The World Economic Forum has warned that 2009 may see a ‘hard landing’ for China. In the context of China, this does not necessarily mean a recession, but the WEF report does identify a significant possible slowdown in Chinese growth. Given that high growth in China has led to a high level of demand for imports from other countries, especailly for raw materials and semi-finished goods, any slowdown in Chinese economic growth may have significant repercussions in the rest of the world. Any hopes that China and the emerging economies may help the rest of the world through their recessions have been dashed by data showing that even exports from China have been falling in October and November 2008 by 2.2% and 2.8% respectively. This has meant that aggregate demand in China is falling and may cause further problems, not only for China, but for the whole world economy.
China slowdown ‘big global risk’ BBC News Online (13/1/09)
China’s exports in record decline BBC News Online (13/1/09)
China’s exports slump in sharpest decline in decade Times Online (13/1/09)
World Economic Forum highlights Chinese slump as biggest risk to global economy Telegraph (14/1/09)
Chinese exports fall by the biggest margin in a decade Telegraph (14/1/09)
Questions
- Explain the significance of the fall in Chinese exports for the Chinese economy.
- Analyse the principal causes of the fall in the level of Chinese exports.
- Assess how the changes in China’s trade position will affect the exchange rate of the Chinese currency, the yuan.
- Discuss policies that the Chinese government can implement to try to minimise the impact of the fall in exports on economic growth.
Economists never like to use simple words when there are more complex ones available! So, the new term for printing money is ‘quantitative easing’. This refers to deliberate increases in the money supply aimed at preventing deflation. The real concern is whether quantitative easing will stoke up inflationary pressures for the future – the balance between inflation and deflation is a fine line to tread. Quantitative easing becomes necessary when there is danger of deflation and interest rates have already been cut as far as is possible.
Another problem, in the short term, is that an increase in the monetary base may have little effect on broader money (M4 in the UK) if people do not want to borrow and thus credit creation is limited.
The articles below all look at various different aspects of quantitative easing.
Europeans Disagree Drastically On Fed Rate Cut Deutsche Welle (17/12/08)
Financial crisis: Free money coming your way! Telegraph (17/12/08)
Wondering what on earth Nils was on about? He’s written this for you BBC News Online (PM programme) (18/12/08)
Japan forecasts no growth in 2009 BBC News Online (19/12/08)
New economic policy: If you haven’t got enough of this stuff, just print some more Scotsman (18/12/08)
Ground Zero The Economist (18/12/08)
Fed throws out the rulebook Times Online (18/12/08)
Quantitative easing: the modern way to print money or a therapy of last resort? Telegraph (8/1/09)
Forget hard choices. We need pampering Times Online (18/12/08)
Jeremy Warner: Darling wants say on ‘quantitative easing’ Independent (8/1/09)
Questions
- Define the term ‘quantitative easing’.
- Explain the mechanism by which the monetary authorities can implement a policy of quantitative easing.
- Discuss the relative effectiveness of cuts in interest rates and quantitative easing to boost aggregate demand in a recession.
- Analyse the impact on an economy of a prolonged period of deflation.
Many commentators (and politicians) have suggested that the most painless route out of the recession is for us all to shop until we drop. If we can prevent consumer spending from falling too far then this may help maintain oonsumer confidence and therefore aggregate demand. So, is it our patriotic duty to shop? Should we all be out there helping in our own small way to prevent recession, or will more shopping just land us even further in debt and therefore make us worse off? The articles linked to below look at various aspects of the ‘shopping debate’ and consider whether retail therapy is also economic therapy.
Your country needs you … to buy some underpants Guardian (20/12/08)
Beyond retail therapy Guardian (8/1/09)
Shopping is no panacea for a broken economy Guardian (28/12/08)
High street counter-offensive Guardian (31/12/08)
Should shopping be a patriotic duty? BBC News Online (19/12/08)
Questions
- How could the need both to reduce debt and to maintain aggregate demand be reconciled?
- Discuss the extent to which an increase in consumer expenditure is (a) a necessary and (b) a sufficient condition for a recovery of the economy?
- To what extent will long-term aggregate supply depend on the maintenance of aggregate demand?
- If shopping is your patriotic duty, what types of shopping would be best for the country?
New figures from the Centre for Economics and Business Research show that the UK has slipped from the fifth to the sixth largest economy in the world as measured by GDP. This places the UK behind the USA, Japan, China, Germany and now France. Two years ago, the UK was fourth largest (ahead of China). However, is GDP the most appropriate measure of the success of an economy?
Zut! France leapfrogs UK in economic table Times Online (7/12/08)
UK drops below first France and then Italy in world GDP league table CEBR News Release (8/12/08)
Questions
- Explain the difference between GDP, GDP per capita and GDP measured on a purchasing-power-parity basis.
- Explain why “….. overvalued sterling has inflated the UK’s claims to be among the top five world economies.”
- Discuss whether GDP per capita is the most appropriate measure of economic success.
The global financial crisis has led to a significant number of countries going into recession. Recession is defined by economists as two successive quarters of negative economic growth. Banking collapses and a collapse in consumer confidence, and therefore expenditure, have reduced aggregate demand. This situation has been exacerbated as each country’s exports fall due to the slowdown in other countries. The combination of these and other factors has led to negative economic growth resulting in recession. We have linked below to a range of news articles looking at different countries that have fallen into recession in recent months.
Germany
German economy now in recession BBC News Online (13/11/08)
Germany tumbles into recession as exports dive Times Online (13/11/08)
Germany slides into recession Guardian (13/11/08)
Eurozone
Threat of worst postwar slump grows as major economies enter recession Times Online (14/11/08)
Eurozone officially in recession BBC News Online (14/11/08)
Eurozone tumbles into first-ever recession Times Online (14/11/08)
Spain
Spain has that shrinking feeling as economy heads south Times Online (20/11/08)
Economic clouds gather as Spain faces recession Times Online (6/12/08)
Japan
Japanese economy now in recession BBC News Online (17/11/08)
Global slowdown and resurgent yen finally drag Japan into recession Times Online (18/11/08)
Japan in sharpest plunge to recession since war Times Online (28/11/08)
Japan slides into recession as global slowdown hits exports Guardian (17/11/08)
Singapore
Singapore officially in recession BBC News Online (21/11/08)
Hong Kong
Hong Kong slides into recession BBC News Online (14/11/08)
Questions
- Choose one of the countries above and analyse the principal reasons why it went into recession.
- Discuss whether a fiscal policy or a monetary policy stimulus will be more effective at boosting aggregate demand in a country that is in recession.
- Assess policies that the governments of the countries above could use to minimise the impact of recession on the level of employment in their country.