As noted in the posting about the new high-speed rail link (High-speed rail link is on track), transport issues in the UK are always newsworthy topics and here we go again. This time, though, we look to the sky, where air traffic was halted for five days, from April 14th to 19th. Whilst some flights took off on the morning of the 20th April, further volcanic clouds were expected to ground flights at 7pm. Then, with new scientific evidence suggesting that it would be safe to ease restrictions, flights resumed on 21st April.
A big problem during this period was the uncertainty about how long the disruption might last. And even with the easing of restrictions, there was no certainty that dangerous levels of ash might not return if there was a new bout of activity from the volcano and if winds were unfavourable. One thing that was certain is that it would cost the British and other European economies at a time when they can hardly afford it.
The airline industry is already expected to lose £1.4bn this year and the volcanic cloud is estimated to have cost airlines approximately £130 million per day in lost revenues. The tourism industry has also suffered, although the losses are significantly lower. Countries, such as Kenya, that rely heavily on air freight to transport goods have suffered and businesses have also lost out, owing to cancelled meetings, delays to mail and stranded staff. Customers were angry that they might face extra charges to rebook flights and were having to pay for further accommodation. Whilst the direct effects on economic growth were thought to be only minimal, the long-term effects are uncertain. A drop of between 1% and 2% for European GDP was being suggested.
Airlines have been asking for compensation, in particular BA. After a tumultuous time with strikes, such a disruption could not have come at a worse time. BA has estimated costs of between £15m and £20m per day, due to lost passenger and freight revenues, as well as the need to support passengers trapped abroad.
However, the news was not all bad, especially if you are a rail operator or own a shipping company, as other means of transport have seen a huge rise in demand. Many stranded passengers have railed against the ‘profiteering’ of rail, coach and car-hire companies as prices soared. A case of supply and demand?
Iceland volcano cloud: the economic impact BBC News (19/4/10)
BA seeks compensation for volcano losses Telegraph (19/4/10)
Tourists and economy trapped by the volcano eruption in Iceland Balkans Business News (19/4/10)
Iceland volcano: the impact of the ash cloud on Britain Guardian, James Meikle (18/4/10)
Volcano’s ash cloud causes sporting chaos BBC News (20/4/10)
Travel companies lose millions of pounds with UK tourism next to suffer Independent, Alistair Dawber (20/4/10)
Volcanic ash costing airline £130m a day Channel 4 News (19/4/10)
BA demands government compensation as airlines watch reserves go up in smoke Independent (20/4/10)
British Airway seeks compensation for air chaos (including video) BBC News (19/4/10)
How long will chaos last – and what has it cost? Independent (19/4/10)
Europe counting economic cost of volcano CNBC, Patrick Allen (18/4/10)
How could Europe volcano cloud crisis play out? Reuters, Peter Apps (19/4/10)
Questions
- Who are the main losers from the volcanic ash cloud? Think about businesses and individuals.
- How can other means of transport, such as rail, be seen as a complement and a substitute to air travel?
- How can the economic impact of such disruption be estimated? Can you apply a cost–benefit analysis to this situation?
- Airlines are losing revenue and hence profits. Try illustrating this on a diagram.
- Should the airlines be compensated? If so, how would you propose compensating them? Are there any problems with your proposal?
- If one airline is the sole provider of flights between two locations, does it have a natural monopoly? Explain your answer.
- What is the impact on UK exports and imports? How might the exchange rate be affected?
- Does anyone gain from the volcanic ash cloud? Explain your answer.
So how are you feeling? Is now a good time to shop? Or, is it perhaps time to put money aside for that rainy day? Well, these types of questions capture the essence of what we might label as ‘sentiment’ or ‘confidence’. Polling organisations each month undertake surveys to try to measure sentiment amongst consumers and businesses. In doing so, they ask questions relating to, amongst other things, perceptions as to the current and future states of the economy, the labour market and finances. The responses to these individual questions are then combined to give an overall indicator which, it is then hoped, can be used to track sentiment over time. Two widely reported surveys of sentiment are the EU economic sentiment indicator and the Nationwide Building Society consumer confidence indicator.
The Nationwide’s indicator focuses solely on households. Its sentiment figure for March suggests that the gains in confidence amongst households enjoyed in the first couple of months of this year have been lost. In other words, the decline in March was significant enough not only to wipe out the effect of the typical ‘January bounce’ seen in most measures of sentiment but also the further rise that occurred in February. Nonetheless, consumer sentiment remains above the levels seen through much of 2008 and 2009 amidst the economic downturn.
The European Union’s economic sentiment index measures sentiment across both households and firms, although separate indicators are available for households and for different sectors of industry. Figures are also available for each individual EU country as well as across the EU. 2009 saw a record low score in the UK for the economic sentiment index – a series which goes back to 1985. But in March 2010 the sentiment index was, perhaps surprisingly, above its long-term average. Interestingly, this reflects further strengthening in sentiment amongst businesses, while sentiment amongst consumers fell slightly in March after recent gains.
