Australia was one of the few economies that seemed to be somewhat insulated from the 2008/09 recession and credit crunch. However, with the UK now back in recession and global economic conditions worsening in much of Europe, Australia has now joined the list of countries that are experiencing economic conditions that are ‘weaker than forecast’.
Today’s world involves economies that are increasingly interdependent, hence the spread of the world economic slowdown. As such, with weak global demand, Australia has started to feel the effects, with demand for its goods and raw materials falling. This has led Australia’s central bank – the Reserve Bank of Australia – to cut its key interest rate (the ‘cash rate’) by more than expected. The rate had been at 4.25% and it was widely believed that a 0.25 percentage point cut would occur. However, the central bank cut the cash rate rate to 3.75% to counter the weakening conditions. The Reserve Bank said:
“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated …Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year.”
Banks’ interest rates have been falling in Australia for the past few months and this latest cut will do much to help financially squeezed households. Data show that Australian house sales have fallen, as have house prices, and retail sales have fared little better.
Lower interest rates are often a tool used to steer inflation and the Australian central bank may not have been as willing to cut rates had the inflation rate not come down in recent months. Keeping consumer prices under control remains a top priority for the central bank and so it will be interesting to see the impact that these rate cuts will have on the Australian economy.
Articles
Australia cenbank surprises with aggressive half point rate cut Reuters, Wayne Cole (1/5/12)
Australia cuts rates by than forecast to 3.75% BBC News (1/5/12)
Banks unlikely to pass on full rate cut The Australian, Wall Street Journal, Peter Trute (1/5/12)
Australia cuts rate to support economy Financial Times, Neil Hume (1/5/12)
Australia slashes interest rates by 0.5pc to boost economy The Telegraph (1/5/12)
Australia cuts interest rates as economy slows Guardian, Phillip Inman (1/5/12)
Banks must pass on rate cut: businesses Sydney Morning Herald, Ehssan Veiszadeh (1/5/12)
Bond prices rally after rate cut Sydney Morning Herald (1/5/12)
Surplus remains appropriate: Swan Sydney Morning Herald, Colin Brinsden (1/5/12)
Webcasts
Reserve Bank of Australia Cuts Rates by 50 Basis Points to 3.75% CNBC video, Lauren Rosborough (1/5/12)
Further `Modest’ RBA Easing Possible, ANZ Says Bloomberg, Tony Morriss (1/5/12)
Australia’s central bank shifts focus to growth BBC News, Duncan Kennedy (1/5/12)
Questions
- Which factors will a central bank consider when setting interest rates?
- Explain the components of aggregate demand that will be affected by a lower rate of interest.
- Using diagrams to illustrate the process, explain both the interest-rate and the exchange-rate transmission mechanisms of the fall in interest rates.
- How are interest rates used to target inflation?
- How will lower rates of interest help the Australian economy recover from weakening global economic conditions?
- Why are Australia’s banks unlikely to pass on the full rate cut to consumers?
- Why did bond prices rise and the Australian dollar depreciate after the rate cut? Why does this suggest that a 0.5% cut was greater than anticpated by markets?
Binge drinking is a problem that has seen much attention, especially with regards to minimum price controls. However, in this blog, we consider attention in this sector concerning taxation on beer.
Alcohol is widely considered to be a de-merit good with negative externalities imposing external costs on society. This is one of the reasons why taxes are imposed on alcoholic beverages. By increasing production costs to the firms providing these drinks, prices rise and hence the policy aims to discourage consumption.
During the recession, many businesses have seen demand fall and one sector hit particularly hard because of this and very high tax rates has been the local pub community. Duty on beer has increased since 2008 by some 42%. As such, many rural and suburban communities have seen their local watering holes close down and this has led to a campaign by CAMRA to force a debate in Parliament, as a means of protecting ‘one of Britain’s oldest and best loved institutions’. Data suggests that 12 pubs per week are closing down, thus the future of the industry is now under threat. This may also have further damaging effects on local communities, as it may adversely affect the social aspect of communities. Camra’s Chief Executive, Mike Benner said:
‘Whether situated in a small village, city high street, or on the edge of a housing estate, pubs are so central to our society that whole communities can grow around a particular pub.’
According to a study, pubs in Lancashire and the West Midlands have been hardest hit by the pub closures. If pubs don’t pass the tax increase on to consumers in the form of higher prices, then they must bear the burden. If they do pass the tax rises on to consumers then the larger chain firms can increase their market share by selling at a lower price. They are also facing growing pressure from the supermarket industry, which are able to sell cheap alcohol, also contributing to going to the pub becoming an ‘unaffordable activity’. The following articles consider this industry.
Pub closures spark beer tax plea The Press Association (30/4/12)
A dozen pubs close each week Telegraph, James Hall (30/4/12)
Calls for beer tax rethink as 12 pubs shut every week BBC Radio 1, News Beat, Steve Holden (30/4/12)
Pubs in the West Midlands hit hardest by pub closures ITV News (30/4/12)
Questions
- Illustrate the effect of a tax being imposed on a product such as beer.
