Despite better economic growth in the first quarter of 2011, confidence remains low and according to Halifax, this has contributed to a decline in house prices from March to April by 1.4% to give their lowest average price since July 2009. Halifax has blamed this steady decline on a lack of confidence and the uncertain economic climate. However, despite this latest decline, Halifax have suggested that the trend may be coming to an end. Martin Ellis, from Halifax had this to say:
“Signs of a modest tightening in housing market conditions, a relatively low burden of servicing mortgage debt and an increase in the number of people in employment are all likely to be providing support for house prices, curbing the pace of decline. There are signs that house sales are stabilising, albeit at a level lower than the historical average.”
There are many factors that contribute towards house prices: the number of properties on the market, the number of buyers, the availability of mortgages and finance, interest rates and the future economic climate. How these factors change will have a crucial influence on the future house price trend. The following articles consider the causes and likely consequences of this latest housing market data.
House prices fall at fastest rate in 18 months Telegraph (9/5/11)
House prices ‘fell by 1.4% in April’ the Halifax says BBC News (9/5/11)
House prices post biggest fall in 1-1 ½ years Reuters, Fiona Shaikh (9/5/11)
House prices dive to a two-year low Independent, Nicky Burridge (9/5/11)
UK housing market remains weak Wall Street Journal, Jason Douglas (9/5/11)
U.K April house prices fall most in seven months, Halifax says Bloomberg, Svenja O’Donnell (9/5/11)
Questions
- What are the main causes behind this decline in house prices?
- The articles talk about the volatility of house prices over recent months. What is the explanation for this?
- If interest rates are increased by the MPC, is it more or less likely to cause house prices to decline further? Explain your answer.
- Why dies Martin Ellis, of Halifax, believe that the decline in house prices might reverse this year?
- How does the housing market affect the wider UK economy? Is these latest data likely to jeopardise the fragile recovery?
In the past few weeks, the prices of gold and silver have been soaring and have hit all-time (nominal) highs. Over the past 12 months, gold has risen by 31%, while silver has risen by 149% and 64% since the start of February. Part of this reflects the general rise in commodity prices (see also). Oil is trading at around $125 per barrel, up 43% on a year ago; wheat is up 66%, maize by 114%, coffee (Arabica) by 118% and cotton by 122%.
Part of the reason for the rise in the price of precious metals, however, has been the weakness of the dollar. In such times, gold and silver are often seen as a ‘safe haven’ for investors.
So why have commodity prices been rising and why has the dollar been falling? What is likely to happen to the prices of gold and silver in the coming weeks and months? Is their meteoric rise set to continue? Will the ratio of the gold price to the silver price continue to fall? The following articles investigate.
Articles
Gold and silver prices jump to new record highs BBC News (25/4/11)
Gold rises 7% in April as US dollar continues to weaken BBC News (29/4/11)
Gold and silver set new highs after S&P move Financial Times, Jack Farchy (22/4/11)
Real Interest Rates Explain the Gold Price Perfectly…Too Perfectly? The Market Oracle, Andrew Butter (25/4/11)
Silver, platinum to outshine gold Toronto Sun, Sharon Singleton (25/4/11)
Gold Bugs Beware Of Fed Extermination Forbes blogs: Great Speculations, Mark Sunshine (25/4/11)
Shock and Au: Hedging Against Fear EconomyWatch, Alice Briggs (26/4/11)
Keeping an Eye on the Gold/Silver Ratio Seeking Alpha, Evariste Lefeuvre (25/4/11)
Data
Commodity Prices Index Mundi
Commodities Financial Times
Commodities BBC Market Data
Questions
- Why have the prices of gold and silver risen so much recently?
- Why has silver risen more than gold?
- Why may higher rates of world inflation make investors turn to precious metals for investment?
- How are future decisions by the Fed likely to affect the price of gold?
- According to the efficient capital markets theory (strong version), the current price of a commodity should already reflect all knowable factors that are likely to affect the price? Does this mean that speculative buying (or selling) is pointless?
- How is the price elasticity of supply of silver and gold relevant in explaining the magnitude of their price movements?
