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).
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
- Why has the gap in GDP per head narrowed between the China and the UK?
- Why is the gap likely to narrow further over the next five years?
- Identify the factors that will determine how much the gap is likely to narrow in this period.
Retail sales in the eurozone have been falling for several months as the recession deepens. The latest figures show a drop in sales of 4.2% between March 2008 and 2009. But what are the implications for fiscal and monetary policy?
With many eurozone countries worried about growing budget deficits the pressure is on the ECB to cut interest rates. Would this help to halt the decline in sales, or do policy-makers need to go further? The linked articles look at the facts and some of the solutions.
Volume of retail trade down by 0.6% in euro area Eurostat news release (6/5/09)
Brussels doubles EU recession forecasts for 2009 Independent (5/5/09)
Euro zone retail sales in record fall IrishTimes.com (24/4/09)
Record decline in eurozone sales BBC News (6/5/09)
EU businesses say worst of crisis over, urge action Guardian (6/5/09)
ECB Is Expected to Cut Rate to 1%, Enlist Other Tools The Wall Street Journal (6/5/09)
ECB set to cut interest rates to record low of 1% Times Online (5/5/09)
See also
Economic Forecast, Spring 2009 European Economy (European Commission)
Questions
- What determines the level of retail sales?
- What would halt the decline in retail sales?
- Discuss various measures that the ECB could take to stimulate the eurozone economy. Why might it be reluctant to take some of the measures?
The following articles look at a recently published book by George Akerlof of the University of California, Berkeley, and Robert Shiller of Yale. They examine the role of what Keynes called ‘animal spirits’ and is the title of the book.
The motivation to make economic decisions (to buy, to sell, to invest, etc) may not be ‘rational’ in the sense of carefully weighing up marginal costs and marginal benefits. Rather it can be one of over-optimism in good times or over-pessimism in bad times. Just as individuals have ‘mood swings’, so there can be collective mood swings too. After all, confidence, or lack of it, is contagious. This motivation that drives people to action is what is meant by animal spirits.
But are animal spirits a blessing to be nurtured or a curse to be reined in? Should governments seek to constrain them?
An economic bestiary The Economist (26/3/09)
Good Government and Animal Spirits Wall Street Journal (23/4/09)
Irrational Exuberance New York Times (17/4/09)
Animal Spirits: A Q&A With George Akerlof Freakonomics: New York Times blog (30/4/09)
Questions
- Describe what is meant by ‘animal spirits’ and their effects on human behaviour.
- Why may animal spirits make economies less stable?
- How may animal spirits help to explain exchange rate overshooting?
- Discuss whether governments should seek to constrain animal spirits and make people more ‘rational’? Also consider what methods governments could/should use to do this?