- In this market, would the tax be more likely to be borne by the producers or consumers? Explain your answer and illustrate on the previous diagram why this is the case.
- Why are supermarkets able to compete local pubs out of the alcohol market? Do you think a minimum price will have any effect?
- What is a de-merit good? Illustrate the concept of a negative externality on a diagram.
- Explain how a de-merit good causes the market to fail. To what extent does the tax on beer solve the market failure?
- Why are there likely to be adverse effects on local communities? Could this have an adverse effect on economic activity in the area?
Oligopoly: it’s a complex market structure and although closer to the monopoly end of the ‘Market Structure Spectrum’, it can still be a highly competitive market. The characteristics are well-documented and key to the degree of competition within any oligopoly is the number of competitors and extent to which there are barriers to entry.
The greater the barriers and the fewer the competitors the greater the power the established firms have. This can then spell trouble for pricing and hence for consumers. The following articles are just some examples of the oligopolies that exist around the world and some of the benefits and problems that accompany them.
Articles
Oligopoly of PSU oil cos reason for high ATF prices The Indian Express, Smita Aggarwal (30/4/12)
Group energy buying hits the UK headlines Spend Matters UK/Europe(18/1/11)
German cartel office probes petrol companies on pricing Fox Business (4/4/12)
Gov’t unveils steps to lower fuel prices Yonhap News (19/4/12)
How big banks threaten our economy Wall Street Journal, Warren Stephens (29/4/12)
UK Governance: Call for Whitehall to simplify the landscape for SME suppliers to win more government contracts The Information Daily (26/4/12)
Other blogs
Pumping up the price: fuel cartels in Germany April 2012
Energy profit margins up by over 700% October 2011
Every basket helps October 2011
The art of oligopoly December 2010
Questions
- What are the assumptions of an oligopolistic market structure?
- Consider (a) the energy sector and (b) the banking sector. To what extent does each market conform with the assumptions of an oligopoly?
- In the ‘Spend Matters’ article, a group of people in a Lincolnshire village formed a local buying consortium to negotiate deals for heating oil. What could we refer to this as?
- To what extent is an oligopoly in the public interest?
- Explain how barriers to entry in oligopolies affect the competitiveness and efficiency of a market.
- Illustrate how an oligopolistic market structure can fix prices and hence exploit consumers.
- How have the actions of the big oil companies in both the UK and Germany been against independent retailers and the consumer interest?
- What action can governments take to break up oligopolies? Will it always be effective?
According to the Sunday Times Rich List, the combined wealth of Britain’s 1000 richest people grew by nearly 4.7% last year to £414 billion (after growing by 18% in 2010).
This is in stark contrast to average households, who saw their real incomes decline by 1.9% in 2011. As the Guardian article below says:
The Rich Listers are not merely the 1%, but the 0.01%, and this fanfared celebration of their assets feels like a celebration of things that nobody feels like celebrating: bankers’ bonuses, complex corporate tax-avoidance structures, the stifling grip of aristocratic family wealth.
So why are the rich getting richer and what are the implications for society and the economy? Watch and read the following webcasts and articles and then see if you can answer the questions below.
Webcasts
Rich List shows how super-wealthy have dodged recession (or) Channel 4 News (29/4/12)
Sunday Times Rich List: Wealthy getting richer BBC News, Ben Thompson (29/4/12)
Articles
Britain’s richest see fortunes rise to record high Reuters, Tim Castle (29/4/12)
Sunday Times Rich List shows rich recover wealth twice as fast Myfinances.co.uk, Ben Salisbury (29/4/12)
Sunday Times Rich List suggests UK’s wealthiest defy recession BBC News (28/4/12)
Sunday Times Rich List 2012: Wealth of richest grows to record levels The Telegraph, Patrick Sawer (28/4/12)
The Not-So-Rich-Any-More List Guardian, Oliver Burkeman and Patrick Kingsley (27/4/12)
Sunday Times Rich List ITV News (29/4/12)
Data
Distribution of Personal Wealth HMRC
The effects of taxes and benefits on household income ONS (19/5/11)
Household Quarterly Release 2011 Q4 – Real household actual income and expenditure per head ONS
Questions
- Distinguish between stocks and flows. Which of the following are stocks and which are flows: income, wealth, savings, saving, expenditure, possessions?
- If the combined wealth of the 1000 wealthiest people increased in 2011, does this imply that their incomes rose? Explain.
- Why have the super rich got richer, while average incomes in the country have fallen?
- What are the costs and benefits to society (other than the super rich) of the super rich becoming richer?
- Distinguish between the income and substitution effects of an increase in income of the wealthy. Which is likely to be larger and why?
The UK hosted the third Clean Energy Ministerial conference on 25/26 April 2012. More than 20 energy ministers from around the world attended. In his address, David Cameron, gave his backing to more wind farms being built in the UK, both onshore and offshore.
