Each year world political and business leaders meet at the World Economic Forum in the Swiss resort of Davos. The aim is to assess the progress of the global economy and to look at challenges ahead and what can be done about them.
Cynics claim that the round of presentations, discussions, Champagne receptions and fine dining rarely leads to anything concrete. Those who are less cynical argue that the Forum gives a unique opportunity for considering policy options and helping to shape a global consensus.
This year the mood was more optimistic. Many believe that the worst of the financial crisis is behind us. Stock markets are buoyant; the banking system seems more secure; the eurozone has not collapsed; growth prospects seem a little brighter.
But perhaps ‘optimistic’ is an overstatement. ‘Less pessimistic’ might be a better description. As Christine Lagarde, head of the IMF, pointed out in her speech:
The recovery is still weak, and uncertainty is still high. As the IMF announced just a few hours ago in our World Economic Outlook, we expect global growth of only 3½ percent this year, not much higher than last year. The short-term pressures might have alleviated, but the longer-term pressures are still with us. (Click here for transcript).
In both her speech and her press conference, she went on to outline the policies the IMF feels should be adopted to achieve sustained global growth.
The articles below summarise the outcomes of the Forum and some of the views expressed.
Articles
Too soon for sighs of relief Deutsche Welle, Andreas Becker (27/1/13)
Davos 2013: The icy economic chill begins to thaw The Telegraph, Louise Armitstead (26/1/13)
IMF Projects Modest Pick-up in Economic Growth in 2013 IMF videos, Olivier Blanchard, IMF Chief Economist (23/1/13)
Managing Director’s New Year Press Briefing IMF videos, Christine Lagarde, IMF Managing Director
Mark Carney in Davos: what’s up next for the global economy Maclean’s (Canada), Erica Alini (26/1/13)
World Economic Forum ends on warning note over ‘complacency’ The Guardian, Graeme Wearden (26/1/13)
Angela Merkel tells Davos austerity must continue The Guardian, Graeme Wearden and Larry Elliott (24/1/13)
Davos 2013: A ‘sigh of relief’ at the World Economic Forum BBC News, Stephanie Flanders (27/1/13)
Happy talk The Economist (27/1/13)
Davos Man and his defects The Economist, Schumpeter (26/1/13)
Davos: are the captains of capitalism finally paying attention? The Observer (27/1/13)
Official site
The Global Agenda 2013 The World Economic Forum
IMF projections
Modest Growth Pickup in 2013, Projects IMF IMF Survey Magazine: In the News (23/1/13)
World Economic Outlook Update IMF (23/1/13)
Questions
- Why was the mood at the WEF less pessimistic than in 2012?
- What threats remain to sustained global recovery?
- What policies are being recommended by Christine Lagarde of the IMF? Explain the reasoning behind the recommendations.
- What disagreements are there between global leaders on the scope for fiscal and monetary policies to stimulate economic growth?
- In her press conference, Christine Lagarde stated that “the teams here have concluded that the fiscal multipliers were higher in the context of that unbelievable international crisis”. Do you agree with this statement? Explain.
The housing market is an incredibly fascinating market to monitor and to research. The market was at the centre of the financial crisis with some lenders accused of over-aggressively expanding their mortgage books and relaxing their lending criteria. The UK housing market of today looks very different to the market before the financial crisis. Nationally, house prices are stagnant while transaction numbers are less than half their pre-crisis level. The UK housing market appears almost as ‘cold’ as the recent weather!
As the first chart shows, the annual rate of house price inflation across the UK has been consistently close to or even below zero over the past couple of years. The latest figures from the Nationwide Building Society point to the average UK house price in the final quarter of 2012 being 1.1 per cent lower than in the final quarter of 2011. The figures from the Halifax concur with their estimate showing UK house prices 0.3 per cent lower year-on-year in the final quarter of 2012. This is a very different picture from that during the 2000s. As recently as 2007, the annual rate of house price inflation was in excess of 10 per cent.
Another indicator of the changing face of the UK housing market is the level of activity. The second chart shows the number of transactions per quarter across England and Wales since 1996. The figures from the Department of Communities and Local Government show that since the start of 2010 England and Wales has seen an average of 159,000 transactions per quarter. This compares with an average of 294,000 transactions over the period from 1996 to the end of 2007. Hence, the number of purchases today is roughly half the level prior to the financial crisis.
A further indicator of today’s very different housing market is the numbers of approvals by lenders for mortgages for house purchases. The latest Bank of England figures show that across the UK, the number of approvals each month in the first eleven months of 2012 averaged 51,000. Since 2010, the average monthly number of approvals has been 49,000. However, over the period from 1996 to the end of 2007 there were over 102,000 mortgages being approved each month.
A trawl through some of the key indicators of the UK housing market helps to paint a picture of a market that is markedly different to that before the financial crisis. It would be a big surprise in today’s financial and economic climate if there were to be any significant change in the path of these indicators for some time.
