The snow the UK has seen over the past two winters created massive disruption, but that is only one reason for hoping for a milder winter to come. With the cold weather, the UK economy faced threats of gas shortages, as households turned on their heating. However, despite the freezing temperatures, many households were forced to turn off their heating regularly, due to the excessive bills they would face. This trend is expected to be even more prevalent if the 2011/12 winter is as cold, as fuel tariffs are predicted to rise. The Bank of England has said that gas and electricity prices could rise this year by 15% and 10% respectively. British Gas’s Parent company, Centrica said:
“In the UK the forward wholesale prices of gas and power for delivery in winter 2011/12 are currently around 25% higher than prices last winter, with end-user prices yet to reflect this higher wholesale market price environment.”
These predictions might see the average UK household paying an extra £148 over the next year. Although these are only estimates, we are still very likely to see many households being forced to turn off their heating. One thing which therefore is certain: a warmer winter would be much appreciated!
Articles
Switch energy tariff to help beat bill rises Guardian, Miles Brignall (14/5/11)
Quarter of households predicted to turn off heating BBC News, Brian Milligan (14/5/11)
Power bills set to soar by 50% in four years Scotsman (14/5/11)
Domestic fuel bills poised to rise by up to £200 Financial Times, Elaine Moore (13/5/11)
Data
Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change
Questions
- Which factors have contributed to rising energy prices? Illustrate these changes on a demand and supply diagram.
- To what extent do these higher prices contribute to rising inflation?
- What impact might these price rises have on (a) poverty and (b) real income distribution in the UK?
- Why are energy prices currently being investigated by Ofgem? What powers does the regulator have and what actions could be taken?
Apple and Google: two well known brands that appear everywhere, but which is the most valuable? For the past few years, the answer to that question has been Google, but with recent product developments, including the iPad, Apple has overtaken Google to become the world’s most valuable brand. This information comes from a recent study by Millward Brown, which found that Apple’s brand is now worth some £94 billion ($153.3bn), which is up about 84% on the previous year.
The study showed that of the top 10 brands, 6 were technology and telecoms companies, which is further evidence of the move towards the technology-based economy. Another interesting trend to come out of the report is the development of the emerging markets, with 6 more companies coming from emerging economies compared to last year. Indeed 12 of the top global companies came from China. Besides Google and Apple, who occupy the top 2 places, other companies in the top 10 include Coca-cola, McDonalds, IBM, Microsoft and General Electric. The following articles look at this overtaking move by Apple.
Apple brand value at $153 billion overtakes Google for top spot Bloomberg, Tim Culpan (9/5/11)
Jobs well done: Apple overtakes Google as the world’s most valuable brand Daily Mail (9/5/11)
Apple overtakes Google as top brand: Study Market Watch, Dan Gallagher (9/5/11)
Success of iPad helps Apple topple Google as No 1 brand Independent, Stephen Foley (10/5/11)
Apple overtakes Google as world’s ‘most valuable’ brand Telegraph (9/5/11)
Questions
- How reliable is this study and how is the value of a brand measured?
- What factors have contributed to Apple’s climb up the tables? Is it because of Apple’s good work or problems faced by Google?
- What are the main trends to come out of the study?
- What might explain the growing presence of fast food companies in the top 100?
- Why is there a growing presence of companies from emerging markets in the top 100?
- Should Google be concerned about this report and what could be done to reverse the situation next year?
Anyone investing in commodities over the past few weeks will have been in for a bumpy ride. During the first part of 2011, commodity prices have soared (see A perfect storm brewing?). This has fuelled inflation and has caused the Bank of England to revise upwards its forecast for inflation (see Busy doing nothing see also Prospects for Inflation).
But then in the first week of May, commodity prices plumetted. On the 5 May, oil prices fell by 7.9% – their largest daily amount since January 2009. Between 28 April and 6 May silver prices fell from $48.35 per ounce to just over $33.60 per ounce – a fall of over 30%. And it was the same with many other commodities – metals, minerals, agricultural raw materials and foodstuffs.
Many financial institutions, companies and individuals speculate in commodities, hoping to make money buy buying at a low price and selling at a high price. When successful, speculators can make large percentage gains in a short period of time. But they can also lose by getting their predictions wrong. In uncertain times, speculation can be destabilising, exaggerating price rises and falls as speculators ‘jump on the bandwagon’, seeing price changes as signifying a trend. In more stable times, speculation can even out price changes as speculators buy when prices are temporarily low and sell when they are temporarily high.