One of the contributing factors towards high inflation in the UK is high and rising oil prices – most of us have seen the effects of this with high prices at petrol stations. However, there are many other areas where high oil prices have had knock on effects and one particular effect is the costs to airlines. As a result, passengers will see a higher price. British Airways will be increasing its fuel surcharge on long-haul flights. The surcharge for economy seats is likely to increase by £10 per flight and for premium seats is to increase by £20 per flight. Nick Swift, BA’s chief financial officer said:
‘As customers will know form the price at petrol pumps, the cost of fuel has continued to rise significantly over the past three months. For us, fuel now represents over one-third of our costs and particularly affects our long-haul flights.’
The impact of high oil prices will undoubtedly affect airline profits, which are expected to halve this year. While International Airlines Group (IAG) has seen a rise in passenger numbers, costs have been rising faster and this may continue with further political unrest in the Middle East, as well as the recent natural disasters we have seen – in particular the concern about the nuclear power station. These concerns have led many airlines, including IAG to engage in hedging, where airlines try to protect themselves from rising fuel prices by agreeing the price they will pay for fuel several months ahead. There are undoubtedly risks of doing so, but with such high prices, this is a practice that airlines have engaged in. After all, fuel does represent over one third of IAG’s costs, so this price hike is hardly unexpected, but consumers will inevitably be affected.
British Airways increases fuel surcharge by £10 Telegraph, David Millward (5/4/11)
BA raises long-haul fuel surcharges BBC News (5/4/11)
BA passengers face fuel surcharge hike Sky News (5/4/11)
BA long-haul surcharge to go up The Press Association (5/4/11)
British Airways ups longhaul fuel surcharge Reuters (5/4/11)
Questions
- What are the causes of rising oil prices?
- What is the process of hedging? Are there any risks involved in it? Under what circumstances could hedging enable companies such as IAG to gain and lose?
- What impact is this surcharge likely to have on consumers? Who will it affect the most?
- What explanation is there for rising passenger numbers, yet falling profits for IAG?
The pensions problems facing many of the developed world are well documented and are largely caused by changing demographics, including rising life expectancy, more people in education, retiring earlier and the ‘baby boomers’ nearing or entering retirement. All of this has contributed to unsustainable pension systems and hence a need for reform. The latest review is by Lord Hutton and looks at public-sector pensions. It makes a number of recommendations about reform. The main thing to come out of the report is that public-sector workers will have to pay larger contributions. work for longer and may receive less in their pension.
Many public-sector pensions have been based on a final salary scheme, which gives workers an extremely generous pension on retirement. The proposal is to change these to career average pensions, which will reduce the generosity for some and hence play a role in reducing the pension deficit. He suggests that public-sector retirement age should be increased in line with the state pension age, which will simultaneously increase the number of workers and hence output, but also reduce the number of years spent in retirement and hence reduce pension payments.
The government will now consider the recommendations laid out in the Hutton Review, but will need to bear in mind potential reactions by the unions, which have already hinted at strike action if the proposals go ahead. As the TUC general secretary, Brendan Barber, said:
‘Public-sector workers are already suffering a wage freeze, job losses and high inflation. They are now desperately worried that they will no longer be able to afford their pension contributions, and will have to opt out.’
With such concern about these proposals, and yet an unarguable case for pension reform, this is certainly an area where we will undoubtedly see significant media coverage.
Articles
Hutton reveals his pension plan – and is blasted by unions Guardian, Polly Curtis (10/3/11)
Pensions anger from unions following Hutton review (including video) BBC News (10/3/11)
High-wire act fails to balance public and private Financial Times, Nicholas Timmins (10/3/11)
A fairer pension deal that is long overdue Telegraph (10/3/11)
Hutton: This changes the basis on which I accepted the job, says teacher Guardian, Jessica Shepherd and Jill Insley (10/3/11)
No winners over public sector pensions if ministers or unions rush to battle Guardian, Polly Toynbee (10/3/11)
Career-average pensions: How do they work? BBC News, Ian Pollock (10/3/11)
Hutton pensions review: Q&A Telegraph, Harry Wallop (10/3/11)
Tackling the intractable The Economist (10/3/11)
Trade unions: pension reforms are unfair and misguided Guardian, James Meikle (10/3/11)
Report
Independent Public Service Pensions Commission: Final Report Pensions Commission, Lord Hutton, HM Treasury, March 2010
Independent Public Service Pensions Commission: Interim Report Pensions Commission, Lord Hutton October 2010
Questions
- Identify the main causes of the pensions problem. Explain how each issue has added to the pensions deficit.
