From early January to late February 2013, the average pump price of petrol in the UK rose by over 6p per litre – a rise of 4.7% in just seven weeks. There have also been substantial rises in the price of diesel.
The higher prices reflect a rise in the dollar wholesale price of oil and a depreciation in the pound. From 2 January to 21 February the pound fell from $1.63 to $1.53 – a depreciation of 6.1% (see). Crude oil prices (in dollars) rose by just under 7% over this period. With oil imports priced in dollars, a weaker pound pushes up the price of oil in the UK. The price has then been pushed up even higher by speculation, fuelled by the belief that prices have further to rise.
The higher price of road fuel, plus the general squeeze on living standards from the recession, with prices rising faster than wages, has caused a reduction in the consumption of road fuel. Petrol sales have fallen to their lowest level for 23 years. Sales in January 2013 were 99m litres down on the previous month’s sales of 1564m litres (a fall of 6.3%).
Not surprisingly motorists’ groups have called for a reduction in fuel taxes to ease the burden on motorists. They also argue that this will help to drive recovery in the economy by leaving people with more money in their pockets.
Equally not surprisingly, those concerned about the environment have welcomed the reduction in traffic, as have some motorists who like the quieter roads, allowing journey times to be cut, with resulting reductions in fuel consumption per mile.
The following videos and articles discuss the causes of the most recent fuel price rises and also examine the responsiveness of demand to these higher prices and to the reductions in real incomes.
Webcasts
Rising petrol prices are ‘forcing drivers off the road’ BBC News, Richard Westcott (22/2/13)
Fuel prices ‘forcing drivers off road’ – AA BBC News (22/2/13)
Fuel Prices Head For Highest Level Ever Sky News (22/2/13)
Commodities Next Week: Fuel Prices Hit Fresh 2013 Highs CNBC (22/2/13)
Ministers to blame for high fuel prices, says competition watchdog The Telegraph, Peter Dominiczak (30/1/13)
Articles
Petrol price surge adds 6.24p to a litre in a month The Guardian (22/2/13)
Petrol prices set for record highs as speculators and weak pound drive up pump costs again This is Money (22/2/13)
How are motorists saving fuel? NNC Magazine, Tom Geoghegan (9/3/11)
AA Report
Fuel Price Report (February 2013)
Data
Weekly road fuel prices Department of Energy and Climate Change
Energy consumption in the UK Department of Energy and Climate Change
Oil and oil products: section 3, Energy Trends Department of Energy and Climate Change
Europe Brent Spot Price FOB (Dollars per Barrel) US Energy Information Administration
Crude Oil (petroleum), Price index Monthly Price – Index Number Index Mundi
Questions
- Is it possible to calculate the price elasticity of demand for petrol from the data given? Try making the calculation.
- How important is the ceteris paribus (other things being equal) assumption when calculating the price elasticity of demand for petrol?
- Why is the long-run price elasticity of demand for road fuel likely to different from the short-run price elasticity?
- If wholesale oil prices go up by x%, will prices at the pumps go up by approximately x% or by more or less then x%? Similarly, if the pound depreciates by y% would you expect prices at the pumps go up by approximately y% or by more or less then y%? Explain.
- How has speculation affected fuel prices? Is this effect likely to persist? Explain.
- Under what circumstances would a reduction in road fuel taxes help to drive the recovery? Are such circumstances likely?
- Which groups in society suffer most from higher fuel prices? Is this reflected in their price elasticity of demand and if so why?
- Is a rise in fuel prices above inflation likely to increase or decrease inequality in living standards? Explain.
- Should externalities from fuel consumption and production be taken into account when setting the duty on petrol and diesel and, if so, what would be the implication for prices?
Each month the accountancy firm BDO publishes its Business Trends Indices. These indices “are ‘polls of polls’ that pull together the results of all the main UK business surveys”. The latest report shows that the January 2013 Optimism Index was its lowest since the report began 21 years ago.
The Optimism Index predicts business performance two quarters ahead. In January 2013 it was 88.9. The way the index is constructed, a reading of 95 or more suggests that firms are optimistic about business performance. Clearly, they were pessimistic.
Although there was an increase in hiring intentions, firms were still predicting a fall in output. The indices for optimism, employment and output are shown in the chart. (Click here for a PowerPoint.)
