A key determinant of the length of any phase of the business cycle is consumer confidence. If people have gloomy expectations and confidence of a recovery is low, then a recession that should have lasted 6 months ends up lasting for years. Companies don’t see an end to the recession and keep holding off on investment plans and the public don’t want to go out and start spending, because there’s no guarantee that the economy is on its way back up. The more you worry about your finances, the less likely you are to go out and start spending, even though that could be the stimulus that a shrinking economy needs.
According to the British Retail Consortium, consumer confidence in the UK is on its way back up and currently stands at an 18-month high – which doesn’t actually say much given the past 18-months!! Despite this, job worries still remain and this has been highlighted significantly in the past week, when Britain’s youngest person ever was made redundant: a 13-year old paper boy. Whilst consumer confidence is argued to be returning to the UK, consumer confidence has been going in the opposite direction in the USA, with further fears of job losses. US confidence had been improving but unexpectedly fell in October. Is that what the UK has to look forward to?
So, why is consumer confidence so important? How does it affect the length of recovery and what is expected to happen over the next few months? Read the articles below to find out more.
US consumer confidence takes hit BBC News (27/10/09)
Consumer confidence hits 18-month high The Independent, David Prosser (1/11/09)
Consumer confidence on the rise BBC News (2/11/09)
Confidence boost hints that worst of recession now over The Scotsman, Peter Ranscombe (2/11/09)
US Michigan Sentiment fell to 70.6 this month Bloomberg, Courtney Schlisserman (30/10/09)
Euro-zone Consumer confidence improves The Wall Street Journal, Ilona Billington and Roman Kessler (30/10/09)
Retailers set for a merry Christmas DIYWeek (2/11/09)
Job fears still remain despite biggest increase in consumer confidence in 18 months, says British Retail Consortium Liverpool Echo, Neil Hodgson (2/11/09)
Business and consumer surveys in each of the EU countries and in the EU as a whole can be found at:
Business and Consumer Surveys European Commission
Questions
- In what ways does consumer confidence affect economic growth?
- Are there likely to be any adverse consequences of consumer confidence returning to the market?
- What are some of the reasons for the unexpected fall in consumer confidence in the USA? Do you think a similar thing is likely to happen in the UK?
- Expectations are crucial in economics. What is the difference between adaptive and rational expectations? How do they affect adjustment to the short- and long-run equilibrium?
- Can anything be done to improve confidence or is it simply a case of leaving things as they are … and waiting?
In 2008, as the economy was on the verge of recession, the UK Prime Minister said that we would ‘spend our way out of it’ despite rising levels of public-sector debt. In recent weeks, however, the focus has been much more on tackling the debt, which has now increased to over £800 billion (58% of GDP) – it was £500 billion at the end of 2006 (37% of GDP).
Although the current level of general government debt in the UK as a proportion of GDP is still one of the lowest of the G8 countries, it is rising the fastest. In other words, the general government deficit as a proportion of GDP is the highest (see Table A8 in IMF World Economic Outlook, Statistical Appendix A). The IMF’s forecasts suggest that, by 2014, government debt could be as much as 92% of GDP – the highest since World War II – and lower only than Japan (144%) and Italy (126%) of the G8 countries (although the USA, Germany and France are forecast by then each to have government debt over 80% of GDP).
Gordon Brown has said that public spending will have to be cut back once the recession is over, mainly by cutting out waste in the public sector. Conservatives too are looking to make substantial cuts in public expenditure if they come to office next year and have talked of an era of austerity.
But will such cuts be too little too late? Has government spending on saving the banks and trying to boost the economy by cutting VAT actually damaged our recovery prospects and are the British people going to be the ones to suffer? Or should the fiscal stimulus be retained for some time yet to prevent a lurch back into recession? The following articles look at the public debt situation, which poses some interesting policy questions, especially with the Party Conferences!
