Despite better economic growth in the first quarter of 2011, confidence remains low and according to Halifax, this has contributed to a decline in house prices from March to April by 1.4% to give their lowest average price since July 2009. Halifax has blamed this steady decline on a lack of confidence and the uncertain economic climate. However, despite this latest decline, Halifax have suggested that the trend may be coming to an end. Martin Ellis, from Halifax had this to say:
“Signs of a modest tightening in housing market conditions, a relatively low burden of servicing mortgage debt and an increase in the number of people in employment are all likely to be providing support for house prices, curbing the pace of decline. There are signs that house sales are stabilising, albeit at a level lower than the historical average.”
There are many factors that contribute towards house prices: the number of properties on the market, the number of buyers, the availability of mortgages and finance, interest rates and the future economic climate. How these factors change will have a crucial influence on the future house price trend. The following articles consider the causes and likely consequences of this latest housing market data.
House prices fall at fastest rate in 18 months Telegraph (9/5/11)
House prices ‘fell by 1.4% in April’ the Halifax says BBC News (9/5/11)
House prices post biggest fall in 1-1 ½ years Reuters, Fiona Shaikh (9/5/11)
House prices dive to a two-year low Independent, Nicky Burridge (9/5/11)
UK housing market remains weak Wall Street Journal, Jason Douglas (9/5/11)
U.K April house prices fall most in seven months, Halifax says Bloomberg, Svenja O’Donnell (9/5/11)
Questions
- What are the main causes behind this decline in house prices?
- The articles talk about the volatility of house prices over recent months. What is the explanation for this?
- If interest rates are increased by the MPC, is it more or less likely to cause house prices to decline further? Explain your answer.
- Why dies Martin Ellis, of Halifax, believe that the decline in house prices might reverse this year?
- How does the housing market affect the wider UK economy? Is these latest data likely to jeopardise the fragile recovery?
Just as the Bank of England has an inflation target of 2%, so does the ECB. UK inflation has been significantly above its target rate for many months and so has the eurozone’s inflation rate, which is up to 2.8% in April from its previous level of 2.7% the previous month. The increase in the general price level has been fuelled by rising costs of raw materials and high energy prices. Whilst interest rates in the UK have remained at 0.5% in a bid to stimulate economic growth, the ECB has increased interest rates by a quarter point to 1.25% and the latest inflation data may be further pressure for further rises. However, any increase in rates will put more pressure on countries such as Greece, Ireland and Portugal who are facing tough austerity measures and may put their recoveries in jeopardy.
The ECB has been optimistic about growth and it may need to be with this and possibly subsequent interest rate hikes, as they are likely to depress aggregate demand. Furthermore, European Commission’s ‘economic sentiment’ indicator has fallen to 106.2, which is the weakest since November. Eurozone unemployment remains at just under 10%, oil prices remain high and this has depressed optimism across the eurozone countries. The euro, meanwhile, continues to strengthen (up 12% against the dollar over the past year) and this has enhanced the fragile state of affairs in those countries suffering from tough austerity measures. An economist at ING has said:
“The combination of high oil prices, a strong euro, and fiscal and monetary tightening has started to dent the economic mood in the euro zone.”
Eurozone inflation rises again Telegraph, Emma Rowley (29/4/11)
Eurozone inflation rate rises to 2.8% BBC News (29/4/11)
Eurozone inflation jumps to 2.8% Financial Times, Ralph Atkins (29/4/11)
Euro zone inflation rises, points to higher ECB rates Reuters, Jan Strupczewski (29/4/11)
Eurozone inflation further above target at 2.8pct The Associated Press (29/4/11)
Questions
- What is the relationship between interest rates and inflation. Why have the ECB and the Bank of England reacted differently to rising inflation?
- Is the inflation currently being experienced in the Eurozone cost-push or demand-pull? Illustrate your answer with the help of a diagram.
- What is the relationship between interest rates and the exchange rate?
- Why is there some concern about the ‘economic sentiment’ indicator in the Eurozone?
- What is the relationship between interest rates and economic growth? Explain the process by which a change in interest rates could affect AD and then economic growth and employment.
