In a recent blog, Falling sterling – bad for some; good for others, we looked at the depreciation of sterling following the Brexit vote. We saw how it will have beneficial effects for some, such as exporters, and adverse effects for others, such as consumers having to pay a higher price for imports and foreign holidays. The article linked below examines these effects in more depth.
Just how much the quantity of exports will increase depends on two main things. The first is the amount by which the foreign currency price falls. This depends on what exporters choose to do. Say the pound falls from €1.30 to €1.18. Do exporters who had previously sold a product selling in the UK for £100 and in the eurozone for €130, now reduce the euro price to €118? Or do they put it down by less – say, to €125, thereby earning £105.93 (£(125/1.18)). Their sales would increase by less, but their profit margin would rise.
The second is the foreign currency price elasticity of demand for exports in the foreign markets. The more elastic it is, the more exports will rise for any given euro price reduction.
It is similar with imports. How much the sales of these fall depends again on two main things. The first is the amount by which the importing companies are prepared to raise sterling prices. Again assume that the pound falls from €1.30 to €1.18 – in other words, the euro rises from 76.92p (£1/1.3) to 84.75p (£1/1.18). What happens to the price of an import to the UK from the eurozone whose euro price is €100? Does the importer raise the price from £76.92 to £84.75, or by less than that, being prepared to accept a smaller profit margin?
The second is the sterling price elasticity of demand for imports in the UK. The more elastic it is, the more imports will fall and, probably, the more the importer will be prepared to limit the sterling price increase.
The article also looks at the effect on aggregate demand. As we saw in the previous blog, a depreciation boosts aggregate demand by increasing exports and curbing imports. The effects of this rise in aggregate demand depends on the degree of slack in the economy and the extent, therefore, that (a) exporters and those producing import substitutes can respond in terms of high production and employment and (b) other sectors can produce more as multiplier effects play out.
Finally, the article looks at the effect of the depreciation of sterling on asset prices. UK assets will be worth less in foreign currency terms; foreign assets will be worth more in sterling. Just how much the prices of internationally traded assets, such as shares and some property, will change depends, again, on their price elasticities of demand. In terms of assets, there has been a gain to UK balance sheets from the depreciation. As Roger Bootle says:
Whereas the overwhelming majority of the UK’s liabilities to foreigners are denominated in sterling, the overwhelming bulk of our assets abroad are denominated in foreign currency. So the lower pound has raised the sterling value of our overseas assets while leaving the sterling value of our liabilities more or less unchanged.
Article
How a lower pound will help us to escape cloud cuckoo land, The Telegraph, Roger Bootle (31/7/16)
Questions
- What determines the amount that exporters from the UK adjust the foreign currency price of their exports following a depreciation of sterling?
- What determines the amount by which importers to the UK adjust the sterling price of their products following a depreciation of sterling?
- What determines the amount by which sterling will depreciate over the coming months?
- Distinguish between stabilising and destabilising speculation? How does this apply to exchange rates and what determines the likelihood of there being destabilising speculation against sterling exchange rates?
- How is UK inflation likely to be affected by a depreciation of sterling?
- Why does Roger Bootle believe that the UK has been living in ‘cloud cuckoo land’ with respect to exchange rates?
- Why has the UK managed to sustain a large current account deficit over so many years?
In our blog What can we read into signs of easing consumer confidence? we noted the slight easing in consumer confidence that had occurred since the autumn of last year. Nonetheless, at that time, survey data from the European Commission was continuing to show consumer confidence levels still well above their long-run average. However, following the UK vote to leave the European Union consumer confidence has fallen sharply and now the headline confidence indicator has fallen below its long-term average for the first time since June 2013.
We take this opportunity to update our May blog to better understand the extent and nature of the decline in confidence. The importance of confidence changes is typically modelled by economists in their models of the macroeconomy as a demand-side shock. Falling consumer confidence would be expected to dampen an economy’s output levels since aggregate demand falls as households spend less. Consequently, a marked fall in confidence amounts to a negative demand-side shock.
The European Commission’s confidence measure is collated from questions in a monthly survey. In the UK around 2000 individuals are surveyed. Across the current 28 member states over 41 000 people are surveyed.
In the survey individuals are asked a series of 12 questions which are designed to provide information on spending and saving intentions. These questions include perceptions of financial well-being, the general economic situation, consumer prices, unemployment, saving and the undertaking of major purchases.
