The economic sentiment indicator for April 2010 published by the European Commission continues to show confidence in the UK economy rising. The UK experience mirrors that across the European Union. The increase in the level of confidence in the UK economy seen in April, as measured by responses to questions posed to businesses and consumers, was the fifth consecutive monthly rise in sentiment.
There is, however, something of a divergence between the moods of UK businesses and consumers. Consumer confidence fell very slightly in April, which follows on from a small fall in March. These falls might reflect some uncertainty amongst consumers induced by the UK general election and, in particular, the extent of future fiscal tightening. In contrast, general business confidence rose in April, especially in the construction and manufacturing sectors.
Nonetheless, confidence is considerably higher across both consumers and businesses than it was a year ago. The increase has been of such magnitude that the economic sentiment indicator has now been above its long-run average for two months in a row. We would perhaps be rather naïve to expect this trend to continue, not least because of the financial rebuilding that households, banks, business and, of course, government will be pursuing. Therefore, it will be fascinating to see how enduring the current levels of confidence are and whether the slight weakening in sentiment amongst UK consumers is a sign of things to come.
Articles
Euro-zone economic sentiment rises in April MarketWatch, William Watts (29/4/10)
EU economic, business sentiment indicators ‘improving’ – poll Sofia Echo, Clive Leviev-Sawyer (29/4/10)
Euro economic sentiment up in April France24, AFP (29/4/10)
Data
Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- Why might the trends in business and consumer confidence be diverging?
- What do you think economists can learn from tracking the patterns in economic sentiment?
- What factors do you think are likely to impact on the sentiment amongst consumers and businesses in the months ahead?
The final debate between the three party leaders was mainly on the economy. A key issue under debate was how each party would cut the huge budget deficit and how households and businesses would be affected. Something that we may see in the future is a banking levy and possibly new powers given to the Bank of England to ‘ration credit in boom years’. Spending cuts and tax rises are inevitable, but there were differences between the parties as to the extent of these changes and when they are likely to occur. The articles below consider these important issues, as the election entered the final 72 hours.
The broadcast debate
Prime Ministerial Debate: The Economy BBC Election 2010
Articles and podcasts
Economic debate: Banks and a balanced economy BBC News, Peston’s Picks (29/4/10)
General Election 2010: a fact checker for the leaders’ debate on the economy Telegraph (29/4/10)
Tim Harford on the truth behind leaders’ claims BBC Today Programme (30/4/10)
Questions
- It is not unusual for countries to have a budget deficit, so why is the UK’s receiving so much attention in the election?
- What is the difference between retail and investment banking?
- What do you think David Cameron meant by giving the Bank of England power ‘to call time on debt in the economy’?
- What is the difference between the budget deficit and national debt?
- What are the arguments for and against cutting the budget deficit now, as the Conservatives want to do and cutting it in the next financial year, as Labour is suggesting?
Taxpayers may actually be in profit by several billion pounds, following reports from Lloyds that their profits are up in the first three months of 2010. At current share prices, the taxpayers are in profit by approximately £2 billion and this figure is expected to rise, as share prices continue to rise. Lloyds is 41% owned by the public, after a £17 billion bail-out rescued the debt-ridden bank. These profits follow two years of losses by Lloyds TSB and HBOS of over £6 billion in 2008 and 2009.
So, what has caused this change in fortunes? First, there has been a fall in the number of loans, which have gone bad. The bank said, “In our wholesale division, the level of impairments has been significantly lower than the last quarter of 2009 and is also at a lower level than our initial expectations for 2010″. Second, there has been a widening gap between the interest charged on a loan and the interest paid to depositors. However, despite this good news, this bank (and others) are still not lending enough to stimulate economic growth. Furthermore, as Lloyds still remains heavily dependent on loans both from British and overseas taxpayers, it could be some time before taxpayers see any return on their ‘investment’.