- Why is this interest rate rise (and possible further rises) likely to hurt countries, such as Ireland and Greece more than other countries within the Eurozone?
According to the first estimates by the Office for National Statistics, real UK GDP rose by 0.5% in the first quarter of 2011. In the House of Commons, David Cameron claimed that “it’s clearly a success the economy is growing”, while Ed Balls, Shadow Chancellor, countered this by stating that the economy “flat-lined in the last six months with no growth at all”.
So who is right? According to the statistics both are, in the sense that the economy grew by 0.5% in the first quarter of 2011 after shrinking by 0.5% in the fourth quarter of 2010. But what bigger picture do the figures paint? Is the economy now in recovery mode? Or is the fact that growth is so small a sign that the economy is still fragile? Could it easily dip back into recession as the tax increases and government expenditure cuts begin to bite?
And what of the policy implications? Do the latest figures make a rise in Bank Rate more or less likely in the near future? And how will the figures impact on confidence? Are they more or less likely to stimulate investment? Will consumers feel more confident that recovery is under way and their jobs are therefore more secure?
The following articles assess the situation and look ahead at the prospects for the UK economy.
Articles
UK economy ‘on a plateau’ as 0.5pc GDP rise disappoints The Telegraph, Emma Rowley and Philip Aldrick (28/4/11)
GDP figures: Cameron accused of complacency over economy Guardian, Hélène Mulholland (27/4/11)
Low growth figure suggests economy is stagnating – at best Independent, Sean O’Grady (28/4/11)
A matter of interpretation but nobody’s happy at the latest news Scotsman, Terry Murden (28/4/11)
UK economy grows by 0.5% in first quarter of 2011 BBC News (27/4/11)
Britain ‘on the edge of a double dip recession’ The Telegraph, Philip Aldrick (27/4/11)
British GDP grows by 0.5 per cent Channel 4 News, Faisal Islam (27/4/11)
GDP: Slow but not stagnant BBC News blogs: Stephanomics, Stephanie Flanders (27/4/11)
GDP figures: Despite meagre growth, we must hold our nerve The Telegraph (27/4/11)
The economic gamble looks ever more reckless Independent (28/4/11)
If George Osborne thinks this is the road to recovery, he needs a new satnav Guardian, Heather Stewart (27/4/11)
GDP figures: the verdict Guardian, Michael Burke, Eamonn Butler, Frances O’Grady, Ian Brinkley (27/4/11)
UK GDP grows 0.5pc: reaction The Telegraph, various commentators (27/4/11)
Data
GDP growth ONS
GDP preliminary estimates ONS
Forecasts for Output, Prices and Jobs The Economist
Forecasts for the UK economy: a comparison of independent forecasts HM Treasury
Questions
- What are the causes of short-term economic growth?
- Why has UK growth been lower than that of most other developed economies?
- What are the arguments for and against the government using fiscal policy at the current time to increase aggregate demand?
- Why has the construction sector performed so badly while the manufacturing sector has performed relatively well?
- How might the growth figures impact on consumer and business confidence? Why is this difficult to predict?
- What impact are the growth figures likely to have on interest rate decisions by the Bank of England’s Monetary Policy Committee?
In January 2011, Chinese growth accelerated to 9.8% as industrial production and retails sales picked up. As the second largest economy, this very high growth is hardly surprising, but it has caused concern for another key macroeconomic variable: inflation. Figures show that inflation climbed to 5.2% in March from a year before and the billionaire investor George Soros has said it is ‘somewhat out of control’. High property and food prices have contributed to high and rising inflation and this has led to the government implementing tightening measures within the economy.
In March, growth in property prices did finally begin to slow, according to the survey by the National Bureau of Statistics. Prices of new built homes had risen in 49 out of 70 Chinese cities in March from the previous months, but this was down from 56 cities in February. A property tax has also been implemented in cities like Shanghai and the minimum down payment required for second-home buyers has risen in a bid to prevent speculative buying. Bank reserve requirements have also been increased for the fourth time, after an increase in the interest rate at the beginning of April. The required reserve ratio for China’s biggest banks has now risen to 20.5%.