The responses elicit either negative or positive responses. For example, respondents may feel that over the next 12 months the financial situation of their household will improve a little or a lot, stay the same or deteriorate a little or a lot. A weighted balance of positive over negative replies can be calculated. The balance can vary from –100, when all respondents choose the most negative option, to +100, when all respondents choose the most positive option.
The European Commission’s principal consumer confidence indicator is the average of the balances of four of the twelve questions posed: the financial situation of households, the general economic situation, unemployment expectations (with inverted sign) and savings, all over the next 12 months. These forward-looking balances are seasonally adjusted.
Sometimes other combinations of the 12 questions are averaged to produce alternative headline confidence numbers (see, for example, the newspaper articles below). These may include a mix of forward and backward-looking questions. However, in this blog we report on the European Commission’s principal confidence indicator as outlined above. The intention is that this or any other confidence indicator tracks developments in households’ spending intentions and, in turn, likely changes in the rate of growth of household consumption.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average of –8.7 shows that negative responses across the four questions typically outweigh positive responses.
In July the confidence balance stood at –9.2 down from –1.2 in June. This 8 point fall is the largest monthly fall in this particular headline indicator since January 1991 when it fell 11 points. The fall also means that not only do negative responses now dominate but more so than is usual. The fall in confidence is therefore very stark indeed. (Click here to download a PowerPoint of the chart.)
Chart 2 is important because it enables us to see what drives the European Commission’s headline confidence indicator for the UK by looking at its four component balances. The sharp decline in confidence is reflected in a deterioration in all four components. (Click here to download a PowerPoint of the chart.)
The most notable change in the individual confidence balances is the sharp deterioration in expectations for the general economy. In July the forward-looking general economic situation balance fell to –29.9 having stood at –15.7 in June. As recently as last December it registered –1.4. This is the lowest forward-looking general economy confidence balance since October 2012, though still some way above the –50.1 reported in July 2008 when the financial crisis was unfolding.
Alongside the 14 point drop in the balance for general economy expectations, the UK experienced 8 point drops in both the balances for households’ financial expectations and the expectations of saving over the next 12 months. In other words, households expect to become financially poorer and less able to save.
The monthly survey contains other questions that can help to predict future spending patterns. For example, we might expect the responses to questions relating to perceptions around what the survey call ‘major purchases’ to give us some important insight in households’ financial well-being and spending plans. ‘Major purchases’ are taken to be items such as furniture, electrical goods and electronic devices.
Chart 3 shows the balances to both whether now is the right time to make major purchases and to whether respondents expect to spend more on major purchases in the coming 12 months compared to the past 12 months. July’s data show a marked deterioration in sentiment towards making major purchases. The balance relating to whether now is the right time to make major purchases fell by 6.5 points, the largest fall since December 2011, while the forward-looking major purchase balance fell by 4.6 points, the largest fall since January 2011. (Click here to download a PowerPoint of the chart.)
The fall in the major purchases balances is consistent with the idea that households are feeling a sense of heightened uncertainty. The implication of this is that households will tend to be more cautious, cutting back on expenditures, including major purchases.
The magnitude of the fall in UK consumer confidence following the outcome of the EU referendum on 23 June is even more stark when compared to developments in consumer confidence across the 28 member states of the European Union and in the 19 countries that make up the Euro area.
Chart 4 shows how UK consumer confidence recovered relatively more strongly following the financial crisis of the late 2000s. The headline confidence indicator rose strongly from the middle of 2013 and, as we noted earlier, was consistently in positive territory during 2014 and remained so at the start of this year. The slump in consumer confidence in the UK means that the headline confidence measure has now fallen below that across the EU as well as that in the euro area. In fact, confidence in the euro area has been consistently between –7 or –9 for the past six months. (Click here to download a PowerPoint of the chart.)
Interest now turns to whether the slump in confidence in the UK will persist or, worse still, deepen further. The implied negative impact on aggregate demand would be expected to translate into weaker growth. The concern therefore is the extent to which we can expect UK growth to weaken in the months ahead. The prospect of weaker growth is likely to influence economic policy.
The government has already talked about ‘resetting fiscal policy’ which can be taken to mean a relative loosening in its fiscal policy relative to the Government’s original plans. Similarly we might yet see a further loosening of monetary policy. While the Bank of England’s Monetary Policy Committee held the official Bank Rate at 0.5 per cent at its July meeting, many commentators expect a cut sooner rather than later. The confidence data will be one important consideration in the Bank’s calculations.
