Many industries are struggling in the current climate and, in particular, car sales have been at an all time low. General Motors was the biggest car company in the world, but recently we have seen them becoming the biggest industrial bankruptcy, which will have consequences for many car manufacturers around the world. UK car sales were 25% lower in May 2009 than at the same time last year and Chrysler will sell most of their assets to Fiat when they form a strategic alliance in a bid to help them exit bankruptcy protection.
The troubles of the carmakers have passed up the production chain to automotive suppliers, component manufacturers and engineering firms, and down the chain to the dealerships at a time when consumer confidence has taken a knock. The following articles look at some of the recent developments in the car industry and consider their likely economic impact.
UK new car sales 25% lower in May BBC News (4/6/09)
Creditors cry foul at Chrysler precedent The Wall Street Journal, Ashby Jones, Mike Spector (13/6/09)
The decline and fall of General Motors The Economist (4/6/09)
GM pensioner’s fears for future BBC News (1/6/09)
Opel staff face wait for job news BBC News (2/6/09)
From biggest car maker to biggest bankruptcy BBC News (1/6/09)
GM sales executive lays out company’s direction Chicago Tribune, Bill Vidonic (14/6/09)
Chrysler and Fiat complete deal BBC News (10/6/09)
Fiat gambles on Chrysler turnaround Telegraph, Roland Gribben (1/6/09)
Obama taskforce faces Congress over car industry rescue Times Online, Christine Seib (10/6/09)
Has pledge of assistance revved up the car industry? EDP24, Paul Hill (10/6/09)
Questions
- What is a strategic alliance and how should it help Chrysler?
- What are some of the methods that governments have used to help stimulate the car industry? Consider their advantages and disadvantages.
- Think about the consequences beyond the car industry of the decline of General Motors. Who is likely to suffer? Will there be any winners?
- General Motors was established in 1908. How were they able to expand so quickly and what do you think are the main reasons for their current decline?
- The article in The Economist suggests that, despite the current problems in the car industry and the global recession, selling cars will never really be a problem. What do you think are the reasons for this?
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
- Why has the pound been appreciating?
- What are the implications of an appreciation of the pound for the UK economy?
- Why is the dollar likely to fall as the prospects for the world economy brighten?
- 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
- Why have German exports fallen considerably more than German GDP? How can the accelerator theory help to explain the fall in German exports?
- If economic sentiment recovers in Germany, how will this affect (a) aggregate demand; (b) imports; (c) exports?
- 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).
Forecasting the future state of economies is difficult at the best of times. Forecasters frequently get it wrong. To see this, just look at forecasts for the current point in time made two or three years ago – or even six months ago, given the current dire circumstances. They were often way-off mark.
But why are forecasts often so inaccurate? The problem is that in the short run the state of the economy depends on the level of aggregate demand; and that, in turn, depends crucially on confidence – both of consumers and business. But confidence is a ‘will-o’-the-wisp’ thing. Confidence can evaporate with bad news, making the situation much worse. Likewise, good news can lead to rapidly growing optimism, which in turn stimulates consumption, investment and growth. Humans are fickle creatures – and the media do not help here, playing on fears or hyping-up good news.
The following articles look at forecasts made in April 2009, when economies around the world were deep in recession. Was this recession the start of something much worse? Or were economies soon to bounce back, taking up the slack created by the recession? Forecasters were being sorely tested. It will be interesting to see in a year’s time just how accurate, or inaccurate, they were.
Are there any signs of recovery? BBC News (16/4/09)
Merkel debates economic woes amid grim forecasts Guardian (22/4/09)
IMF is being unduly alarmist: Jeremy Warner Independent (24/4/09)
What the experts say: the shrinking economy Guardian (24/4/09)
Economic surveys signal that worst could be behind Europe EarthTimes (24/4/09)
Darling’s economic forecast “unrealistic” Moneywise (23/4/09)
Crisis deepens in Europe, Japan AsiaOne News (24/4/09)
IMF warns that worldwide slump will be deeper than thought Times Online (23/4/09)
World Economic Outlook: April 2009 IMF (24/4/09). See also webcast.
Questions
- Why do forecasters differ so markedly from each other?
- Other than an unexpected rise or fall in confidence, what else could make forecasts turn out to be wrong?
- To what extent is economic forecasting similar to and different from weather forecasting?
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
- 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?
- For what reasons might the OECD March forecasts turn out to be (a) much too pessimistic; (b) much too optimistic?
- 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)?