- To what extent is it equitable that public sector workers should pay more in contributions and retire at the same age as the state pension age?
- Who will benefit the most from a change from final-salary to career average schemes?
- How might higher contributions affect the incentive to work? What could we see happen to labour supply? Think about both income and substitution effects.
- What are the union’s main arguments against the proposals? To what extent Is striking likely to solve the problem?
Are we heading for ‘perfect storm’ in commodity production and prices? Certainly the prices of many commodities have soared in recent months. These include the prices of foodstuffs such as dairy products, cooking oils and cereals, crude oil, cotton, metals and many other raw materials. The overall world commodity price index has risen by 28% in the past 12 months. The following are some examples of specific commodities:
Price rises in the 12 months to February 2011
• Wheat 62%
• Maize 59%
• Coffee 70%
• Beef 39%
• Sugar 46%
• Palm kernal oil 142%
• Soybean oil 50%
• All food price index 32%
• Crude oil 20%
• Cotton 132%
• Fine wool 55%
• Softwood timber 25%
• Iron ore 78%
• Copper 29%
• Tin 55%
• All metals index 58%
• Rubber 79%.
The problems are both short term and long term, and on both the demand and supply sides; and the effects will be at micro, macro and global levels. Some hard choices lie ahead.
The following webcast, articles and reports explore both the current position and look into the future to ask whether rising commodity prices are likely to continue or even accelerate.
The first link is to a BBC World Debate which considers the following issues: “Is scarcity of natural resources a serious challenge for developing and advanced economies? How great is the risk that scarcity might lead to conflict, both within and between nations? Might a scramble for resources lead to a retreat from globalisation and to greater protectionism?”
Webcast
World Debate: Resources BBC World Debate, Louise Arbour, President and CEO, International Crisis Group; James Cameron, Global Agenda Council on Climate Change; He Yafei, Ambassador and Permanent Representative of China to the UN; Malini Mehra, Founder and CEO, Centre for Social Markets; Kevin Rudd, Minister of Foreign Affairs, Australia (19/1/11)
Articles
Global Food Prices Continue to Rise Reuters, Steve Savage (7/3/11)
The 2011 oil shock The Economist (3/3/11)
Global Food Prices Will Probably Be Sustained at Record This Year, UN Says Bloomberg, Supunnabul Suwannaki (9/3/11)
Food prices to stay high as oil costs, weather weigh livemint.com, Apornrath Phoonphongphiphat (9/3/11)
‘Perfect storm’ threatens agriculture in developing nations Manila Bulletin, Lilybeth G. Ison (9/3/11)
IMF sees no immediate respite from high food prices Commodity Online (7/3/11)
Drought, supply, speculation drive world food prices to record high NZ Catholic (8/3/11)
The Factors Affecting Global Food Prices Seeking Alpha, David Hunkar (7/3/11)
World food prices climb to record as UN sounds alarm on further shortages FnBnews (India), Rudy Ruitenberg (9/3/11)
Food crisis: It’s a moral issue for all of us New Straits Times (Malaysia), Rueben Dudley (8/3/11)
Oil prices: Green light from the black stuff Guardian (5/3/11)
Cotton hits $2 a pound Guardian, Terry Macalister (17/2/11)
Supermarkets are raising prices faster than inflation, says UBS The Telegraph, Philip Aldrick (1/3/11)
What next for commodity prices? BBC News, Jamie Robertson (5/5/11)
Reports
FAO Cereal Supply and Demand BriefFood & Agriculture Organization, United Nations (March 2011)
Rising Prices on the Menu Finance & Development (IMF), Thomas Helbling and Shaun Roache (March 2011)
Data
Commodity prices Index Mundi
Commodities Financial Times, market data
Questions
- Identify the various factors that are causing rises in commodity prices. In each case state whether they are supply-side or demand-side factors.
- How can the price elasticity of demand and supply, the income elasticity of demand and the cross-price elasticity of demand be used to analyse the magnitude of the price rises?
- To what extent are rising food prices the result of (a) short-term (i.e. reversible) factors; (b) long-term trends?
- Why are food prices in the shops rising faster in the UK than in many other countries?
- To what extent is the future of food security and prices and moral issues?
- Why may current oil price rises become an opportunity for the future?
- What might be the respective roles be of government, business and consumers in responding to natural resource constraints?