As Peter Hemington, Partner, BDO LLP, commented:
In spite of a strengthening Labour Market, business confidence continues to weaken, and improved hiring intentions are not translating into growth plans. It seems the damaging effects on businesses of five years’ zigzagging economic growth, has left them wary of making concrete plans for expansion and resigned to the ‘new normal’ of economic stagnation.
To end this cycle, it is imperative that the Government implements plans to expedite growth. Without growth incentives, we will continue to see UK businesses reluctant to invest and expand, which poses a grave threat to the UK’s economic recovery.
The following articles comment on the gloomy mood of business and on its implications for output and investment. They also look at the implications for government policy.
Articles
Confidence slumps despite optimism from manufacturers Insider News (11/2/13)
Fears of a triple-dip recession return as survey puts business confidence at a 21-year low This is Money (11/2/13)
Pressure grows on ministers for growth strategy Yorkshire Post (11/2/13)
Triple-dip jitters as business confidence hits 21-yr low Management Today, Michael Northcott (11/2/13)
Report and data
Business Trends: Business confidence hits 21-year low signalling economic contraction BDO Press Release (11/2/13)
BDO Monthly Business Trends Indices, February 2013 – Full Report BDO (11/2/13)
Business and Consumer Surveys European Commission: Economic and Financial Affairs
Questions
- What reasons are given by the report for a decline in business optimism?
- Explain how an accelerator/multiplier interaction could compound the recession or help to cause a bounce back from recession.
- How does business sentiment in one country affect business sentiment in others?
- In the absence of a change in its fiscal stance, what policies could the government adopt to increase business confidence?
- Why might firms’ hiring intentions increase even though they are predicting a fall in output?
The news in many European countries has been dominated in February by the ‘horse meat scandal’. Small traces of horse meat may be the result of faulty quality control. But the significant amount of horse found in several processed meat products suggest fraud at one or more points in the supply chain from farm to supermarket or other outlet. Indeed several specific suppliers, from abattoirs to processors are facing criminal investigation.
The scandal has put the supply chain under intense scrutiny. Part of the problem is that the supply chain is often very long and complex. As the Guardian article states:
The food and retail industries have become highly concentrated and globalised in recent decades. A handful of key players dominate the beef processing and supermarket sectors across Europe. They have developed very long supply chains, particularly for their economy lines, which enable them to buy the ingredients for processed foods from wherever they are cheapest at any point, depending on exchange rates and prices on the global commodity markets. Networks of brokers, cold stores operators and subcontracted meat cutting plants have emerged to supply rapidly fluctuating orders “just in time”. Management consultants KPMG estimate there are around 450 points at which the integrity of the chain can break down.
Then there is the huge pressure on all parts of the supply chain to reduce costs.
Supermarkets use their market power to drive down the prices of the products they buy from their suppliers and this has a knock-on effect backwards down the supply chain. This pressure has intensified as real wages have fallen and consumers have found their budgets squeezed.
At the same time, beef and other meat prices have been rising as the costs of animal feed have soared. This all puts tremendous pressure on suppliers to add cheaper ingredients. Again to quote the Guardian article:
Manufacturers add other cheap ingredients including water and fat, and use concentrated proteins to bind the water and fat in. They may appear on labels as ‘seasoning’. One of the cheapest sources of these protein additives is pork rind. It is possible that horse hide is now also being used. The widespread adulteration of cheap chicken breast with pig and beef proteins and water has been uncovered in previous scandals. The beef proteins were derived from hydrolysed cattle hides. It is not illegal to use these protein concentrates so long as they are identified correctly to the manufacturer.
It is not surprising that if cheap horse meat becomes available to suppliers, such as from old horses towards the end of their working lives, some processing companies may be tempted to add it fraudulently, stating that it is beef.
The articles look at the issues of long and complex supply chains in the processed food industry and assess why they have evolved into their current form and the difficulties in regulating them.
Horsegate: heed economics of the cold chain The Grocer, Andrew Godley (16/2/13)
Horsemeat scandal: the essential guide The Guardian, Felicity Lawrence (15/2/13)
After the horse has been bolted The Economist (16/2/13)
Slavery, not horse meat, is the real scandal on our doorstep The Telegraph, Fraser Nelson (14/2/13)
Industry must take the reins on food safety Globe and Mail (Canada)Sylvain Charlebois (15/2/13)
Supply chains changed the growth model The Economist, Richard Baldwin (15/8/12)
Supply-chain management The Economist (6/4/09)
Tesco pledges to open up supply chain after horse meat scandal The Telegraph (16/2/13)
Horse meat scandal: Shoppers who buy ‘cheapest food’ at risk The Telegraph, James Quinn, Jason Lewis and Patrick Sawer (16/2/13)
Let Them Eat Horse Bloomberg, Marc Champion (15/2/13)
Scandal shows meat supply chain must be policed heraldscotland (14/2/13)
MPs push for new powers for FSA as officials seize yet more suspect meat Independent, Martin Hickman (13/2/13)
Questions
- Why do supermarkets and their suppliers use long supply chains?
