International trade brings various benefits to an economy. One is that it can stimulate economic growth – something the UK government would very much like to achieve in current circumstances.
As one of the components of aggregate demand, net exports is a key variable that can create jobs and growth in an economy, and it is this variable that is being directly targeted in a trade agreement between the UK and South Korea. Growth in developing countries is far outstripping that in the West and through this trade deal, the UK is hoping to benefit from some of this growth – to the tune of about £500m per year.
South Korea already trades a huge amount with the UK – we are its second largest European trade partner after Germany. The Free Trade Area that has been agreed will put British firms in a stronger position when negotiating contracts, especially in relation to sporting events, such as the Asian Games in 2014, the World Student Games in 2015 and the Pyeongchang Winter Olympics in 2018. Nick Clegg, who announced the agreement said:
‘The best of British design, innovation and services will have even greater opportunity to show their strength in South Korea. UK and Korean companies will be able to form alliances on multi-billion pound projects across the world.’
Some of the benefits of this agreement may be seen relatively soon, as the South Korea National Pension Service has announced plans to set up a base in London, which would create a much need injection of investment into the stagnant economy. This latest trade deal is very much a part of the Coalition’s strategy of creating stronger ties and trade links to the fast growing emerging markets. The size of these potential benefits and the speed with which they emerge can only be estimated, but if they do materialise they will undoubtedly have positive effects on economic growth. The following articles consider these ‘economic opportunities in the UK’.
Nick Clegg hails Korean trade deal as £2bn opportunity for Britain Telegraph, Anna White (25/3/12)
South Korea trade deal ‘may bring £500m to UK economy’ BBC News (26/3/12)
South Korea’s $320bn pension fund to set up London base Guardian (26/3/12)
S Korea pension fund to set up London office Financial Times, Elizabeth Rigby (25/3/12)
Nick Clegg boosts British business in South Korea The Economic Voice, Jeff Taylor (26/3/12)
Questions
- What are the benefits and costs of trade? To whom do they accrue?
- The articles talk about a free trade area. What are the characteristics of such an agreement?
- What other types of trade agreement are there? In each case, find examples of that type of agreement.
- Why is trade seen as an engine of growth? Think about aggregate demand and how this can explain a boost to national income.
- If the South Korea National Pension Service does create a base in London, explain how the multiplier effect might create additional benefits to the UK.
With the financial crisis came accusations towards the banking sector that they had taken on too many bad risks. Banks were lending money on more and more risky ventures and this in part led to the credit crunch. Since then, bank lending has fallen and banks have been less and less willing to take on risky investments.
Small businesses tend to fall (rightly or wrongly) into the category of high risk and it is this sector in particular that is finding itself struggling to make much needed investments. All businesses require loans for investments and improvements and if the banking sector is unable or unwilling to lend then these improvements cannot take place.
Quantitative easing has been a key response across the world to the credit crisis to encourage banks to begin lending to each other and to customers. A new government backed scheme worth £20bn aims to increase bank lending to small and medium sized enterprises (SMEs). By guaranteeing £20bn of the participating banks’ own borrowing, lenders will be able to borrow more cheaply than normal. As the banks (so far including Barclays, Santander, RBS and Lloyds Banking Group) can borrow at a cheaper rate, they will therefore be able to pass this on to the businesses they lend to. Under this National Loan Guarantee Scheme (NLGS), businesses will be able to borrow at interests rates that are 1 percentage point lower than those outside the scheme. £5bn will initially be made available with subsequent installments each of £5bn to come later.
With the Budget looming, the Chancellor is keen to show that the government is delivering on its promise to give smaller businesses access to finance at lower interest rates. If this initiative does indeed stimulate higher lending, it may be a much needed boost for the economy’s faltering economic growth. Criticisms have been leveled at the scheme, saying that although it is a step in the right direction, it can by no means be assumed that it will be sufficient to solve all the problems. In particular, the NLGS is unlikely to provide much help for those small businesses that can’t get finance in the first place, irrespective of the cost of the borrowing. Furthermore some banks, notably HSBC, have chosen not to participate in the scheme, due to it not being commercially viable. The overall effect of this scheme will take some time be seen, but if it is effective, it could give the economy and the small business sector a much needed boost.
