Belarus wins $3 billion loan from Russia-led fund, still seeks IMF’s help Bloomberg, Scott Rose and Daryna Krasnolutska (4/6/11)
IMF frees up $225mn for Iceland Associated Press (4/6/11)
IMF loan: which country owes the most? Guardian (24/5/11)
International Monetary Fund
International Monetary Fund Homepage
IMF outlines $3 billion support for Egypt International Monetary Fund, IMF Survey Online (5/6/11)
Questions
- What is the role of the IMF and how is it financed?
- What are the objectives of the loans to countries such as Greece, Iceland and Egypt?
- What other countries has the IMF lent to and what are the conditions that have been placed on these loans?
- What has been the impact on the Egyptian economy of the uprisings? Think about all the industries that have been affected and the wider impacts.
- Can you find any examples of circumstances in which the conditions of an IMF loan have made problems worse for the recipient?
- Why are the conditions of the IMF loan to Egypt favourable and how will the loan help the economy?
- Look at the trend in IMF lending. What factors explain the peak and troughs? In particular, what is the explanation for the incresae in lending during the financial crisis?
The banking sector was at the heart of the credit crunch and it may also be at the heart of the recovery. Too much lending to those who could not repay has now translated into government encouragement and targets to stimulate further lending. Banks made a deal with the government (Project Merlin) to lend £76bn to small and medium sized companies (SMEs) in 2011, however, the data for the first quarter of 2011 shows that the top five UK banks lent only £16.8bn, some £2.2bn short of their quarterly target (about 12%). Despite this sum still being a significant figure, small companies have said that they are still finding it difficult to obtain credit from banks. A poll found 44% of companies that asked for a loan were turned down and many were discouraged from even applying as they had almost no chance.
Encouraging banks to lend and hence stimulating investment by businesses may prove crucial to the UK’s recovery. Vince Cable’s words with regard to lending emphasise its importance:
“We will monitor the banks’ performance extremely closely and if they fail to meet the commitments they have agreed we will examine options for further action.”
If small businesses can obtain credit, it will help them to develop and expand and this should have knock on effects on the rest of the economy. Jobs could be created, giving more people an income, which in turn should stimulate consumption, further investment and finally aggregate demand. It may not be the case that the UK’s recovery is entirely dependent on bank lending, but it could certainly play an important role, hence the government’s insistence for further lending. It may also act to create confidence in the economy. The following articles consider the bank’s role in providing credit to SMEs.
Articles
Bank lending falling short of promises by £25m a day Mail Online, Becky Barrow (24/5/11)
Cable tells banks to increase lending to small firms BBC News (23/5/11)
Bank lending targets: What the experts say Guardian, Alex Hawkes (23/5/11)
Major banks fail to meet their lending targets Independent, Sean Farrell (24/5/11)
Banks on course to miss small business lending target Guardian, Philip Inman (23/5/11)
Project Merlin needs to be less woolly and more wizard Guardian, Nils Pratley (23/5/11)
Bankers caused the crash and now they strangle recovery Guardian, Polly Toynbee (27/5/11)
Data
Trends in Lending Bank of England (see in particular, Lending to UK Businesses)
Questions
- Why have banks not met their lending targets for the first quarter of 2011?
- Why is project Merlin so potentially important to the recovery of the economy?
- Using an AD/AS diagram, illustrate the possible effects of further lending.
- Are there any possible adverse consequences of too much lending?
- Why might banks have little incentive to increase their lending to SMEs?