- Explain the concepts of ‘countervailing power’ and ‘monopsony or oligopsony power’? How do they apply in the processed meat supply chain?
- Identify the types of transactions costs in the processed meat industry.
- In what ways do consumers (a) gain and (b) lose from such supply chains?
- Why is the problem of fraud in processed food supply chains likely to have intensified in recent years?
- How have supermarkets reacted to the horse meat scandal? Why has it taken the scandal to make them react in this way?
- To what extent is the problem simply one of inaccurate labelling?
- To what extent is there a principal–agent problem in the processed meat supply chain?
Events on the high street continue to grab the headlines. These are incredibly difficult times for retailers as households’ spending power continues to be squeezed and, in conjunction with technological change, households’ spending habits continue to evolve. In this blog we examine what the latest data from Consumer Trends tells us about the composition of household spending.
There are 12 broad categories of household spending. Each tells us something about the amount of expenditure in the UK by both UK and foreign households. In 2012 Q3, the value of household consumption taking place within the UK was £242 billion. During the whole of 2011, spending amounted to £929 billion. In real terms (after adjusting for price changes) spending in the UK fell by 1 per cent in 2011. Evidence of a rebound is limited. In the year to 2012 Q3, the volume of spending was just 0.8 per cent higher. In contrast, from 1998 to 2007 the average real rate of growth was 3.5 per cent.
As Chart 1 shows, the largest component of household spending in the UK is on spending associated with running a home. This component includes rents, expenditures incurred in undertaking routine maintenance and the payments for electricity, gas and water. Since 1997 this component has typically accounted for (after adjusting for price changes) 24 per cent of household consumption in the UK (22 per cent in 2012 Q3). The second largest consumption category is transport. This includes expenditure on purchasing vehicles, fuels, maintenance of vehicles and the costs of rail and air transport. It has typically accounted for about 15 per cent of expenditure (14 per cent in 2012 Q3).
Chart 2 shows the real annual rate of growth in expenditure of our 12 consumption categories from 1998 Q1 to 2007 Q4 and so before the financial crisis really took hold. It enables us to measure how the volume of purchases changes over a 12-month period. From it, we can see that all categories, except education, contributed to the positive real growth of household spending in the UK. The fastest growing component was clothing and footwear recording real growth of almost 11 per cent per year. The second most rapidly growing component was recreation and culture, which includes items ranging from package holidays, garden plants and musical instruments to sports equipment, cameras and books. This component grew, after adjusting for inflation, by nearly 9 per cent per year.
Chart 3 focuses on the real annual rate of growth since 2008 Q1. It paints a very different picture. Now only four categories have on average recorded positive annual rates of growth. Again, the volume of purchases of clothing and footwear has grown most rapidly by 6.3 per cent per year. While purchases on items associated with recreation and culture continue to grow, the annual rate of growth since 2008 is only 1.5 per cent compared with 9 per cent prior in the previous 10 years or so.
(Click here for a PowerPoint of all three charts.)
One category of spending that has been especially badly affected by events since 2008 has been household goods and services. This includes items such as furniture, major and small household appliances (including electrical appliances), carpets and tools. While the volume of purchases grew by 5 per cent per year from 1998 to 2007, since 2008 they have typically contracted at a rate of 3 per cent per year. This category helps to illustrate the difficult trading environment currently faced by many businesses in the UK.
Data
Consumer Trends, Q3 2012 Statistical Bulletin National Statistics
Consumer Trends Time Series Dataset, Q3 2012 National Statistics
Articles
Surprise UK retail sales drop fuels trip-dip recession fears The Guardian, Larry Elliott (15/2/13)
UK retail sales fall unexpectedly in January BBC News, (15/2/13)
Retail sales: What the economists say The Guardian, Phillip Inman (15/2/13)
Another dark day for the high street as John Lewis cuts jobs The Guardian, Sarah Butler (13/2/13)
Republic chains enters administration BBC News, (15/2/13)
High Street retailers: Who has been hit the hardest? BBC News, (13/2/13)
Questions
- Using Charts 2 and Chart 3 construct a short briefing paper comparing the fortunes of difficult components of consumption before and after 2008.