Banks to join credit-easing scheme Associated Press (20/3/12)
Credit easing: small businesses to get £20bn of guaranteed cheap loans Telegraph, Harry Wilson (20/3/12)
Bank lending scheme targets small businesses BBC News (20/3/12)
Move over Merlin, credit easing has arrived Independent, Ben Chu (20/3/12)
Credit easing injects £20bn into small firms Sky News (20/3/12)
UK launches small firm loan scheme, critics want more Reuters, Fiona Shaikh (20/3/12)
Osborne’s big plan: £20bn for small businesses Independent, Andrew Grice and Ben Chu (20/3/12)
George Osborne launches new scheme to boost lending to businesses Guardian, Larry Elliott (20/3/12)
Questions
- What is credit easing? Has the government’s previous credit easing had the intended effect?
- Why are small and medium sized enterprises normally seen as risky investments?
- Briefly explain the thinking behind this National Loan Guarantee Scheme.
- What are the criticisms currently levelled at this scheme? To what extent are they justified?
- Why has HSBC said that the scheme is not commercially viable for the bank?
- Explain why this scheme could provide a stimulus to the UK economy.
The rate of inflation in the UK is measured using the Consumer Prices Index (CPI). This is made up of a basket of goods and the ONS updates this ‘basket’ each year to ensure it is representative of what the average UK household buys. The basket contains 700 items, with 180,000 individual prices collected each month.
In recent years, items such as lip gloss have been added to the basket of goods and in the latest adjustment, the ONS has added tablet computers, amongst other things. This is a market that has seen enormous growth. It has been added to the basket as a means of giving a more accurate representation of the price changes faced by the average consumer. The ONS has made it clear that items are not added simply because they are new or removed simply because spending on them has fallen.
‘In each of these cases, the item has not been added because spending has increased or because the product is new on the market … It is purely as part of the rebalancing of the basket to improve its representation of overall price change.’
It is essential that these changes are made each year, as consumer buying habits do fluctuate considerably. One area in particular has been consumer responses to changes in technology. For example, developing and printing colour film has been removed as, with the development of digital cameras, this is no longer reflective of what a representative household spends its money on. Further to this, some items that have previously been used in calculating the RPI have now been added to the CPI, again to give a clearer picture of household spending in the UK. The following articles consider what’s in and what’s out.
Teenage fiction and iPads now in official UK shopping basket Guardian, Julia Kollewe (13/3/12)
Tablet computers added to UK inflation basket BBC News (13/3/12)
New items used to calculate inflation BBC News, Emma Simpson (23/3/12)
Tablet Computers Enter ‘Inflation Basket’ Sky News, Darren Morgan (ONS) (13/3/12)
Inflation basket of goods 2012: full list of what’s out and what’s in Guardian, Simon Rogers (13/3/12)
Tablet computers added to inflation basket of goods Telegraph (13/3/12)
How has the UK’s ‘inflation’ basket has changed? Metro, Ross McGuinness (27/3/12)
iPad and Galaxy added to inflation index Financial Times, Norma Cohen (13/3/12)
Questions
- What is the difference between the CPI and RPI? Which is usually higher? Explain your answer.
- How is the CPI calculated and hence how is inflation measured?
- What impact has technological progress had on the basket of goods that the representative household purchases? Do you think that technological progress make it more or less important for the basket of goods to be reviewed annually?
- Do you think products such as the iPad should be included in the CPI? Are they truly representative?
- In the second Guardian article, you can access a list of the products that are ‘in and out’. Is there anything on there that you think should be in or that should be out? Be sure to justify your answer!
Unemployment figures for the UK have been going in the wrong direction for some time. With consumer expenditure, investment and hence aggregate demand remaining low, job creation has been severely lacking. However, 2 pieces of news have emerged in the last couple of days, which as David Cameron said was ‘a massive confidence boost for the UK economy’. Tesco and Nissan have both announced the creation of thousands of new jobs.
Over the next 2 years, Tesco has said that it will create 20,000 new jobs through store improvement and the opening of new stores. Whilst it is not clear how many will be full-time, part-time or apprenticeship placements, it still represents net job creation. This huge investment represents what many are calling a ‘fight-back’ from Tesco, who issued its first profit warning in 20 years, following weak Christmas trading. That announcement slashed their shares by over £5bn and is perhaps partly responsible for this planned investment.
Despite this good news, criticisms have emerged that the major supermarkets are simply inflating the job creation figures and that the actual number of new jobs will be significantly less than the 20,000 suggested. This follows allegations made towards Asda, who claimed to have created 30,000 jobs. However, evidence from records at Companies House suggests that new job creation by the company was closer to 7,000. Whatever the true figure, it still means new jobs, which can only help UK unemployment data.
