What is the future of the Royal Mail? One thing for certain is that it needs an injection of money, which has led the government to consider either privatisation of the Royal Mail or selling it. Over the past years, we have seen continued strikes by the postal service in response to proposed changes in working practices. Mr. Cable commented that:
‘Royal Mail is facing a combination of potentially lethal challenges – falling mail volumes, low investment, not enough efficiency and a dire pension position.’
However, there are concerns that the privatisation or sale of the Royal Mail could lead to higher prices, job losses and further pension problems. The transfer of the Royal Mail to the highest bidder could shift the pension deficit, currently standing at £13.3 billion, to the taxpayer, potentially costing each taxpayer £400. The choice for the public is stark: either lose the right to send a letter anywhere in the UK for the same price or take on postal workers’ pensions.
Expecting massive opposition from the Communication Workers Union (CWU), Ministers are looking to pursue an arrangement similar to that of John Lewis, whereby staff are given shares in the company. This will give the staff an incentive to perform well to improve the performance of the company and hence increase their future dividend. Read the following articles and then try answering the questions that follow.
Royal Mail is to be privatised, government confirms BBC News (10/9/10)
Royal Mail sell-off is confirmed BBC News, Hugh Pym (10/9/10)
Royal Mail privatisation backed Press Association (10/7/10)
Royal Mail sale could cost £400 per home as taxpayers set to fund £13.3 billion pension deficit Mail Online, James Chapman (10/9/10)
Royal Mail pension plan challenged by regulator BBC News, Ian Pollock (30/7/10)
Ministers consider offering 20 per cent of shares in Royal Mail to staff Telegraph, Christopher Hope (10/9/10)
Cable to privatise ‘inefficient’ Royal Mail Independent, Cahal Milmo and Alistair Dawber (11/9/10)
Royal Mail revolution needed, say bankers Telegraph, Louise Armitstead (10/9/10)
Questions
- What are the problems that the Royal Mail is facing? Why have they occurred?
- What are the arguments for and against privatisation of the Royal Mail?
- How might privatisation lead to job losses and higher prices?
- What type of business arrangement does John Lewis have? Explain why this may improve overall performance of the company?
- If the pension deficit is passed on to the government, why will it cost the taxpayer? Is such an arrangement (a) efficient (b) equitable? Explain your answer.
You may have heard that house prices are stalling. August’s house price numbers from the Nationwide Building Society revealed that the average UK house price fell by 0.9% which came on the back of a 0.5% fall in July. The Nationwide talks of an ‘unwinding of the demand-supply imbalance that drove up prices for much of the last year’. It seems that the house price rises last year have, over recent months, induced additional supply by encouraging home-owners to put their property on the market. Unfortunately, there are indications that housing demand has weakened during 2010 though, of course, this gives buyers a greater degree of bargaining power.
But, you might wonder how we can get a handle on the strength of housing demand. Well, one particularly useful piece of information in assessing housing demand is the number of mortgage approvals for purchasing property. After all, there are not many of us that can reach into our back-pocket to find the £166,507 that the Nationwide estimates is needed to buy the average UK property.
If we look at Table A5.4 from August’s edition of Monetary and Financial Statistics, which is published by the Bank of England, we find that the number of mortgage approvals for house purchase in July was 48,722. Now, this was marginally up on the 48,562 in June, but, of more significance is the fact that July’s number was over 8% lower than in July 2009 when approval numbers stood at 53,126. Indeed, this number was to rise further through 2009, hitting 59,117 in November. This indicates a strengthening of housing demand at the time and helps us to appreciate why house prices rebounded last year.
But, the start of 2010 was to see mortgage approval numbers fall away and they have essentially flatlined over recent months at between 48,000 and 50,000. This time the numbers indicate a weakening of housing demand and so help to explain why house price growth has seemingly ceased and gone into reverse.
It remains to be seen how the balance between housing demand and supply will ‘play out’ over the remainder of the year. Will, for instance, some properties be taken off the market in response to this weaker demand? Could housing demand weaken further in response to economic conditions or to economic uncertainty? The answers to these questions will help to determine that all important balance between housing demand and supply. But, by monitoring the mortgage approval numbers we have a ready-made barometer on the strength of housing demand. Feel free to see which way the barometer needle swings in future!
