What lies ahead for economic growth in 2013 and beyond? And what policies should governments adopt to aid recovery? These are questions examined in four very different articles from The Guardian.
The first is by Nouriel Roubini, Professor of Economics at New York University’s Stern School of Business. He was one of the few economists to predict the collapse of the housing market in the USA in 2007 and the credit crunch and global recession that followed. He argues that continuing attempts by banks, governments and individuals to reduce debt and leverage will mean that the advanced economies will struggle to achieve an average rate of economic growth of 1%. He also identifies a number of other risks to the global economy.
In contrast to Roubini, who predicts that ‘stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro and an ongoing credit crunch – remain Europe’s norm’, Christine Lagarde, head of the IMF and former French Finance Minister, predicts that the eurozone will return to growth. ‘It’s clearly the case’, she says, ‘that investors are returning to the eurozone, and resuming confidence in that market.’ Her views are echoed by world leaders meeting at the World Economic Forum in Davos, Switzerland, who are generally optimistic about prospects for economic recovery in the eurozone.
The third article, by Aditya Chakrabortty, economics leader writer for The Guardian, looks at the policies advocated at the end of World War II by the Polish economist, Michael Kalecki and argues that such policies are relevant today. Rather than responding to high deficits and debt by adopting tough fiscal austerity measures, governments should adopt expansionary fiscal policy, targeted at expanding infrastructure and increasing capacity in the economy. That would have an expansionary effect on both aggregate demand and aggregate supply. Sticking with austerity will result in continuing recession and the ‘the transfer of wealth and power into ever fewer hands.’
But while in the UK and the eurozone austerity policies are taking hold, the new government in Japan is adopting a sharply expansionary mix of fiscal and monetary policies – much as Kalecki would have advocated. The Bank of Japan will engage in large-scale quantitative easing, which will become an open-ended commitment in 2014, and is raising its inflation target from 1% to 2%. Meanwhile the Japanese government has decided to raise government spending on infrastructure and other government projects.
So – a range of analyses and policies for you to think about!
Risks lie ahead for the global economy The Guardian, Nouriel Roubini (21/1/13)
Eurozone showing signs of recovery, says IMF chief The Guardian, Graeme Wearden (14/1/13)
Austerity? Call it class war – and heed this 1944 warning from a Polish economist The Guardian, Aditya Chakrabortty (14/1/13)
Bank of Japan bows to pressure with ‘epoch-making’ financial stimulus The Guardian, Phillip Inman (22/1/13)
Questions
- What are the dangers facing the global economy in 2013?
- Make out a case for sticking with fiscal austerity measures.
- Make out a case for adopting expansionary fiscal policies alongside even more expansionary monetary policies.
- Is is possible for banks to increase their capital-asset and liquidity ratios, while at the same time increasing lending to business and individuals? Explain.
- What are the implications of attempts to reduce public-sector deficits and debt on the distribution of income? Would it be possible to devise austerity policies that did not have the effect you have identified?
- What will be the effect of the Japanese policies on the exchange rate of the yen with other currencies? Will this be beneficial for the Japanese economy?
Market trading has existed for centuries and in many respects it hasn’t changed very much. One thing that has developed is the means of exchange. Goods used to be traded for other goods – for example 1 pig for 4 chickens! But then money was developed as a means of exchange and then came cheques and plastic.
However, for many market traders, accepting credit and debit cards is relatively costly. It involves paying a monthly contract, which for many traders is simply not worthwhile, based on the quantity and value of the transactions. But, for many customers using debit or credit cards is the preferred method of payment and the fact that some traders only accept cash can be a deterrent to them making purchases and this therefore reduces the sales of the market traders.
But, with advances in technology a new way of paying has emerged. Small card readers can now be plugged into iphones, ipads, other tablets and smartphones. By putting a customer’s card into this device customers can then pay by card and either sign for their purchase or use the phone to enter their security details. There are plan for these companies to offer chip and pin technology to further ease payment by card on market stalls. The traders pay a small commission per transaction, but aside from that, the initial start-up cost is minimal and it is likely to encourage more customers to use markets. Jim Stewart, the Director of a firm that has begun using this technology said:
I think it’s definitely going to take off, the world is going that way … The money has always appeared in my bank account, no transactions have been declined, my accountant is happy, it’s all been good.
Some customers have raised concerns about the security of these transactions, as they have to put their cards into someone else’s ipad. However, traders have said that there are no risks and that customers can be sent a receipt for their purchase. The following few articles look at this latest (and other) technological developments.
Smartphone card payment system seeks small firms BBC News, Rob Howard (19/1/13)
POS Trends: What’s new for 2013 Resource News (17/1/13)
Payments by text message service to launch in UK in Spring 2014 BBC News (15/1/13)
Questions
- What are fixed cost and why does having a traditional card payment machine represent a fixed cost for a firm?
- How might this new technology affect a firm’s sales and profits?
- Will there be an increase in the firm’s variable costs from adopting this technology?
- Using a cost and revenue diagram, put your answers to questions 1 – 3 into practice and show how it will shift them and thus how the equilibrium may change for a market trader.
- What are the properties of money that allow it to be a good medium of exchange?
- How will this increased use of debit and credit cards affect the demand for money? Use a diagram to illustrate your answer.
The exchange rate for sterling is determined in much the same way as the price of goods – by the interaction of demand and supply.
