World markets were taken by surprise by a large rise in Turkish interest rates on 28/1/14. In an attempt to combat a falling lira and rising inflation, the Turkish central bank raised its overnight lending rate from 7.75% to 12%. Following the decision, the lira appreciated by over 3%.
Since the start of this year, the Turkish lira had depreciated by 7.1% and since the start of 2013 by 22.8%. Along with the currencies of several other emerging economies, such as India and Brazil, speculators had been selling the Turkish currency. This has been triggered by worries that the Fed’s tapering off its quantitative easing programme would lead to a fall, and perhaps reversal, of the inflow of finance into these countries; in the worst-case scenario it could lead to substantial capital flight.
Consumer price inflation in Turkey is currently 7.4%, up from 6.2% a year ago. The central bank, in a statement issued alongside the interest rate rise, said that it would continue with a tight monetary
policy until the inflation outlook showed a clear improvement.
The Turkish Prime Minister, Tayyip Erdogan, has been opposed to rises in interest rates, fearing that the dampening effect on aggregate demand would reduce economic growth, which, as the chart shows, has been recovering recently (click here for a PowerPoint of the chart). A slowing of growth could damage his prospects in forthcoming elections.
World stock markets, however, rallied on the news, seeing the rise in interest rates as a symbolic step in emerging countries stemming outflows of capital.
Articles
Turkey raises interest from 7.75pc to 12pc The Telegraph (28/1/14)
Emerging markets forced to tighten by US and Chinese monetary superpowers The Telegraph, Ambrose Evans-Pritchard (28/1/14)
Turkey Gets Aggressive on Rates The Wall Street Journal, Joe Parkinson (28/1/14)
Turkish central bank raises lending rate to 12% BBC News (28/1/14)
Asian stock markets stage relief rally after Turkey rate rise BBC news (29/1/14)
Turkey raises rates to halt lira’s slide Financial Times, Daniel Dombey (29/1/14)
Turkey Rate Increase Stems Lira Drop as Basci Defies Erdogan Bloomberg Businessweek, Onur Ant and Taylan Bilgic (29/1/14)
Fragile economies under pressure as recovery prompts capital flight The Observer, Angela Monaghan (2/2/14)
Data
Main Economic Indicators (including Turkish data) OECD
Data on Turkey, World Economic Outlook database IMF
Turkey price indices Central Bank of the Republic of Turkey
Questions
- Why did the Turkish central bank decide to raise interest rates by such a large amount?
- Why has the Turkish lira been depreciating so much over the past few months? How has this been linked to changes in Turkey’s balance of payments and what parts of the balance of payments account have been affected?
- Why did global stock markets rally on the news from Turkey?
- What will be the impact of the central bank’s actions on (a) inflation; (b) economic growth?
- How has the USA’s quantitative easing programme affected developing countries?
Christine Lagarde, managing director of the IMF, has warned of the danger of deflation in the eurozone. She also spoke of the risks of a slowdown in the developing world as the Fed tapers off its quantitative easing programme – a programme that has provided a boost to many emerging economies.
Speaking at the World Economic Forum, in the Swiss Alps, she did acknowledge signs of recovery across the world, but generally her speech focused on the risks to economic growth.
Some of these risks are old, such as a lack of fundamental bank reform and a re-emergence of risky behaviour by banks. Banks have taken steps towards recapitalisation, and the Basel III rules are beginning to provide greater capital buffers. But many economists believe that the reforms do not go far enough and that banks are once again beginning to behave too recklessly.
Some of the risks are new, or old ones resurfacing in a new form. In particular, the eurozone, with inflation of just 0.8%, is dangerously close to falling into a deflationary spiral, with people holding back on spending as they wait for prices to fall.
Another new risk concerns the global impact of the Fed tapering off its quantitative easing programme (see Tapering off? Not yet). This programme has provided a considerable boost, not just to the US economy, but to many emerging economies. Much of the new money flowed into these economies as investors sought better returns. Currencies such as the Indian rupee, the Brazilian real and the Turkish lira are now coming under pressure. The Argentinean peso has already been hit by speculation and fell by 11% on 24/1/14, its biggest one-day fall since 2002. Although a fall in emerging countries’ currencies will help boost demand for their exports, it will drive up prices in these countries and put pressure on central banks to raise interest rates.
Christine Lagarde was one of several speakers at a session titled, Global Economic Outlook 2014. You can see the complete session by following the link below.
Articles
Lagarde warns of risks to global economic recovery TVNZ (27/1/14)
Lagarde Cautions Davos on Global Deflation Risk Bloomberg News, Ian Katz (26/1/14)
Davos 2014: Eurozone inflation ‘way below target’ BBC News (25/1/14)
IMF fears global markets threat as US cuts back on cash stimulus The Guardian, Larry Elliott and Jill Treanor (25/1/14)
Davos 2014: looking back on a forum that was meant to look ahead The Guardian, Larry Elliott (26/1/14)
Speeches at the WEF
Global Economic Outlook 2014 World Economic Forum (25/1/14)
Questions
- Why is deflation undesirable?