Lloyds: Black is the colour of spring BBC News, Peston’s Picks, Robert Peston (27/4/10)
Lloyds Banking Group returns to profits Guardian, Jill Treanor (27/4/10)
Lloyds profits revive as bad debts imorive Reuters, Edward Taylor and Clara Ferreira-Marques (27/4/10)
Lloyds Bank returns to profit Telegraph (27/4/10)
Lloyds and RBS shares to rise to give taxpayer potential £9bn profit Guardian, Jill Treanor and Larry Elliott (26/4/10)
Questions
- How have fewer bad debts and different lending and saving rates contributed to rising profits for Lloyds?
- If profits are back up, why are British banks still not lending enough?
- What factors will determine when the taxpayers actually see the return on their ‘investment’?
- In the Guardian article, ‘Lloyds Banking Group returns to profit’ what does it mean by “The bank did not change its earlier guidance that it expected to achieve £2bn of synergies and other operating efficiencies from the HBOS takeover by the end of 2011”?
- To what extent is the news about profits at Lloyds Banking Group and RBS a useful tool for the government in the upcoming election?
- Why is it so important that banks begin to increase their lending? What will determine the size of the effect on GDP of any given increase in lending?
On 21st April the IMF published its latest World Economic Outlook. It forecasts that the output of the world economy will grow by 4.2% in 2010, following last year’s 0.6% contraction, and by a further 4.3% in 2011. However, the Foreword to the report identifies considerable economic uncertainties. In particular, it identifies ‘fiscal fragilities’ and, hence, a ‘pressing need’ for fiscal consolidation. But, it also points to the need for policies ‘to buttress lasting financial stability’.
The IMF notes that Europe has come out of the recession slower than other parts of the world. For the EU-27 it is predicting growth of 1.0% this year, following a contraction of 4.1% last year, but with growth remaining at 1% in 2011. The UK is forecast to grow by 1.3% this year, following a contraction of 4.9% last year, and by a further 2.5% in 2011. Therefore, economic growth in the UK is forecast to be stronger than that across the European Union in both 2010 and, in particular, in 2011.
If we look at the expected growth in some of the principal components of the UK’s aggregate demand we see signs of a ‘rebalancing’. Firstly, household spending, which contracted by 3.2% last year is expected to rise by 0.2% in 2010 and by 1.4% in 2011. Secondly, general government current expenditure, which grew by 2.2% last year, is forecast to grow by 1.3% this year but, as the expected fiscal consolidation kicks in, will fall by 1% in 2011. Thirdly, gross fixed capital formation (capital expenditures) which fell by some 14.9% in 2009 is forecast to fall this year by a further 2.6%, before growing by 4.7% in 2011.
Report
World Economic Outlook, April 2010 IMF
Articles
IMF Raises 2010 Growth Outlook, Says Government Debt Poses Risk Bloomberg Businessweek, Sandrine Rastello (22/4/10)
GDP figures: what the experts say Guardian (23/4/10)
IMF cuts UK forecast in blow to Gordon Brown The Telegraph, Angela Monaghan (22/4/10)
IMF maintains U.K. 2010 forecast at 1.3 per cent Bloomberg, Svenja O’Donnell (21/4/10)
Global recovery faster than expected, says IMF BBC News (21/4/10) )
IMF nudges up world GDP view; fiscal fears mount Reuters, Lesley Wroughton and Emily Kaiser (21/4/10)
Data
World Economic Outlook Reports IMF
World Economic Outlook Databases IMF
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- What economic uncertainties do you think might affect the forecasts of economic growth for both the world and UK economies? Would you expect these uncertainties to be less or more significant in the UK?
- What do you understand by the term ‘fiscal consolidation’? Why do you think the IMF are highlighting this as a concern?
- Why do you think growth across Europe has been lagging behind other parts of the world? What might explain why growth in the UK is expected to be above that across Europe over the next two years?