Times are uncertain at present. Confidence fluctuates over the strength of the world recovery. On days of good economic news, demand for commodities rises as people believe that a growing world economy will drive up the demand for commodities and hence their prices. On days of bad economic news, the price of commodities can fall. The point is that when undertainty is great, commodity prices can fluctuates wildly.
Articles
Commodities plunge: Blip or turning point? BBC News, Laurence Knight (6/5/11)
Commodity hedge fund loses $400m in oil slide Financial Times, Sam Jones (8/5/11)
Commodities: ‘epic rout’ or the new normal? BBC News blogs: Stephanomics, Stephanie Flanders (6/5/11)
Commodities Still a Bubble – But Prices May Continue to Rise Seeking Alpha, ChartProphet (9/5/11)
When a sell-off is good news The Economist, Buttonwood (6/5/11)
Gilt-edged argument The Economist, Buttonwood (28/4/11)
Commodities: What volatility means for your portfolio Reuters blogs: Prism Money (9/5/11)
Gold, silver rise again on debt, inflation concerns Reuters, Frank Tang (10/5/11)
Commodities After The Crash, No Way But Up The Market Oracle, Andrew McKillop (9/5/11)
Outlook 2011:Three Dominant Factors Will Impact Precious Metals in 2011 GoldSeek (9/5/11)
Energy bills set to rise sharply next winter, Centrica warn Guardian, Graeme Wearden (9/5/11)
Dollar triggered commodities ‘flash crash’, not Bin Laden The Telegraph, Garry White, and Rowena Mason (9/5/11)
The outlook for commodity prices Live Mint@The Wall Steet Journal, Manas Chakravarty (11/5/11)
Three ways to play the next commodities bubble Market Watch, Keith Fitz-Gerald (11/5/11)
Data
Commodity Prices Index Mundi
Commodities Financial Times
Commodities BBC Market Data
Questions
- Why did commodity prices fall so dramatically in early May, only to rise again rapidly afterwards?
- Why do commodity prices fluctuate more than house prices?
- What is the relevance of price elasticity of demand and supply in explaining the volatility of commodity prices?
- Under what circumstances is speculation likely to be (a) stabilising; (b) destabilising?
- To what extent are rising commodity prices (a) the cause of and (b) the effect of world inflation?
- If commodity prices go on rising every year, will inflation go on rising? Explain.
The latest mortgage approval numbers from the Bank of England are another demonstration of the fragility of the UK housing market. March 2011 saw 47,577 mortgages approved for house purchase. This is roughly in line with levels seen since the turn of the year and, more generally, over the past year. In other words, activity in the housing market might be described as ‘flat-lining’.
Over the past year, the number of monthly mortgage approvals for house purchase has averaged 47,355. This number is almost half the 10-year monthly average of 89,258. There is little momentum in either direction in the number of mortgage approvals. Given the negative influences on both the supply of credit and on households’ demand for credit, it would be a major surprise if the monthly average for mortgage approvals was to rise much above the ‘50k-mark’ any time soon.
But, why the subdued mortgage data? Well, on the supply-side, mortgage lenders are maintaining tight lending criteria. On the demand side, households remain understandably cautious. Unless circumstances dictate a need to move, households are unlikely to be rushing in any great numbers to their local estate agent.
In conclusion, it appears that the current weak activity levels have become the new norm for the UK housing market post-credit crunch. Furthermore, the current flat-lining is likely to persist.
Articles
Mortgage approvals highest in five months Financial Times, Norma Cohen (4/5/11)
UK March mortgage approvals slightly lower than forecast Reuters (4/5/11)
Mortgage lending plummets by 60% Belfast Telegraph (5/5/11)
UK mortgage approvals little changed in March, BOE says Bloomberg, Jennifer Ryan (4/5/11)
Rise in mortgage approvals does not indicate recovery, say economists Guardian, Jill Insley (27/4/11) )
Mortgage lending from UK banks still subdued BBC News (27/4/11)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- Why do you think housing market activity might be ‘flat-lining’?
- Compile a list those variables that you think affect the demand for mortgages. Which of these do you think are particularly important at the moment?
- Compile a list of those variables that you think affect the supply of mortgages by lenders. Which of these do you think are particularly important at the moment?
- If you were advising an estate agent about future activity levels in the housing market, what would you be telling them?
- What do recent mortgage approvals numbers imply for the strength of housing demand?
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?