- What are the solutions to deflation? Why is it difficult to combat deflation?
- What are the arguments for the USA tapering off its quantitative easing programme (a) more quickly; (b) less quickly?
- How is tapering off in the USA likely to affect the exchange rates of the US dollar against other currencies? Why will the percentage effect be different from one currency to another?
- What are Japan’s three policy arrows (search previous posts on this site)? Should the eurozone follow these three policies?
Politicians often make use of economic statistics to promote their point of view. A good example is a claim made by the UK Prime Minister on 23 January 2014. According to the latest statistics, he said, most British workers have seen their take-home pay rise in real terms. The Labour party countered this by arguing that incomes are not keeping up with prices.
So who is right? Studying economics and being familiar with analysing economic data should help you answer this question. Not surprisingly, the answer depends on just how you define the issue and what datasets you use.
The Prime Minister was referring to National Statistics’ Annual Survey of Hours and Earnings (ASHE). This shows that in April 2013 median gross weekly earnings for full-time employees were £517.5, up 2.25% from £506.10 in 2012, and mean gross weekly earnings for full-time employees were £620.30, up 2.06% from £607.80 in 2012 (see Table 1.1a in the dataset). CPI inflation over this period was 2.4%, representing a real fall in median gross weekly earnings of 0.15% and mean gross weekly earnings of 0.34%.
But when adjustments are made for increases in personal income tax allowances, then, according to the government, except for the richest 10% of the working population, people had an average increase in real take-home pay of 1.1%.
But does this paint the complete picture? Critics of the government’s claim that people are ‘better off’, make the following points.
First, the ASHE dataset is for the year ending April 2013. The ONS publishes other datasets that show that real wages have fallen faster since then. The Earnings and Working Hours datasets, published monthly, currently go up to November 2013. 
The chart shows real wages from January 2005 to November 2013 (with CPI = 100 in December 2013). You can see that the downward trend resumed after mid 2013. In the year to November 2013, nominal average weekly earnings rose by 0.9%, while CPI inflation was 2.1%. Thus real weekly earnings fell by 1.2% over the period (click here for a PowerPoint of the chart).
Second, there is the question of whether CPI or RPI inflation should be used in calculating real wages. RPI inflation was 2.9% (compared to CPI inflation of 2.4%) in the year to April 2013. The chart shows weekly earnings adjusted for both CPI and RPI.
Third, if, instead of looking at gross real wages, the effect of income tax and national insurance changes are taken into account, then benefit changes ought also to be taken into account. Some benefits, such as tax credits and child benefit were cut in the year to April 2013.
Fourth, looking at just one year (and not even the latest 12 months) gives a very partial picture. It is better to look at a longer period and see what the trends are. The chart shows the period from 2005. Real wages (CPI adjusted) are 8.0% lower than at the peak (at the beginning of 2009) and 5.0% lower than at the time of the election in 2010. The differences are even greater if RPI-adjusted wages are used.
But even if the claim that real incomes are rising is open to a number of objections, it may be that as the recovery begins to gather pace, real incomes will indeed begin to rise. But to assess whether this is so will require a careful analysis of the statistics when they become available.
Articles
UK pay rising in real terms, says coalition BBC News (24/1/14)
Are we really any better off than we were? BBC News, Brian Milligan (24/1/14)
Government take-home pay figures ‘perfectly sensible’ BBC Today Programme, Paul Johnson (24/1/14)
Take-Home Pay ‘Rising Faster Than Prices’ Sky News, Darren McCaffrey (25/1/14)
David Cameron hails the start of ‘recovery for all’ The Telegraph, Peter Dominiczak (23/1/14)
Is take-home pay improving? The answer is anything but simple The Guardian, Phillip Inman and Katie Allen (24/1/14)
Cameron’s ‘good news’ about rising incomes is misleading says Labour The Guardian, Rowena Mason (24/1/14)
The Tories’ claim that living standards have risen is nonsense on stilts New Statesman, George Eaton (24/1/14)
FactCheck: Conservative claims on rising living standards Channel 4 News, Patrick Worrall (25/1/14)
Living standards squeeze continues in UK, says IFS BBC News (31/1/14)
Richest have seen biggest cash income squeeze but poorest have faced higher inflation IFS Press Release (31/1/14)
Data
Average Weekly Earnings dataset ONS (22/1/14)
Annual Survey of Hours and Earnings, 2013 Provisional Results ONS (12/12/13)
Consumer Price Inflation, December 2013 ONS (14/1/14)
Inequality and Poverty Spreadsheet Institute for Fiscal Studies
An Examination of Falling Real Wages, 2010 to 2013 ONS (31/1/14)
Questions
- Why are mean weekly earnings higher than median weekly earnings?