- What economic factors could explain the contrasting impact of the economic slowdown since 2008 on the components of consumption?
- Can economic factors alone explain the success of failure of businesses? Explain your answer drawing on real-world examples.
- What factors do you think are likely to be important for the growth in consumer spending in the months ahead?
Recent figures from the ONS suggest that the UK lags well behind its competitors in terms of labour productivity. In terms of output per hour worked, Germany produces 22% more than the UK, France produces 26% more, the USA produces 27% more, the Netherlands 31% more and Ireland 43% more. The first chart illustrates some of these figures.
(Click here for a PowerPoint of this chart.)
And in the past few years the problem has been getting worse. This is shown in the second chart. This, however, is a relatively recent phenomenon. Until 2006, the gap was narrowing, but since then it has widened. (Click here for a PowerPoint of the second chart.)
What has caused this widening of the gap? Part of the problem is a historical lack of investment in the UK. Between 2005 and 2012, the UK invested on average 15.7% of GDP. The USA invested 16.5%, Germany 17.9% and France 20.1%. And part of the problem has been the cut back in private-sector investment in response to the recession (which has been deeper in the UK) and in public-sector investment as part of the government’s austerity measures.
Part of the problem has been lower levels of inward investment. Inward direct investment to the UK in 2011 was only 24 per cent of that in 2007. In France, Germany, Italy and the USA, the figures were 43, 50, 66 and 105 per cent respectively.
Part of the problem has been the size of the financial sector in the UK. This is considerably larger as a proportion of the economy than in most the UK’s major competitors. And it was this sector most hard hit by the crisis of 2007/8.
With this poor productivity performance, you might expect unemployment to have soared. In fact, the UK has one of the lowest unemployment rates of the developed countries and in recent months it has been falling while other countries have seen their unemployment rates rise.
In fact, low productivity and high employment are compatible. If people produce less than their counterparts abroad, then more people will be needed to produce the same level of output. The problem, of course, is that this only works if wages are kept down. Indeed, wages have fallen in real terms and now stand at the level of 10 years ago.
The problem of falling real wages is that this translates into a lack of demand – especially when people are trying to reduce their debts. Not only does this result in a lack of economic growth, it discourages firms from investing – and investment is one of the prime drivers of future productivity growth!
The following articles explore the problem of low productivity and its relationship with employment and with both short-term and long-term economic growth.
Articles
UK has widest productivity gap since 1993 City A.M., Ben Southwood (14/2/13)
Productivity ‘key to UK’s economic future’ SnowdropKCS (7/2/13)
Low wages and lack of investment – why UK’s productivity has slumped Wales Online, David Williamson (2/3/13)
Recovery in jobs gives a fillip before the news on growth Independent, Russell Lynch (23/1/13)
U.K. Triple-Dipping as Productivity Falls Slate, Matthew Yglesias (25/1/13)
UK productivity puzzle baffles economists BBC News, By Andrew Walker (18/10/12)
Is low productivity a structural problem in the UK? BBC Today Programme, Bridget Rosewell and Andrew Sentance (4/1/13)
We Need to Talk About the Middle Huffington Post, Stewart Wood (14/2/13)
UK Wages Slump to Lowest Level in a Decade – ONS International Business Times, Shane Croucher (13/2/13)
Britain’s low-wage economy serves as a bind on the country The Guardian, Philip Inman (13/2/13)
Real wages fall back to 2003 levels in UK The Guardian, Hilary Osborne (13/2/13)
Data
International Comparisons of Productivity – Final Estimates for 2011 ONS (13/2/13)
International Comparisons of Productivity, datasets ONS (13/2/13)
Changes in real earnings in the UK and London, 2002 to 2012 ONS (13/2/13)
Questions
- Which is a better measure of productivity – output per worker or output per hour worked? Why, do you think, does the USA produce 39% more per worker, but only 27% more per hour worked?
- What policies should the government adopt in order to encourage a growth in productivity?
- If productivity growth increased, what would be the likely effect on employment? Explain.
- Why has unemployment not risen in recent months?