So what should we read into these sentiment indices? Well, firstly, consider the patterns in the sentiment scores. The sentiment indices rose markedly in the second half of last year and into the beginning of this year, although sentiment amongst households may have now weakened while continuing to rise amongst firms. Now, secondly, consider these patterns alongside evidence which shows that economic sentiment indices tend to track the direction of economic growth. So last year, the rise in both the EU and Nationwide sentiment indices was indeed mirrored by improvements in the rate of economic growth with initially smaller contractions followed by positive growth in the final quarter.
One of the advantages of these sentiment measures is their timeliness. The first provisional estimate of growth in Q1 2010 is not available until the end of this month and, of course, is then subject to revision. But, if we reflect on the sentiment measures, the fact that sentiment appears no weaker across the first quarter of this year as a whole and, when measured across both households and firms, may actually be higher, indicates that the growth number for the first quarter of this year may not be too different from the 0.4% growth recorded in Q4 2009. Stay cheerful!
Articles
Consumer confidence has sharpest fall this recession The Times, Grainne Gilmore (15/4/10)
U.K. consumer confidence fell in March The Wall Street Journal, Paul Hannon (15/4/10)
Election drives down consumer confidence Sky News, Adam Arnold (15/4/10) )
Consumer morale suffers biggest fall since July 2008 Reuters UK (15/4/10)
Data
Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- What factors do you think might influence sentiment or confidence amongst households?
- What factors might affect sentiment or confidence amongst businesses?
- In what ways do you think sentiment and economic activity might be connected?
- Some commentators are arguing that the general election might be impacting on consumer confidence. Why do you think this might be the case?
- If you were going to assess the economic sentiment of consumers or businesses, what sorts of questions do you think you might ask?
In 2007, BT, Virgin, Top up TV and Setanta complained about Sky’s dominance within the pay-TV industry. Sky, who have an estimated 85% share of the market were investigated by Ofcom and a decision has now been made. Sky will be forced to reduce the price it charges to other Broadcasters for showing premium sport channels. The wholesale price of Sky Sports 1 and 2 (two of my favourite channels!!) will each be reduced by just over 23% to £10.63 a month each. The idea is that this decision will benefit consumers by increasing choice. However, Sky argues that it will be to the ‘detriment of consumers’ as incentives to invest and take risks will be blunted.
Furthermore, there are also concerns that it will mean less money going into sport. Rugby, football, tennis etc benefit from some very lucrative TV rights deals and if Sky is forced to reduce prices (it is appealing the decision), then the value of these deals is likely to decline, which may lead to less investment in grass-routes participation.
Whilst progress has been made within this area, critics argue that Ofcom have not gone far enough and should have extended their decision to more sport channels (not just Sky Sports 1 and 2) and even to the premium movie channels. This would again increase consumer choice and provide more people with access to premium TV. This would work alongside more innovation within the pay-TV industry, which has seen Sky being given permission to offer pay-TV services on freeview, which will open up pay-TV to millions more consumers. Whilst no action has been taken regarding Sky’s dominance of premium movie channels, this issue has been referred to the Competition Commission. Is Sky’s dominance over sporting events about to come to an end?
Articles
BSkyB ordered to cut sports channels rates Reuters, Kate Holton (31/3/10)
Sky forced to cut price of sports channels Telegraph (31/3/10)
Consumers are big winners in BSkyB ruling Financial Times, Ben Fenton and Andrew Parker (31/3/10)
BSkyB should shake hands and move on Financial Times (31/3/10)
Sky told to cut wholesale prices by regulator Ofcom BBC News (31/3/10)
Ofcom v Sky BBC News blogs: Peston’s Picks, Robert Peston (31/3/10)
BSkyB ‘restricting competition’ BBC Today Programme (31/3/10)
Ofcom orders Sky Sports price cut Guardian, Mark Sweney (31/3/10)
Sky ruling: Culture Secretary challenges Tories to back Ofcom Guardian, Mark Sweney (31/3/10)
Sky forced to cut the price for top sports events: Q and A Telegraph, Rupert Neate (31/3/10)
New ruling lets fans see Premier League on TV for just £15 a month London Evening Standard, Jonathan Prynn (31/3/10)
Regulator sets the fuse for shake-up of pay-TV Independent, Nick Clark (31/3/10)
Ofcom report
Delivering consumer benefits in Pay TV Ofcom Press Release (31/3/10)
Pay TV Statement Overview (31/3/10)
Pay TV Statement Summary (pdf file) (31/3/10)
Pay TV Statement Full document (pdf file) (31/3/10)
Questions
- To what extent will Ofcom’s decision to force Sky to reduce prices lead to an increase in consumer choice? Why is consumer choice good?
- Why has Sky been able to charge such high prices in the past, in particular for sports channels?
- According to the BBC News article, Sky shares were the biggest risers on the FTSE by midday on the day of the announcement. Why do you think this was the case?
- Would a similar decision on premium movie channels significantly increase consumer choice?
- Into which market structure does the Premium TV industry best fit? Consider the characteristics of the pay-TV industry. Into which market structure does it best fit?