Currently just under 10 per cent of the UK’s electricity is generated from renewable sources. But to meet agreed EU targets this must increse to at least one-third by 2020. Most of this will have to come from wind.
But whilst wind turbines create no CO2 emissions, electricity generated from wind is currently some 15% more expensive than from gas. To make wind power profitable, energy companies are required by law to generate a certain percentage of their electricity from renewables and the cost is passed on to the consumer. This adds some £20 per year to the average household energy bill.
Over the coming years, many new power plants will have to be built to replace the electricity generated from older plants that reach the end of their life. So what types of plant should be built? Unfortunately measuring the costs and benefits from power generation is not easy. For a start, energy needs are not easy to predict. But more importantly, electricity generation involves huge environmental and social externalities. And these are extremely difficult to measure.
What is more, the topic is highly charged politically. The social costs do not fall evenly on the population. People might favour wind turbines, but they do not want to see one outside their window – or from their golf course!
The following videos and articles will give you some insight into the difficulties that any decision makers face in making the ‘right’ decisions about electricity generation
Webcasts and podcasts
Can Cameron still claim the ‘greenest government ever’? Channel 4 News, Tom Clarke (26/4/12)
Energy Secretary: UK will meet green targets BBC News, Ed Davey (25/4/12)
Donald Trump attacks Scottish government’s green policy BBC News, James Cook (25/4/12)
Trump: Wind farms ‘bad for Scotland’ BBC News (24/4/12)
Tycoon Trump fights Scotland over wind farms near golf resortReuters, Deborah Gembara (25/4/12)
Wind power blows Siemens off course Euronews, Anne Glemarec (25/4/12)
Mexico inaugurates largest wind farm in Latin America BBC News, Carolina Robino (9/3/12)
BP’s Flat Ridge 2 Wind Farm in Kansas YouTube, BPplc (10/4/12)
Arnold Schwarzenegger: Green quest goes on BBC News (26/4/12)
Denmark Pioneers Clean Energy Green TV (18/4/12)
EU wind industry defies recession Green TV (16/4/12)
Wind Farm Issues – Compilation LiveLeak (15/4/12)
News articles
David Cameron commits to wind farms The Telegraph, Louise Gray (26/4/12)
David Cameron says wind energy must get cheaper The Telegraph, Louise Gray (27/4/12)
Could 2012 be year of the wind turbine? The Telegraph, Louise Gray (3/2/12)
Green energy vital, says David Cameron Independent, Emily Beament (26/4/12)
Cameron: renewables are ‘vital to our future’ businessGreen, Will Nichols and James Murray (26/4/12)
Green energy ‘must be affordable’ – Cameron BBC News (26/4/12)
Wind farms will kill tourism, says Donald Trump Independent (25/4/12)
Donald Trump accuses Salmond of ‘betrayal’ over wind farm plans The Telegraph, Simon Johnson (25/4/12)
Turbine scheme provokes wuthering gale of protest Independent, Mark Branagan (6/4/12)
Prince Charles endorses wind power in new film at Sundance Festival The Telegraph, Roya Nikkhah (29/4/12)
Study claims tourists ‘not put off’ by wind farms in Scotland BBC News (24/4/12)
Tide turns in favour of wave power instead of wind farms Scotsman, David Maddox (23/4/12)
Rush towards wind-generated electricity will not reduce fuel poverty Power Engineering (21/4/12)
Shell says no to North Sea wind power Guardian, Terry Macalister (26/4/12)
David Cameron, the Speech He Needs to Make Huffington Post, Juliet Davenport (25/4/12)
Campaigners want David Cameron to come clean over wind farm policy Western Daily Press (27/4/12)
Being Green Doesn’t Mean Higher Electricity Costs Says Green Energy UK DWPub (27/4/12)
Documents
Cost Benefit Methodology for Optimal Design of Offshore Transmission Systems Centre for Sustainable Electricity and Distributed Generation, Predrag Djapic and Goran Strbac (July 2008)
A Cost Benefit Analysis of Wind Power University College Dublin, Eleanor Denny (19/1/07)
Ecological and economic cost-benefit analysis of offshore wind energy Renewable Energy 34, Brian Snyder, Mark J. Kaiser (2009)
Questions
- Why is difficult to predict the future (financial) cost per kilowatt-hour of electricity generation by the various methods?
- Why is it difficult to estimate the demand for electricity in 10 years’ time?
- Identify the external benefits and costs of electricity generation from (a) onshore wind turbines; (b) offshore wind turbines.
- Is ‘willingness to pay’ a good method of establishing the value of external benefits and costs?
- What are the steps in a cost–benefit analysis?
- What types of problems are there in measuring external benefits and costs?
Australia was one of the few economies that seemed to be somewhat insulated from the 2008/09 recession and credit crunch. However, with the UK now back in recession and global economic conditions worsening in much of Europe, Australia has now joined the list of countries that are experiencing economic conditions that are ‘weaker than forecast’.