In addition to this, Nissan has also announced that it will be creating 2,000 new jobs, as it begins production on a new model at its Sunderland factory. The jobs will be created as part of a £125m investment, including a £9.3m grant from the government. This is especially good news, given the area where many of these jobs will emerge. The North East is a region that has been hit particularly hard by the recession and the grant from the government has come from its regional growth fund. Nissan has said that even in hard economic times, it is possible to sell cars, as long as they are competitively priced. Neither of the plans discussed above will create jobs immediately, but perhaps the key is that it creates confidence, which is a rarity in the UK with the current economic situation. The following articles consider these job creation plans and their wider implications.
Tesco plans to create 20,000 UK jobs over 2 years BBC News (5/3/12)
Tesco to create 20,000 jobs in UK fight-back Telegraph, Jamie Dunkley (6/3/12)
Tesco’s UK boss defends ‘new jobs’ claims Sky News (5/3/12)
Tesco to freshen up with 20,000 new staff Financial Times, Andrea Felsted (5/3/12)
Now Tesco creates 20,000 jobs – with pay Independent (9/5/11)
Nissan to build new car in Sunderland BBC News (6/3/12)
Nissan pledges 2,000 new jobs at North East plant Sky News, Gerard Tubb (6/3/12)
Nissan Invitation compact car set to create 2,000 jobs Telegraph, Roland Gribben and David Millward (6/3/12)
Nissan to create 2,000 new jobs by building compact car in Sunderland Guardian, Dan Milmo(6/3/12)
Questions
- Explain the process by which net job creation should provide a boost to the economy.
- Will these new jobs have any impact on the government’s budget deficit?
- Why is there concern that the supermarkets are inflating the employment creation figures?
- What type of unemployment has been created by the recession? Why have certain areas, such as the North East been affected so badly by the recession and austerity measures?
- Which factors could have led to Tesco’s weaker trading figures towards then end of 2011? Why did this lead to a £5bn loss in the value of the group’s shares?
- Nissan has said that cars can be sold as long as they are competitively priced. To what extent do you think price is the main competitive weapon in the market for cars and in the supermarket industry?
In December 2011, the ECB provided some €489bn to banks in the form of three-year loans at low interest rates (1%) through open-market operations (see Will new ECB repo operations support the eurozone bond market?).
These ‘Longer-term refinancing operations’ or ‘LTROs’ are designed to ease the burden on European banks which have been struggling to persuade markets that they are dealing with their large amounts of toxic debt, some of which is sovereign debt. Indeed, some of the ECB loans have been used to purchase Italian and Spanish bonds, thereby reducing the likelihood that these countries will default on their debts – at least for the timebeing.
On 29 February 2012, the ECB offered another round of LTROs. Some 800 banks borrowed €530bn under the scheme, bringing the total to a little over €1tr. Initially, much of the money has been put back on overnight deposit with the ECB. The hope, however, is that the loans will be used to support increased credit throughout the eurozone and to fund further purchases of sovereign debt.
But will the increased narrow money supply in the eurozone through these open-market operations result in increased broad money and increased spending and growth? The answer to that depends a great deal on confidence: confidence of banks to lend to firms and consumers; confidence of firms and consumers to borrow. The hope is that the extra money supply will not simply see a corresponding reduction in the velocity of circulation.
The following articles consider the likely effects of these longer-term repos on the real economy.
Articles
ECB hands €529bn in emergency loans to European banks Guardian, Heather Stewart (29/2/12)
Q&A: The ECB’s bank funding programme The Telegraph, Angela Monaghan (29/2/12)
Fighting Debt with Debt Forbes, Bob McTeer (5/3/12)
Is ECB’s €1trn cash boost just the tip of the iceberg? Investment Week, Kyle Caldwell, Dan Jones (5/3/12)
Banks deposit record €821bn at ECB Financial Times, Mary Watkins (5/3/12)
Europe economy may see slim gain from supersize funding: poll Reuters, Sumanta Dey (5/3/12)
Who is the ECB helping? BBC News, Stephanie Flanders (29/2/12)
ECB information on OMOs
Open Market Operations ECB
Questions
- Explain how longer-term refinancing operations work.
- What will determine how much of these ECB loans will be lent to companies?
- Explain what is meant by (a) the velocity of circulation; (b) the money multiplier. Why will the size of these two determine the likely success of the ECB’s LTRO programme?
- Why may the ECB’s actions boost market sentiment? Why might they have the opposite effect?
- Explain what is meant by the “continued de-leveraging by banks”. How does this impact on the money multiplier?
International trade brings various benefits to an economy. One is that it can stimulate economic growth – something the UK government would very much like to achieve in current circumstances.