When factors change that cause residents abroad to want to hold more or fewer pounds, the demand curve for sterling will shift. If, instead, factors change that cause UK residents to want to buy more or less foreign currency, then the supply curve of sterling will shift. It is these two curves that determine the equilibrium exchange rate of sterling.
There are concerns at the moment that sterling is about to reach a peak, with expectations that the pound will weaken throughout 2013. But is a weakening exchange rate good or bad for the UK?
With lower exchange rates, exports become relatively more competitive. This should lead to an increase in the demand for UK products from abroad. As exports are a component of aggregate demand, any increase in exports will lead to the AD curve shifting to the right and thus help to stimulate a growth in national output. Indeed, throughout the financial crisis, the value of the pound did fall (see chart above: click here for a PowerPoint) and this led to the total value of UK exports increasing significantly. However, the volume of UK exports actually fell. This suggests that whilst UK exporters gained in terms of profitability, they have not seen much of an increase in their overall sales and hence their market share.
Therefore, while UK exporters may gain from a low exchange rate, what does it mean for UK consumers? If a low exchange rate cuts the prices of UK goods abroad, it will do the opposite for the prices of imported goods in the UK. Many goods that UK consumers buy are from abroad and, with a weak pound, foreign prices become relatively higher. This means that the living standards of UK consumers will be adversely affected by a weak pound, as any imported goods buy will now cost more.
It’s not just the UK that is facing questions over its exchange rate. Jean-Claude Junker described the euro as being ‘dangerously high’ and suggested that the strength or over-valuation of the exchange rate was holding the eurozone back from economic recovery. So far the ECB hasn’t done anything to steer its currency, despite many other countries, including Japan and Norway having already taken action to bring their currencies down. Mario Draghi, the ECB’s president, however, said that ‘both the real and the effective exchange rate of the euro are at their long-term average’ and thus the current value of the euro is not a major cause for concern.
So, whatever your view about intervening in the market to steer your currency, there will be winners and losers. Now that countries are so interdependent, any changes in the exchange rate will have huge implications for countries across the world. Perhaps this is why forecasting currency fluctuations can be so challenging. The following articles consider changes in the exchange rate and the impact this might have.
A pounding for sterling in 2013? BBC News, Stephanomics, Stephanie Flanders (17/1/13)
UK drawn into global currency wars as slump deepens Telegraph, Ambrose Evans-Pritchard (16/1/13)
Foreign currency exchange rate predictions for GBP EUR, Forecasts for USD and NZD Currency News, Tim Boyer (15/1/13)
Euro still looking for inspiration, Yen firm Reuters (16/1/13)
Daily summary on USD, EUR, JPY, GBP, AUD, CAD and NZD International Business Times, Roger Baettig (16/1/13)
UK inflation bonds surge on Index as pound falls versus euro Bloomberg, Business News, Lucy Meakin (10/1/13)
Questions
- Which factors will cause an increase in the demand for sterling? Which factors will cause a fall in the supply of sterling?
- In the article by Stephanie Flanders from the BBC, loose monetary policy is mentioned as something which is likely to continue. What does this mean and how will this affect the exchange rate?
- Explain the interest- and exchange-rate transmission mechanisms, using diagrams to help your answer.
- If sterling continues to weaken, how might this affect economic growth in the UK? Will there be any multiplier effect?
- What is the difference between the volume and value of exports? How does this relate to profit margins?
- Why are there suggestions that the euro is over-valued? Should European Finance Ministers be concerned?
- Should governments or central banks intervene in foreign exchange markets?
- If all countries seek to weaken their currencies in order to make their exports more competitive, why is this a zero-sum game?
Consumer spending is crucial to an economy. In the UK total consumer spending is equivalent to almost two-thirds of the value of country’s GDP. Understanding its determinants is therefore crucial in attempting to forecast the short-term path of the economy. In other words, the growth of the economy in 2013 will depend on our inclination to spend.
While the amount of disposable income (post-tax income) will be one factor influencing our spending, other factors matter too. Amongst these ‘other factors’ is the stock of wealth of households. Here we look at the latest available figures on the net worth of the UK household sector. Will our stock of wealth help to underpin spending or will it act to constrain spending?
The household sector’s net worth is the sum of its net financial wealth and non-financial (physical) wealth. Net financial wealth is the balance of financial assets over financial liabilities. Financial assets include funds in savings accounts, shares and pension funds. Financial liabilities include debts secured against property, largely residential mortgages, and unsecured debts, such as overdrafts and unpaid balances on credit cards. Non-financial wealth largely includes the value of the sector’s holdings of property and buildings.
The following table summarises the net worth of the UK household sector at the end of 2011 and 2010. The figures are taken from the Office for National Statistics release, National Balance Sheet. They show that at the end of 2011, the household sector had a net worth of £7.04 trillion. This was up just 0.1 per cent up 2010. At the end of 2011, the stock of net worth of the household sector was 7 times the amount of disposable income earned by the sector in 2011.
The Household Sector Balance Sheet
| Component |
2010 (£bn) |
2011 (£bn) |
| Financial assets |
4,302.8 |
4,283.7 |
| Financial liabilities |
1,540.7 |
1,541.3 |
| Net financial wealth |
2,762.1 |
2,742.4 |
| Non-financial (physical) wealth |
4,272.2 |
4,302.1 |
| Net worth |
7,034.3 |
7,044.5 |