The situation in China is not the only country causing concern. Inflation in emerging markets is a growing concern, especially for the richer nations. The Singaporean finance minister, Tharman Shanmugaratnam, said:
“When inflation goes up in emerging markets, it’s not just an emerging market problem, it’s a global inflation and possibly interest rate problem … We have learned from painful experience in the past few years that nothing is isolated and that risk in one region rapidly gets transmitted to the rest of the world.”
He has said that inflation in emerging markets needs addressing to ensure that it does not begin to threaten the economic recovery of other leading economies. The following articles consider the latest Chinese developments.
New home price growth dips amid government tightening BBC News (18/4/11)
China growth may cool in boost for Wen’s inflation campaign Bloomberg Business (14/4/11)
China steps up inflation fight with bank reserves hike Independent, Nikhil Kumar (18/4/11)
China raises bank reserves again Reuters (17/4/11)
China’s economy ‘is just too hot’ says Peter Hoflich BBC News (18/4/10)
Top G20 economies face scrutiny over imbalances AFP, Paul Handley (16/4/11)
Inflation in China poses big threat to global trade Global Business, David Barboza (17/4/11)
Chinese inflation to slow to 4% by year-end: IMF AFP (17/4/11)
Chinese economic growth slows but inflation soars Guardian, Tania Branigan (15/4/11)
Questions
- What type of inflation is the Chinese economy experiencing? Explain your answer using a diagram.
- To what extent will the minimum payment on second homes and the property tax help reduce the growth in Chinese property prices?
- Why is there concern about high inflation in emerging markets and the impact it might have on other countries?
- How could the inflation in China hurt the economic recovery of countries such as the UK?
- How will the increase in the banks’ reserve requirements help inflation?
- Is high Chinese growth and high inflation the relationship you would expect to occur between these macroeconomic objectives? Explain your answer.
Gross Domestic Product (GDP) is a measure of the total value of goods and services produced in the domestic economy. It gives us an idea about whether national output is growing or falling and by how much. A recession represents a period of 2 consecutive quarters where economic growth is negative. Following the quarters of declining growth, the UK economy slowly began to pick up, but in the final quarter of 2010, economic growth once again turned negative. Data first showed a decline of 0.5%, which was then revised down to 0.6%. However, the most recent data from the ONS has put the decline in economic growth back to just 0.5% and the snow we experienced is supposedly to blame. Still a decline, but not as much as previously thought.
What does this mean for the economy? It might be better than previously thought, but it does little to change the economic outlook for the economy. Furthermore, the UK’s position remains relatively weak compared to other nations. As Chris Williamson from Markit said:
“The decline [in growth] overstates the weakness in the economy, reflecting the bad weather at the end of last year, but is nevertheless still a dire reading compared to the UK’s peers.”
The UK also saw a declining trade balance in the final quarter of 2010 to £27bn, showing that the UK was importing more than it was exporting. This was the second biggest deficit since the second quarter of 2009. Whilst the data for growth is a little better, the key for the UK economy will be what happens in Q1 of 2011, especially given that inflation is so far above the target. In order to get inflation back to its 2% target, interest rates need to rise, but this may put the economic recovery in jeopardy. The key is likely to be confidence. If confidence returns to the economy, aggregate demand may begin to rise and put the economy back on track to achieve its 1.5% forecast rate of growth.
UK GDP less bad than forecast at end-2010, Q1 key Reuters (29/3/11)
UK GDP figures show smaller fall BBC News (29/3/11)
UK GDP shrinks by less than expected: reaction Telegraph (29/3/11)
UK growth figures: what the economists say Guardian (29/3/11)
Disposable income falls by 0.8% The Press Association (29/3/11)
British economy shrank 0.5% in fourth quarter Associated Press (29/3/11)
UK GDP figures revised higher The Economy News (29/3/11)
Questions
- What is GDP? Is it a good measure of the standard of living in a country?
- To what extent does the revised figure change the economic outlook for the UK economy?
- How do you think the Monetary Policy Committee will be affected in their decision on changing interest rates, given this new GDP data?
- What factors are worsening the UK’s relative to other countries who also suffered from the recession?
- How were financial and currency markets affected by the revised GDP data? Was it expected?