- Why may Ofcom’s decision lead to less investment in sport at the grass roots?
An important measure of activity in the housing market is the number of mortgage approvals. Figures released by the Bank of England show that the number of mortgage approvals for house purchase, after seasonal adjustment, fell from 48,099 in January to 47,094 in February. This was the third consecutive monthly fall in the number of mortgage approvals and the lowest number since the 46,551 recorded back in May 2009.
If we take the latest three months as a whole (December 2009 to February 2010), there were 153,446 approvals worth £20.89 billion. Now, when compared with the same three months a year earlier we can see just how thin activity in the housing market was back then: the number of approvals is now 45.2% higher, while the value of approvals is 30.8% higher. But, it is short-term growth or, more accurately, the lack of it which is worrying commentators. It appears that much of the autumnal recovery in housing market activity is petering out. When we compare the figures for latest three months with those in the previous three months (September to November 2009) we find approval numbers down 10.7%, while the value of approvals is down 11.4%. In other words, it appears that housing demand is again weakening.
If we take a slightly longer-term perspective it becomes even clearer just how low, by historic standards, current activity levels are. Over the past ten years the average number of mortgage approvals for house purchase each month has been 94,443 – this is more than double the number reported for February. So, while the clocks may have gone forward, mortgage approvals are reluctant to move forward. But, more than this, it will be fascinating to watch in the months ahead the patterns in mortgage approvals and so monitor the demand for housing.
Articles
Mortgage lending falls to a nine-month low Times Online , Robert Lindsay (29/3/10)
Mortgage slowdown continues, Bank of England data shows BBC News (29/3/10)
Mortgage approvals fall to a nine-month low Financial Times, Daniel Pimlott (29/3/10)
BoE reports fall in February mortgage approvals Home Move, Kay Murchie (29/3/10)
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
- Between September 2008 and the end of 2009, the government introduced what became known as a ‘Stamp Duty holiday’. This meant that buyers became liable to pay Stamp Duty (a tax on house purchases) on property purchases worth over £175,000 rather than over £125,000. How would you have expected the ‘Stamp Duty holiday’ to have affected activity levels during this period? And what types of buyers would have most benefited?
- The government announced in the March 2010 Budget that it is removing Stamp Duty for first-time buyers on properties up to £250,000 for a 2-year period starting from 25th March 2010. What impact might this have on current activity levels? What about in the run-up to its removal in 2012?
- In the March 2010 Budget, the government announced that a 5% rate of Stamp Duty was being introduced on properties of over £1 million from tax year 2011-12. Currently, a top rate of 4% is applied to properties over £500,000. How would you expect this to affect activity levels now, the closer we get to next April and then after April 2011?
- What can we infer from the recent patterns in mortgage approvals about the strength of housing demand?
- Do patterns in the number of mortgage approvals have implications for house prices? Explain your answer.
Ofcom, the communications regulator, is keen to encourage the spread of super-fast broadband through investment in fibre-optic cabling. So far, super-fast broadband is available to around 46 per cent of the UK population. Both Virgin Media (formerly Telewest and NTL) and BT have invested in fibre optic cables, but Ofcom is keen to extend the use to rival companies.
It proposes two methods: the first is to give competitors access to BT’s cables; the second is to allow competitors to install their own cables using BT’s ducts and telegraph poles. In both cases BT would charge companies to use its infrastructure and would be free to set prices so as to ensure a ‘fair rate of return’.
The articles below consider this ‘solution’ and its likely success in developing competition in the super-fast broadband market through competition, or whether BT’s and Virgin’s market dominance will continue to the detriment of consumers. You can also find links below to the Ofcom report and summaries
Articles
BT welcomes Ofcom’s fibre access plans Reuters, Kate Holton (23/3/10)
Ofcom to encourage super-fast broadband Business Financial Newswire (23/3/10)
Ofcom tells BT to open its fibre network ShareCast (23/3/10)
Ofcom wants BT to open up infrastructure Financial Times, Philip Stafford (23/3/10)
Ofcom push to give broadband rivals access to BT tunnels Financial Times, Tim Bradshaw and Andrew Parker (23/3/10)
BT UK Pushes Ofcom to Open Virgin Medias Broadband Cable Ducts SamKnows, Phil Thompson (23/3/10)
BT welcomes Ofcom’s fibre access plans ISPreview, MarkJ (8/3/10)
Report and summaries
Summary: Enabling a super-fast broadband Britain Ofcom (23/3/10)
Review of the wholesale local access market: full document Ofcom (23/3/10)
Review of the wholesale local access market: summary Ofcom (23/3/10)
Questions
- What forms does competition take in the broadband market?
- What are the barriers to entry to the super-fast broadband market?
- Are fibre-optic networks a natural monopoly? Explain the significance of your answer for competition in the super-fast broadband market.
- Will Ofcom’s desire for BT to get a fair return on its wholesale pricing of access to its cabling, ducts and telegraph poles be sufficient to ensure effective competition and that profits are not excessive?
- Explain whether it would be in consumers’ interests for competitors to be given access to Virgin’s cables and ducts.