Articles
UK mortgage approval rise but total lending weakest since March Telegraph (31/8/10)
House prices set to slump even further as home loans stay scarce Independent, Sean O’Grady (1/10/10)
Housing market ‘faces double dip’ Press Association (31/8/10)
UK mortgage approvals beat estimates as banks make more funds available Bloomberg, Scott Hamilton (31/8/10)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- What variables do you think are important in affecting the level of housing demand?
- What variables do you think are important in affecting the level of housing supply?
- Using a demand-supply diagram illustrate how shifts in housing demand and/or supply may have affected house prices (i) during 2009 and (ii) during 2010.
- What would you expect to happen to the strength of housing demand in the coming months? How will this impact on house prices?
Ginsters is a large producer of pasties in Cornwall. Most of its ingredients come from Cornwall, but the pasties are sold throughout Britain. But, not surprisingly, they are also sold in Cornwall. In fact, there is a large Tesco virtually next door to the Ginsters’ pasty plant and, as you can imagine, it does a good trade in Ginsters’ pasties, pies and sandwiches. After all, they are a local product.
But are they delivered directly from the Ginsters’ factory? No they are not. In fact, they are sent by lorry to the Avonmouth distribution depot, some 125 miles away, only to be sent back again to the Tesco supermarket next door! So does it make economic sense to incur all the costs of transporting the pasties 250 miles only to end up virtually where they started?
It is a similar story with Rodda’s Cornish clotted cream. It is made with Cornish milk but is also sold nationwide. In this case it is transported some 340 miles to get to another Tesco supermarket virtually next door to the Rodda plant.
The following articles and podcast consider the logistics of manufactured food distribution, and ask whether private costs are the only thing that should be taken into account when judging the sense of the system.
Articles
From here to eternity: 340-mile journey for clotted cream made two miles away Guardian, Steven Morris (3/9/10)
Food miles row as pasties travel 250 miles to the supermarket next door This is Cornwall (30/8/10)
Supermarket food mileage ‘completely bonkers’ BBC Today Programme, Tim Lang (30/8/10)
Questions
- Why does Tesco’s distribution system for pasties, clotted cream and other products made in parts of the country away from large centres of population make sense in ‘conventional economic terms’?
- What economies of scale are there in pasty production and distribution?
- What externalities are involved in the distribution of Ginsters’ pasties?
- Consider the arguments for and against locating mass producers of food products nearer to the ‘centre of gravity’ of markets.
$8 billion – this is the likely cost of the BP oil leak, which spilled 206 million gallons of oil into the Gulf of Mexico. Whilst the oil leak has been stopped for some time, there were ongoing concerns that the leak would re-appear due to the underwater pressure. The cost of stopping the leak has been substantial, but BP will face further costs, as the company begins to pay out compensation.
$20 billion is the compensation that residents of the Gulf of Mexico will receive. Further to this, BP has said that it will invest more money in promoting the tourism industry there, which has suffered from the oil spill. However, what about the fishing industry? Although compensation will be paid for the losses incurred, will this continue in the long term? The oil may cause a loss in productivity in certain populations of sea-life. How will this impact us? If certain fish became scarcer, then their price will rise accordingly, whether you purchase the fish at a shop or have it as a meal in a restaurant. To make matters worse, the hurricane season has arrived in the affected areas, which will make the clean-up effort even harder.
As BP’s share price has fallen, individuals have suffered from lower dividends. Jupiter Income Trust had almost 10% of their portfolio invested in BP, which largely explains the 9 per cent drop in their payout.
Articles
BP oil well ‘poses no further risk’, says Allen BBC News (5/9/10)
BP oil spill fallout hits Jupiter dividend Mail Online, Richard Dyson (4/9/10)
Gulf Oil leak: biggest ever, but how bad? BBC News, Richard Black (3/8/10)
BP oil spill didn’t hit tourism too hard Jabber Lounge, Gloria Rand (5/9/10)
BP oil victims face strings on $20 billion oil fund Telegraph, Rowena Mason (20/8/10)
BP share price data
BP historical share prices Yahoo Finance
BP share price chart Interactive Investor
Questions
- Which industries have been affected by the oil leak? Don’t think too close to home – look at the wider picture.