£805,000,000,000: UK’s monstrous debt The Mirror (19/9/09)
Osborne gambles with cut plans BBC News (6/10/09)
Governments will have legal obligation to reduce UK’s debt Telegraph (28/9/09)
We’ll spend our way out of recession Independent (20/10/08)
Public sector borrowing soaring BBC News (18/9/09)
Govt spending cuts ‘could help pound’ Just the Flight (21/9/09)
Deficit danger worries Cameron BBC News (4/10/09)
Public debt hits £800 billion – the highest on record Times Online (19/9/09)
Pay freeze ‘to protect UK services’ The Mirror (6/10/09)
This recession demands that we employ logic and spend our way out of it Telegraph (11/1/09)
Cuts and pay freezes ‘just the beginning’, Tories admit Telegraph (7/10/09)
Robert Stheeman: So what’s worrying the banker in charge of our £1trn debt? Independent (8/10/09)
Has Darling or Osborne the best plan for cutting the deficit? Observer (11/10/09)
This public-spending squeeze will be much tighter than people expect Independent on Sunday (11/10/09)
Tax and spending squeeze will keep Bank rate low Sunday Times (11/10/09)
UK rates ‘to stay low for years’ BBC News (11/10/09)
Questions
- According to economic theory, how does increasing government spending or reducing taxation aim to boost the economy?
- What do we mean by a budget deficit or budget surplus? How does a budget deficit differ from national debt?
- What is the ‘golden rule’ for fiscal policy? Discuss the advantages and disadvantages of such a rule-based approach to fiscal policy.
- What are the advantages and disadvantages of a policy of ‘spending our way out of a recession?’
- With spending cuts looming, many will be affected. How will cuts in government spending affect the UK’s ability to recover from the recession? Will you be affected and, if so, how?
- Last year £85.5 billion was spent by the government on bailing out banks. Do you think this was money well spent, or is it the main cause of the current spending cuts that could see the recession worsen?
The housing market has been very volatile over the past year or so. House prices crashed, but then appeared to stabilise. Since then, however, different sources have given very different opinions and predictions about future movements. According to Nationwide Building Society, house prices have increased by an average of £53 a day during September, but others suggest that they remain stable and that they may fall again in 2010.
Not only are house prices important to those buying and selling, but the state of the housing market is also crucial for the recovery of the economy. For example, the construction industry has suffered over the past year and, as of the 2nd October 2009, unemployment in this sector stood at 17.1%. As more and more workers lose their jobs, their disposable income falls and hence demand in the economy is affected. With the possibility of an election debate between the party leaders, many will be waiting to see what their strategies are to revitalise a struggling economy.
House prices rise an average of £53 a day’ Daily Record, Clinton Manning (3/10/09)
Mortgage approvals dip in August BBC News (29/9/09)
Construction contracts at slowest pace for seven months Construction News, Nick Whitten (5/5/09)
House sales ‘stalled’ in August BBC News (22/9/09)
Housing market needs ‘feel-good’ factor to recover City Wire, Nicholas Paler (26/6/09)
Double whammy for first-timers as prices stabilise and loans dry up Scotsman, Jeff Salway (3/10/09)
Head-to-head view on house prices BBC News, Kevin Peachey (27/8/09)
UK construction industry still contracting, says Cips Guardian, Kathryn Hopkins (2/10/09)
House prices see ‘slight decline’ BBC News (28/9/09)
House prices ‘back to 2008 level’ BBC News (2/10/09)
Construction unemployment rises to 17.1% HomeTown Sources (2/10/09)
House prices up – but so are insolvencies Management Today (2/10/09)
Financial shadow cast by city apartments BBC News (8/10/09)
For house price data see:
Nationwide House Prices
Halifax House Price Index from the Lloyds Banking Group
Housing Market and House Prices from the Department of Communites and Local Government
Questions
- Why are recent movements in the housing market going to be a problem for first-time buyers?
- The ‘Stamp duty holiday’ will soon come to an end. What do you think will be the impact on the demand for and supply of houses and hence equilibrium prices over the next 6 months?
- One of the reasons why house prices have stabilised is a lack of supply. How does this affect equilibrium prices?
- Why is the economy so affected by changes in house prices? Think about what happens when construction workers lose their jobs and how this affects aggregate demand. Then consider how the macroeconomy will be affected.