Articles
UK sees biggest fall in consumer confidence for 26 years after Brexit vote The Guardian, Katie Allen (29/7/16)
UK consumer confidence takes biggest drop since 1990s ITV News (29/7/16)
Consumer confidence suffers biggest drop in 26 years after Brexit vote The Telegraph, Szu Ping Chan (29/7/16)
Consumer confidence slides at fastest pace in 26 years after Brexit vote Indepedent, Ben Chu (29/7/16)
Housing Outlook ’Uncertain’ as Brexit Hits Consumer Confidence Bloomberg, Charlotte Ryan (28/7/16)
Brexit Sees U.K. Consumer Confidence Fall Most Since 1990 Bloomberg, Charlotte Ryan (29/7/16)
Consumer confidence nosedives in Scotland in wake of Brexit vote Herald Scotland, Helen McArdle (29/7/16)
Data
Business and Consumer Surveys European Commission
Questions
- Draw up a series of factors that you think might affect consumer confidence.
- Analyse the ways in which consumer confidence might affect economic activity.
- Explain what you understand by a positive and a negative demand-side shock. How might changes in consumer confidence initiate demand shocks?
- Which of the following statements is likely to be more accurate? (a) Consumer confidence drives economic activity. (b) Economic activity drives consumer confidence.
- What macroeconomic indicators would those compiling the consumer confidence indicator hope that the indicator would help to predict?
- Analyse the possible economic implications of the fall in consumer confidence following the EU referendum vote.
- What economic effects might any persistence in the fall in consumer confidence have?
This time last year bookmakers Ladbrokes and Coral announced their intention to merge. This was closely followed by a merger between Betfair and Paddy Power. This wave of consolidation appears to have been partly motivated by the rise of online gambling, stricter regulation and increased taxation.
The UK Competition and Markets Authority (CMA) commenced an initial investigation into the Ladbrokes-Coral merger in late 2015 and, at the request of the merging parties, agreed to fast track the case to a detailed phase 2 investigation.
Despite the growth in the online market, the CMA’s investigation recognised the continued importance of high-street betting shops:
Although online betting has grown substantially in recent years, the evidence we’ve seen confirms that a significant proportion of customers still choose to bet in shops – and many will continue to do so after the merger.
The CMA identified almost 650 local markets where it believed there would be a substantial lessening of competition. It concluded that this could have both local and national effects:
Discounts and offers of free bets to individual customers are 2 of the ways betting shops respond to local competition which could be threatened by the merger. Such a widespread reduction in competition at the local level could also worsen those elements that are set centrally, such as odds and betting limits.
Therefore, earlier this week the CMA announced that before it is prepared to clear the merger, the parties must sell around 350 stores in order to preserve competition in the problem markets (many of these overlap so the number of store sales required is less than the number of problem markets). This divestment represents around 10% of the total number of stores currently owned by the two merging parties. It appears that rivals Betfred and Boylesports, plus a number of private equity investors, are already interested in purchasing the stores.
This may also not be the last consolidation in the industry with the struggling leading bookmaker William Hill apparently attracting merger interest from rival 888 in combination with a casino and bingo hall operator.
Articles
BHA warns CMA over Coral-Ladbrokes merger Racing Post, Bill Barber (7/7/16)
Ladbrokes-Gala Coral must sell 350-400 shops to clear merger BBC, (26/7/16)
William Hill is lukewarm on ambitious three-way merger deal The Telegraph, Ben Martin (25/7/16)
Questions
- Why might the merging parties in this case have been so keen to fast track the case to phase 2?
- What are the key factors in defining the market in this case? How do you think these would have affected the decision?
- Are there arguments that wider social issues in addition to the effect on competition should be taken into account when considering mergers in this market?
- Which of the potential purchasers of the divested stores do you think might be best for competition?
- How do you think this market will evolve in the future?
In this post we focus on three aspects of poverty around the world. The first is the definition of poverty. Is it an absolute or a relative concept? Does its definition change as the world develops. The second is the extent of poverty. Is the problem getting worse as inequality deepens, or are the numbers (absolutely or proportionately) getting smaller despite increased inequality? The third is policy to tackle the problem. What can be done and is being done? What answers are being given by policymakers in different parts of the world?
As far as the measurement of poverty is concerned, the simplest distinction is between absolute and relative poverty. Absolute poverty could be measured as income below a certain real level deemed necessary to achieve a particular standard of living. This could be specified in terms of sufficient income to have adequate food, shelter, clothing and leisure time, and adequate access to healthcare, clean water, sanitation, education, etc. An obvious problem here is what is considered ‘adequate’, as this is partly culturally determined and will also depend on physical and geographical features, such as climate.