Data
Statistical data set – Property transactions Department of Communities and Local Government
Nationwide house price index Nationwide Building Society
Halifax House Price Index Lloyds Banking Group
Lending to individuals – November 2012 Bank of England
Articles
UK house prices drop 1% Guardian, Hilary Osborne (3/1/13)
House prices on course to pass pre-crisis peak levels Telegraph, Roland Gribben (21/1/13)
House prices rise at highest rate in seven months Independent, Vicky Shaw (15/1/13)
UK mortgage market ‘now more robust’ BBC News, (21/1/13)
Bank of England report flags improving mortgage market Telegraph, Emma Rowley (21/1/13)
Questions
- Draw up a list factors that are likely to have affected each of our 3 indicators of the UK housing market (house price inflation, transactions and mortgage approvals) since the late 2000s.
- Using a demand-supply diagram, illustrate the forces that have affected house prices in the late 2000s and early 2010s.
- Draw up a list of issues surrounding the housing market that would be of interest to a microeconomist. Now repeat the exercise for a macroeconomist.
- Why are house prices so notoriously volatile? Can you think of any other markets where prices are similarly volatile? Do these markets share any common traits?
- If you were a commentator on the UK housing market what would you be forecasting for prices and activity in 2013?
What lies ahead for economic growth in 2013 and beyond? And what policies should governments adopt to aid recovery? These are questions examined in four very different articles from The Guardian.
The first is by Nouriel Roubini, Professor of Economics at New York University’s Stern School of Business. He was one of the few economists to predict the collapse of the housing market in the USA in 2007 and the credit crunch and global recession that followed. He argues that continuing attempts by banks, governments and individuals to reduce debt and leverage will mean that the advanced economies will struggle to achieve an average rate of economic growth of 1%. He also identifies a number of other risks to the global economy.
In contrast to Roubini, who predicts that ‘stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro and an ongoing credit crunch – remain Europe’s norm’, Christine Lagarde, head of the IMF and former French Finance Minister, predicts that the eurozone will return to growth. ‘It’s clearly the case’, she says, ‘that investors are returning to the eurozone, and resuming confidence in that market.’ Her views are echoed by world leaders meeting at the World Economic Forum in Davos, Switzerland, who are generally optimistic about prospects for economic recovery in the eurozone.
The third article, by Aditya Chakrabortty, economics leader writer for The Guardian, looks at the policies advocated at the end of World War II by the Polish economist, Michael Kalecki and argues that such policies are relevant today. Rather than responding to high deficits and debt by adopting tough fiscal austerity measures, governments should adopt expansionary fiscal policy, targeted at expanding infrastructure and increasing capacity in the economy. That would have an expansionary effect on both aggregate demand and aggregate supply. Sticking with austerity will result in continuing recession and the ‘the transfer of wealth and power into ever fewer hands.’
But while in the UK and the eurozone austerity policies are taking hold, the new government in Japan is adopting a sharply expansionary mix of fiscal and monetary policies – much as Kalecki would have advocated. The Bank of Japan will engage in large-scale quantitative easing, which will become an open-ended commitment in 2014, and is raising its inflation target from 1% to 2%. Meanwhile the Japanese government has decided to raise government spending on infrastructure and other government projects.
So – a range of analyses and policies for you to think about!
Risks lie ahead for the global economy The Guardian, Nouriel Roubini (21/1/13)
Eurozone showing signs of recovery, says IMF chief The Guardian, Graeme Wearden (14/1/13)
Austerity? Call it class war – and heed this 1944 warning from a Polish economist The Guardian, Aditya Chakrabortty (14/1/13)
Bank of Japan bows to pressure with ‘epoch-making’ financial stimulus The Guardian, Phillip Inman (22/1/13)
Questions
- What are the dangers facing the global economy in 2013?
- Make out a case for sticking with fiscal austerity measures.
- Make out a case for adopting expansionary fiscal policies alongside even more expansionary monetary policies.
- Is is possible for banks to increase their capital-asset and liquidity ratios, while at the same time increasing lending to business and individuals? Explain.
- What are the implications of attempts to reduce public-sector deficits and debt on the distribution of income? Would it be possible to devise austerity policies that did not have the effect you have identified?
- What will be the effect of the Japanese policies on the exchange rate of the yen with other currencies? Will this be beneficial for the Japanese economy?
It’s a relatively common dish to see on a menu at a restaurant: mackerel. This particular fish has been promoted as a healthy and sustainable dish, but now its sustainability is coming into question and the Marine Conservation Society has taken it off its ‘fish to eat’ list. My brother Hugh is a marine biologist and often comments on which fish we should be avoiding due to sustainability issues (especially given how much I like fish!) So, how is this an economics issue?
There a couple of key things to pick out here. Firstly, with the conservationists’ warning of this issue of unsustainability, they have been asking consumers to reduce the amount of mackerel they buy. This will naturally have an impact on fisherman. If consumers do listen to the conservationists and hence reduce their demand for mackerel, we could see a fall in the price of this fish and a reduction in the fishermen’s turnover. It could be that we see a switch in consumption to other more sustainable fish, especially if we see some form of intervention.