- When demand for houses increases, why do prices increase so rapidly? Consider elasticity.
According to labour market data released by Office for National Statistics on 16 September, unemployment has risen to a 14-year high. The Labour Force Survey figures show a rise in unemployment from 2.26 million (7.2%) in the three months to April 2009 to 2.47 million (7.9%) in the three months to July 2009. The data also show a 12,000 rise in the claimant count between July and August.
However, there are signs that the UK economy is growing again. This was underlined by evidence given to the House of Commons Treasury Select Committee on 15 September by the Governor of the Bank of England. So does this mean that businesses will take on more labour and that unemployment will fall?
The problem is that unemployment is a lagging indicator of economic activity. The reason is that many firms are reluctant to shed labour in recession and simply take up the slack as the economy recovers, without taking on extra labour. Even if they are short of labour, they may prefer to offer overtime to existing staff rather than employing new staff for fear that the upturn may be short-lived.
So what is likely to happen to unemployment over the coming months? Will it slowly fall or will it go on rising and, if so, for how long? Read the articles and then attempt the questions.
UK unemployment at 14 year high (video) BBC News (16/9/09)
UK jobless rate hits 14-year high Telegraph (17/9/09)
Unemployment crisis creates divide between private and public sector Telegraph (16/9/09)
Record one in five young people out of work (including video) Times Online (16/9/09)
Unemployment hits highest since 1995 Guardian (16/9/09)
Rising UK unemployment (charts of UK unemployment from 1984 to the present day) Guardian (16/9/09)
Unemployment at highest level since 1995 (including video) Channel 4 News (16/9/09)
Questions
- What is meant by the terms ‘leading indicators’ and ‘lagging indicators’? Give some examples of each.
- What determines the length of lag between a rise in output and (a) a rise in employment and (b) a fall in unemployment?
- Is unemployment a good measure of the excess supply of labour in the labour market? What other evidence might you need in order to assess the degree of slack in individual labour markets?
- If labour becomes more flexible in terms of the hours that people are prepared to work, will the unemployment lag increase or decrease? Explain.
- Under what circumstances does obtaining a university degree improve your job prospects?
- To what extent would reforming the benefits system, so as to reduce the poverty trap and give people a greater incentive to work, reduce unemployment (a) during a recession and (b) over the long term? What type of unemployment would be affected?
Economic growth is normally seen as the most important long-term macroeconomic objective. Without economic growth, so it is argued, people will be unable to achieve rising living standards. But, according to Nicholas Stern, Professor of Economics and Government at the London School of Economics, former head of the Government Economic Service, former World Bank chief economist and author of the 2006 Stern Review on the Economics of Climate Change, countries will need to reconsider making growth the goal of their societies.
Speaking to students at the People’s University of Beijing, Lord Stern warned that unless substantial cuts were made in carbon emissions, the effects of global warming would have devastating effects on people’s lives. As the Stern report stated, “Climate change will affect the basic elements of life for people around the world – access to water, food production, health, and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding as the world warms.” The implications are that countries must making cutting carbon emissions a priority and must reconsider their growth strategies. In his speech he said that “Beijing should shift the economy away from heavy industry, manufacturing for exports and other high-emission activities. Instead, it should focus more on domestic consumption, service industries and low-carbon technology.”
So should countries rethink their economic objectives? Is economic growth either a necessary or sufficient condition for an increase in human welfare? Read the articles and then consider the questions below.
World must help China shift to clean growth-Stern Reuters (11/9/09)
Stern Truths: Some Parts of China Have Western-Style Emissions Wall Street Journal (11/9/09)
Stern: Rich nations will have to forget about growth to stop climate change Guardian (11/9/09)
Stern words in Beijing Hot Topic (New Zealand) (13/9/09)
Questions
- Are the objectives of economic growth and tackling gobal warming necessarily incompatible?
- What would a low carbon growth strategy look like?
- What would you include in the opportunity costs of maintaining a high growth strategy compared with switching to a lower carbon, lower growth one?
- Consider whether economic growth is (a) a necessary condition; (b) a sufficient condition for a growth in the wellbeing of the human race.