In his Budget on the 24th March the Chancellor of the Exchequer forecast that the public sector’s net borrowing, i.e. its budget deficit, in financial year 2009-10 would be £166.5 billion. This figure excludes the on-going effects from those ‘temporary financial interventions’ designed to ensure the stability of the financial system following the financial crisis. These interventions include injections of capital into financial institutions and payments received from financial institutions entering the Asset Protection Scheme – essentially an insurance scheme whereby these institutions could insure themselves against losses on assets placed in the scheme. The Chancellor also forecasted that the public sector’s stock of debt would rise to £776.6 billion. Again, the debt figure excludes the impact of ‘financial interventions’ and, in particular, the ‘balance sheet effects’ of those financial institutions now incorporated within the public sector.
The burgeoning size of the deficit and debt numbers has been the subject of considerable debate amongst the public, politicians and, of course, economists. Here we don’t intend to revisit those debates; rather we just present the latest public finance numbers from the Office for National Statistics.
Firstly, consider the budget deficit. The budget deficit is a flow concept representing the extent to which expenditures have exceeded receipts. Over the last financial year (2009/10), public sector net borrowing, inclusive of ‘temporary financial interventions’, was measured at £152.8 billion. When these interventions are excluded the figure rises to £163.4 billion; this is £3.1 billion less than was forecast in the Budget. Numbers of this magnitude are very hard to get one’s head around. But, some context is offered by expressing the level of net borrowing relative to GDP over the 12 month-period. This shows net borrowing in 2009/10 to have been equivalent to 11.62% of GDP, up significantly from 6.73% of GDP in financial year 2008/9. Further, it is considerably above the 2.6% average since 1955.
Secondly, consider the level of debt. Public sector net debt (net of liquid financial assets) is a stock concept. The stock of debt builds up if expenditures exceed receipts. It’s rather like the level of water in a bath tub; if the flow of water in through the taps is greater than the flow out through the plug hole, then the water level rises. At the end of the last financial year (2009/10) the public sector’s net debt, excluding ‘temporary financial interventions’, stood at £760 billion (£890b when including financial interventions). Again, putting this in context, this is equivalent to 53.8% of GDP (62% when including financial interventions), up from 44% in 2008/9 and 36.5% in 2007/08. Further, the level of public sector net debt relative to GDP was as low as 29.7% in 2001/2.
So what of future projections for deficits and debt? Well, part of the answer might lie in who forms the next government. But, as of February 2010 a Fiscal Responsibility Bill was enshrined in law. The Financial Responsibility Act, as it is now known, requires governments to set out legislative fiscal plans for delivering sound public finances and places a duty on Government to meet their plan. The Act also laid out the Government’s first Financial Consolidation Plan which includes reducing, year-on-year, net borrowing as a share of GDP up to 2015-16 and public sector net debt falling as a share of GDP in 2015-16.
Articles
UK budget deficit at record levels Associated Press, Jane Wardell (22/4/10)
Budget deficit at record £163 billion The Herald, Douglas Hamilton (23/4/10)
UK borrowing hits record £163.4 billion BBC News (22/4/10) )
Darling deficit highest in peacetime Financial Times, Chris Giles (22/4/10)
Gordon Brown wins boost as budget deficit proves £3billion lower than forecast The Guardian, Larry Elliott (22/4/10)
Data
Latest on Public Sector Finances Office for National Statistics (22/4/10)
Public Sector Finances Statistical Bulletin, March 2010 Office for National Statistics (22/4/10)
Public Sector Finances (First Release) Time Series Data Office for National Statistics
For the Budget forecasts for the UK’s public finances see:
Annex C of the Financial Statement and Budget Report Budget 2010, HM Treasury
Questions
- What do you understand to be the difference between the concepts of ‘deficits’ and ‘debt’? Illustrate with reference to both your own financial situation and that of the public sector.
- In what ways will the Government’s interventions to ensure the stability of the financial system have affected the size of the budget deficit and the stock of public sector debt?
- If the government is to continue running deficits for the foreseeable future, how can public sector debt as a share of GDP begin to fall from 2015/16 as is set out in the Fiscal Consolidation Plan?
- What arguments can you make for government’s adhering to fiscal plans such as those now required by the Fiscal Responsibility Act?