Another area concerning economics is the idea of over-fishing. For years, there have been disputes over who has the rights to these fish stocks. In the past, the Faroe Isles and Iceland have increased their quotas significantly, as mackerel appear to have migrated to their shores, contributing to this question of sustainability. Iceland and the Faroe Isles have ‘unilaterally agreed their quotas … as they are not governed by the common fisheries policy’.
The question is: when fisherman catch one additional mackerel, what are they considering? Do they think about the private benefit to them (or their company) or do they consider the external cost imposed on others? Whenever one fish is taken from the sea, there is one less fish available for other fishermen.
This leads to over-consumption of fish and contributes towards the well-documented depletion of fish stocks and ‘The Tragedy of the Commons’, if account is not taken of the external cost imposed on other fishermen.
The total catch is now far in excess of what has been scientifically recommended and previously agreed upon by all participating countries. Negotiations to introduce new catch allowances have so far failed to reach agreement.
There are hopes that an international policy on quotas can be agreed to ensure mackerel levels return to or remain at a sustainable level. However, at present no progress has been made. Until some form of an agreement is reached, fishermen around Iceland and the Faroe Isles will continue to battle against the conservationists. The following articles consider this fishy topic.
Mackerel taken off conservationists’ ‘fish-to-eat’ list The Guardian, Rebecca Smithers (22/1/13)
Warning over mackerel stocks Scottish Herald (22/1/13)
Fishing quota talks begin amid ongoing disputes and finger-pointing The Scotsman, Fran Urquhart (14/1/13)
Mackerel no longer an ethical choice because of over-fishing The Telegraph, Louise Gray (22/1/13)
Ths fishy tale of macro-mismanagement The Guardian, Annalisa Barbieri (22/1/13)
You can still eat mackerel – just make sure it’s British The Telegraph, Louise Gray (22/1/13)
Dispute means mackerel is no longer fish of the day BBC News, Matt McGrath (22/1/13)
Mackerel struck off sustainable fish list Associated Press (22/1/13)
Questions
- Why are quotas set by the EU for fishing? Who do they apply to?
- Why is there an externality from fishing?
- What is the Tragedy of the Commons? Using a diagram with average and marginal revenue product and average and marginal cost illustrate the market equilibrium and the social optimum. Why are they different?
- Following on from question 3, what does this suggest about the role of governments?
- If the conservationists’ request regarding buying less mackerel is successful, what impact might this have on fishermen and fisheries?
- If consumers do switch to buying other fish, what would happen to the equilibrium in the mackerel market and in the market for other fish? Think about this question in terms of general equilibrium analysis.
Market trading has existed for centuries and in many respects it hasn’t changed very much. One thing that has developed is the means of exchange. Goods used to be traded for other goods – for example 1 pig for 4 chickens! But then money was developed as a means of exchange and then came cheques and plastic.
However, for many market traders, accepting credit and debit cards is relatively costly. It involves paying a monthly contract, which for many traders is simply not worthwhile, based on the quantity and value of the transactions. But, for many customers using debit or credit cards is the preferred method of payment and the fact that some traders only accept cash can be a deterrent to them making purchases and this therefore reduces the sales of the market traders.
But, with advances in technology a new way of paying has emerged. Small card readers can now be plugged into iphones, ipads, other tablets and smartphones. By putting a customer’s card into this device customers can then pay by card and either sign for their purchase or use the phone to enter their security details. There are plan for these companies to offer chip and pin technology to further ease payment by card on market stalls. The traders pay a small commission per transaction, but aside from that, the initial start-up cost is minimal and it is likely to encourage more customers to use markets. Jim Stewart, the Director of a firm that has begun using this technology said:
I think it’s definitely going to take off, the world is going that way … The money has always appeared in my bank account, no transactions have been declined, my accountant is happy, it’s all been good.
Some customers have raised concerns about the security of these transactions, as they have to put their cards into someone else’s ipad. However, traders have said that there are no risks and that customers can be sent a receipt for their purchase. The following few articles look at this latest (and other) technological developments.
Smartphone card payment system seeks small firms BBC News, Rob Howard (19/1/13)
POS Trends: What’s new for 2013 Resource News (17/1/13)
Payments by text message service to launch in UK in Spring 2014 BBC News (15/1/13)
Questions
- What are fixed cost and why does having a traditional card payment machine represent a fixed cost for a firm?
- How might this new technology affect a firm’s sales and profits?
- Will there be an increase in the firm’s variable costs from adopting this technology?
- Using a cost and revenue diagram, put your answers to questions 1 – 3 into practice and show how it will shift them and thus how the equilibrium may change for a market trader.
- What are the properties of money that allow it to be a good medium of exchange?
- How will this increased use of debit and credit cards affect the demand for money? Use a diagram to illustrate your answer.