- Is the oil spill an example of a negative externality? Can it be illustrated on a diagram and, if so, how?
- What has happened to BP’s share price since the beginning of the oil spill? Put this on to a graph to trace the trend. Try to explain the changes in the share price using a demand and supply diagram.
- How would BP have calculated the compensation to be paid to residents of the Gulf of Mexico? Would cost–benefit analysis have been involved?
The prices of grains and other foodstuffs are rising rapidly. Wheat prices rose some 40 per cent in July and have continued to rise rapidly since. In June wheat futures were trading at around 450 US cents/bushel. By early September, they were trading at around 700 US cents/bushel. Global food prices generally rose by 5% over the two months July/August. And it’s not just food. Various other commodity prices, such as copper and oil, have also increased substantially.
At the beginning of September there were three days of food riots in Mozambique in protest against the 30% rise in the price of bread. Seven people were killed and 288 were injured. On 2 September Russia announced that it was extending a ban on wheat exports for another 12 months following a disastrous harvest. In Pakistan, the floods have destroyed a fifth of the country’s crops. Drought in Australia and floods in the Canadian prairies have reduced these countries’ grain production.
In response to the higher prices and fears of food riots spreading, the United Nations has called a special meeting on 24 September to bring food exporters and importers together to consider “appropriate reactions to the current market situation”. And yet, although global cereal production is down by some 5% on last year, it is still predicted to be the third largest harvest on record.
So what is causing the price rises? Is it simply a question of the balance of supply and demand and, if so, what has caused the relevant shifts in supply and/or demand? And what role does speculation play? The following articles look at the issues and at the outlook for commodity prices over the coming months.
Clearly changes in commodity prices affect the rate of inflation. The news item (Bank of England navigates choppy waters) amongst other issues looks at the outlook for inflation and the various factors influencing it.
Articles
Commodity prices soar as spectre of food inflation is back Guardian, Simon Bowers (6/8/10)
Food inflation is a rumble that won’t go away Telegraph, Garry White (8/8/10)
Global wheat supply forecast cut BBC News (12/8/10)
Commodity crisis sparks fear of food inflation on high street Independent, James Thompson and Sean O’Grady (10/8/10)
Should we be concerned about high wheat prices? BBC News, Will Smale (6/8/10)
Commodity prices: Wheat The Economist (12/8/10)
Interactive: What’s driving the wheat price spike? Financial Times, Akanksha Awal, Valentina Romei and Steven Bernard (20/8/10)
Wheat pushes world food prices up BBC News (1/9/10)
UN to hold crisis talks on food prices as riots hit Mozambique Guardian, David Smith (3/9/10)
Grain prices spark global supply fears CBC News, Kevin Sauvé (3/9/10)
GRAINS-US wheat firms after Russian ban extension Forex Yard (3/9/10)
Global food prices reach 20 year high BBC News, John Moylan (3/9/10)
Speculators ‘not to blame for higher food costs’ BBC Today Programme, David Hightower (4/9/10)
Q&A: Rising world food prices BBC News (3/9/10)
Don’t starve thy neighbour The Economist (9/9/10)
Data
Commodity prices Index Mundi
Commodity prices BBC market data
Energy prices U.S. Energy Information Administration
Questions
- Use a supply and demand diagram to illustrate (a) what has been happening to wheat prices (b) what is likely to happen to wheat prices over the coming months?
- How relevant is the price elasticity of demand and supply and the income elasticity of demand to your analysis?
- What factors have caused the shifts in demand and/or supply of wheat and copper?
- What has been the role of speculation in the price rises? Is this role likely to change over the coming months?
- What is likely to happen to food prices in the shops over the coming months? Would you expect bread prices to rise by the same percentage as wheat? If so, why; if not, why not?
- If commodity prices generally rose by 5 per cent over the coming year, would you expect inflation to be 5 per cent? Again, if so, why; if not, why not?