- Explain the difference between RPI and CPI. Which is the more appropriate index for determining changes in real incomes?
- Find out what benefit changes have taken place over the past two years and how they have affected household incomes.
- How have gross weekly earnings changed for the different income groups? (The ASHE gives figures for decile groups.)
- Which is better for assessing changes in incomes: weekly earnings or hourly earnings?
- How would you define a change in living standards? What data would you need to be able to assess whether living standards have increased or decreased?
World leaders are meeting at the World Economic Forum in Davos, in the Swiss Alps. This annual conference is an opportunity for politicans, economists and businesspeople from around the world to discuss the state of the world economy and to consider policy options.
To coincide with the conference, the BBC’s Newsnight has produced the following slide show, which presents some economic facts about the world economy. The slide show provides no commentary and there is no commentary either in this blog – just some questions for you to ponder.
Using the economics you’ve learned so far, try answering these questions, which focus on the reasons for the patterns in the figures, the likely future patterns and the policy implications.
Slide show
Davos: 22 facts people should know BBC Newsnight (23/1/14)
Data
For additional international data to help you answer the questions, see:
Economic Data freely available online Economics Network
Questions
- Go through each of the slides in the Newsnight presentation and select the ones of most interest to you. Then, as an economist, provide an explanation for them.
- Identify some patterns over time in the statistics. Then project forward 20 years and discuss whether the patterns are likely to have changed and, if so, why.
- What policies could governments adopt to reverse any undesirable trends you have identified? How likely are these policies to be implemented and how successful are they likely to be?
I am an avid tennis fan and have spent many nights and in the last 10 days had many early mornings (3am), where I have been glued to the television, watching in particular Rafael Nadal in the Australian Open. Tennis is one of the biggest sports worldwide and generates huge amounts of revenue through ticket sales, clothing and other accessories, sponsorship, television rights and many other avenues. When I came across the BBC article linked below, I thought it would make an excellent blog!
There are many aspects of tennis (and of every other sport) that can be analysed from a Business and Economics stance. With the cost of living having increased faster than wages, real disposable income for many households is at an all-time low. Furthermore, we have so many choices today in terms of what we do – the entertainment industry has never been so diverse. This means that every form of entertainment, be it sport, music, cinema, books or computer games, is in competition. And then within each of these categories, there’s further competition: do you go to the football or the tennis? Do you save up for one big event and go to nothing else, or watch the big event on TV and instead go to several other smaller events? Tennis is therefore competing in a highly competitive sporting market and a wider entertainment market. The ATP Executive Chairman and President said:
We’ve all got to understand the demands on people’s discretionary income are huge, they are being pulled in loads of different avenues – entertainment options of film, music, sport – so we just need to make sure that our market share remains and hopefully grows as well.
As we know from economic analysis, product differentiation and advertising are key and tennis is currently in a particularly great era when it comes to drawing in the fans, with four global superstars.
However, tennis and all sports are about more than just bringing in the fans to the live events. Sponsorship deals are highly lucrative for players and, in this case, for the ATP and WTA tennis tours. It is lucrative sponsorship deals which create prize money worth fighting for, which help to draw in the best players and this, in turn, helps to draw in the fans and the TV companies.
With technological development, all sports are accessible by wider audiences and tennis is making the most of the fast growth in digital media. Looking at the packaging of tour events and how best to generate revenues through TV rights is a key part of strategic development for the ATP. It goes a long way to showing how even one of the world’s most successful sporting tours is always looking at ways to innovate and adapt to changing economic and social times. Tennis is certainly a sport that has exploited all the opportunities it has had and, through successful advertising, well-organised events and fantastic players, it has created a formidable product, which can compete with any other entertainment product out there. As evidence, the following fact was observed in the Telegraph article:
A 1400 megawatt spike – equivalent to 550,000 kettles being boiled – was recorded at around 9.20pm on that day [6/7/08] as Nadal lifted the trophy. The surge is seen as an indicator of millions viewing the final and then rushing to the kitchen after it is over. The national grid felt a bigger surge after the Nadal victory even than at half time during the same year’s Champions League final between Manchester United and Chelsea.
Tennis top guns driving ATP revenues BBC News, Bill Wilson (20/1/14)
The top 20 sporting moments of the noughties: The 2008 Wimbledon Final The Telegraph, Mark Hodgkinson (14/12/09)
The global tennis industry in numbers BBC News (22/1/14)
Questions
- How does tennis generate its revenue?
- In which market structure would you place the sport of tennis?
- What are the key features of the ATP tour which have allowed it to become so successful? Can other sports benefit from exploiting similar things?
- How has technological development created more opportunities for tennis to generate increased revenues?
- Can game theory be applied to tennis and, if so, in what ways?
- Why does sponsorship of the ATP tour play such an important role in the business of tennis?
- How important is (a) product differentiation and (b) advertising in sport?