The World Bank defines extreme absolute poverty as living on under $1.90 per day in purchasing-power parity terms. However, even after adjusting for purchasing power, what is considered the poverty threshold differs enormously from country to country. As the Wikipedia entry states:
Each nation has its own threshold for absolute poverty line; in the United States, for example, the absolute poverty line was US$15.15 per day in 2010 (US$22,000 per year for a family of four), while in India it was US$1.0 per day and in China the absolute poverty line was US$0.55 per day, each on PPP basis in 2010.
Relative poverty is normally taken to mean when a person’s income falls below a certain percentage of the mean or median. Thus in richer countries, for a given percentage, the poverty threshold would be at a higher absolute income. 
In the EU, people in relative poverty are defined as those with disposable income (after monetary benefits) less than 60% of the median.
Both approaches focus on consumption. Other approaches include social and cultural exclusion as dimensions of poverty.
What is clear is that poverty has a number of definitions. One problem with this is that politicians can focus on whatever definition suits them. Thus in the UK, with relatively high levels of employment, but often at low wages and only part-time employment, the Conservative government has redefined poverty as where no-one in a family is in work. Yet many working families have very low levels of income, considerably below 60% of the median.
The second aspect of poverty is its extent and whether it is growing. According to the United Nations, globally ‘extreme poverty rates have been cut by more than half since 1990. While this is a remarkable achievement, one in five people in developing regions still live on less than $1.25 a day, and there are millions more who make little more than this daily amount, plus many people risk slipping back into poverty.’
Despite this progress, in many countries extreme poverty is increasing. And in others, although the number in extreme poverty may be declining, it is still high and inequality is increasing so that more people are living only just above the extreme poverty line. The articles look at dimensions of poverty in different countries.
For example, the first The Conversation article argues that the financial crisis of 2008–09 led to a substantial increase in poverty across the European continent.
The impoverishment of Greece, Italy, Cyprus, Spain and Portugal has been so severe that these southern European countries, taken together, had higher levels of poverty and deprivation than many of the former Communist nations that joined the European Union in 2004.
The third aspect is how to tackle the problem of poverty. There are three broad policy approaches.
The first is the use of cash transfers, such as unemployment benefits. The second is providing free or subsidised goods and services, such as healthcare or education. The ability of a country to support the poor in either of these ways depends on its tax base. Also, clearly, it depends on its priorities. There is also the issue of incentives. Do benefits encourage or discourage the recipients from seeking work? This depends on the design of the system. For example, if childcare is subsidised, this may both aid poor parents and also encourage parents responsible for looking after young children to seek work.
The third is to attempt to improve the earning power of the poor. This may in part be by the second approach of improving education, training and health. But it may also involve removing restrictions to employment, say by making various forms of discrimination illegal. It may also involve increasing land rights. In many developing countries land is very unequally distributed; redistribution to the poor can make a substantial contribution to relieving poverty. Another approach is to encourage agencies which supply microfinance for poor people wishing to set up their own small business.
The articles below look at a number of dimensions of poverty: its measurement, its extent and its alleviation. They look at the problem from the perspective of different countries. It is interesting to see to what extent the problems and solutions they identify are country-specific or general.
Articles
Extreme poverty affects 1 in 8 globally Buenos Aires Herald (20/7/16)
How poverty has radically shifted across Europe in the last decade The Conversation, Rod Hick (20/7/16)
The economics of poverty The Tribune of India, S Subramanian (22/7/16)
Poverty Chains and Global Capitalism. Towards a Global Process of Impoverishment Global Research (Canada), Benjamin Selwyn (20/7/16)
Asia’s cost of prosperity The Nation, Karl Wilson (24/7/16)
Private rental sector is the ‘new home of poverty’ in the UK The Guardian, Brian Robson (20/7/16)
Challenges in maintaining progress against global poverty Vox, Martin Ravallion (23/12/15)
California, sixth largest economy in the world, has highest poverty rate in US wsws.org, Marc Wells (22/7/16)
How gross inequality and crushed hopes have fed the rise of Donald Trump The Conversation, Nick Fischer (21/7/16)
Information
Sustainable Development Goals – Goal 1: End poverty in all its forms everywhere United Nations
Children of the Recession: Innocenti Report Card 12 UNICEF, Gonzalo Fanjul (September 2014)
Listings on Poverty Joseph Rowntree Foundation
Poverty The World Bank
Hunger and World Poverty Poverty.com
Questions
- Distinguish between absolute and relative poverty. Give examples of specific measures of each and the extent to which they capture the complex nature of the problem.
- Discuss the appropriateness of the seven measures of poverty used in the first The Conversation article.
- How did the financial crisis affect the proportion of people living in poverty? Explain.
- What is the relationship between poverty and inequality? Does a more unequal society imply that there will be a greater proportion of people living in poverty?
- How has international poverty changed in recent years? What explanations can you give?
- What are the advantages and disadvantages of using income per head as a measure of poverty, whether absolute or relative?
- Why is poverty so high in (a) the USA as a whole; (b) California specifically?
- How does globalisation affect poverty?
- Are adverse environmental consequences an inevitable result of reducing poverty in developing countries?
- Is freer trade likely to increase or decrease poverty? Explain
Record fines have been imposed by the European Commission for the operation of a cartel. Truck makers, Volvo/Renault, Daimler, Iveco and DAF have been fined a total of €2.93bn. The fines were considerably higher than the previous record fine of €1.7bn on banks for rigging the LIBOR rate.
Along with MAN, they were found to have colluded for 14 years over pricing. They also colluded in passing on to customers the costs of compliance with stricter emissions rules. Together these five manufacturers account for some 90% of medium and heavy lorries produced in Europe.
The companies have admitted their involvement in the cartel. If they had not, the fines might have been higher. MAN escaped a fine of €1.2bn as it had revealed the existence of the cartel to the Commission.
A sixth company, Scania, is still in dispute with the Commission over its involvement. Thus the final total of fines could be higher when Scania’s case is settled.
In addition, any person or firm adversely affected by the cartel can seek damages from any of the companies in the national courts of member states. They do not have to prove that there was a cartel.
The Commission hopes that the size of the fine will act as a disincentive for other firms to form a cartel. ‘We have, today, put down a marker by imposing record fines for a serious infringement,’ said Margrethe Vestager, the EU’s competition commissioner.
Also, by being able to exempt a cartel member (MAN in this case) from a fine if it ‘blows the whistle’ to the authorities, it will help to break existing cartels.
There are some other major possible cartels and cases of abuse of market power currently being considered by the Commission. These include Google and whether unfair tax breaks were given to Apple and Amazon by Ireland and Luxembourg respectively.
Articles
Price-Fixing Truck Makers Get Record E.U. Fine: $3.2 Billion New York Times, James Kanter (19/7/16)
Truckmakers Get Record $3.23 Billion EU Fine for Cartel Bloomberg, Aoife White (19/6/16)
EU fines truckmakers a record €2.93bn for running 14-year cartel Financial Times, Peter Campbell, Duncan Robinson and Alex Barker (19/7/16)
Truckmakers fined by Brussels for price collusion The Guardian, Sean Farrell (19/7/16)
Europa Press Release
Antitrust: Commission fines truck producers € 2.93 billion for participating in a cartel European Commission (19/7/16)
Information
Competition DG European Commission
Questions
- How have the various stakeholders in the truck manufacturing industry been affected by the operation of the cartel?
- What incentive effects are there, (a) for existing cartel members and (b) for firms thinking of forming a cartel, in the fining system used by the European Commission?
- Unlike the USA, the EU cannot jail managers for oligopolistic collusion. Compare the relative effectiveness of large fines and jail sentences in deterring cartels.
- What determines the profit-maximising price(s) for a cartel?
- Apart from the threat of action by the competition authorities, what determines the likely success of a cartel in being able to fix prices?
- Choose two other cases of possible cartels or the abuse of market power being examined by the European Commission. What is the nature of the suspected abuse?
In a recent blog, Falling sterling – bad for some; good for others, we looked at the depreciation of sterling following the Brexit vote. We saw how it will have beneficial effects for some, such as exporters, and adverse effects for others, such as consumers having to pay a higher price for imports and foreign holidays. The article linked below examines these effects in more depth.
It is similar with imports. How much the sales of these fall depends again on two main things. The first is the amount by which the importing companies are prepared to raise sterling prices. Again assume that the pound falls from €1.30 to €1.18 – in other words, the euro rises from 76.92p (£1/1.3) to 84.75p (£1/1.18). What happens to the price of an import to the UK from the eurozone whose euro price is €100? Does the importer raise the price from £76.92 to £84.75, or by less than that, being prepared to accept a smaller profit margin?
