Tag: aggregate demand

Retail sales in the eurozone have been falling for several months as the recession deepens. The latest figures show a drop in sales of 4.2% between March 2008 and 2009. But what are the implications for fiscal and monetary policy?

With many eurozone countries worried about growing budget deficits the pressure is on the ECB to cut interest rates. Would this help to halt the decline in sales, or do policy-makers need to go further? The linked articles look at the facts and some of the solutions.

Volume of retail trade down by 0.6% in euro area Eurostat news release (6/5/09)
Brussels doubles EU recession forecasts for 2009 Independent (5/5/09)
Euro zone retail sales in record fall IrishTimes.com (24/4/09)
Record decline in eurozone sales BBC News (6/5/09)
EU businesses say worst of crisis over, urge action Guardian (6/5/09)
ECB Is Expected to Cut Rate to 1%, Enlist Other Tools The Wall Street Journal (6/5/09)
ECB set to cut interest rates to record low of 1% Times Online (5/5/09)
See also
Economic Forecast, Spring 2009 European Economy (European Commission)

Questions

  1. What determines the level of retail sales?
  2. What would halt the decline in retail sales?
  3. Discuss various measures that the ECB could take to stimulate the eurozone economy. Why might it be reluctant to take some of the measures?

Forecasting the future state of economies is difficult at the best of times. Forecasters frequently get it wrong. To see this, just look at forecasts for the current point in time made two or three years ago – or even six months ago, given the current dire circumstances. They were often way-off mark.

But why are forecasts often so inaccurate? The problem is that in the short run the state of the economy depends on the level of aggregate demand; and that, in turn, depends crucially on confidence – both of consumers and business. But confidence is a ‘will-o’-the-wisp’ thing. Confidence can evaporate with bad news, making the situation much worse. Likewise, good news can lead to rapidly growing optimism, which in turn stimulates consumption, investment and growth. Humans are fickle creatures – and the media do not help here, playing on fears or hyping-up good news.

The following articles look at forecasts made in April 2009, when economies around the world were deep in recession. Was this recession the start of something much worse? Or were economies soon to bounce back, taking up the slack created by the recession? Forecasters were being sorely tested. It will be interesting to see in a year’s time just how accurate, or inaccurate, they were.

Are there any signs of recovery? BBC News (16/4/09)
Merkel debates economic woes amid grim forecasts Guardian (22/4/09)
IMF is being unduly alarmist: Jeremy Warner Independent (24/4/09)
What the experts say: the shrinking economy Guardian (24/4/09)
Economic surveys signal that worst could be behind Europe EarthTimes (24/4/09)
Darling’s economic forecast “unrealistic” Moneywise (23/4/09)
Crisis deepens in Europe, Japan AsiaOne News (24/4/09)
IMF warns that worldwide slump will be deeper than thought Times Online (23/4/09)
World Economic Outlook: April 2009 IMF (24/4/09). See also webcast.

Questions

  1. Why do forecasters differ so markedly from each other?
  2. Other than an unexpected rise or fall in confidence, what else could make forecasts turn out to be wrong?
  3. To what extent is economic forecasting similar to and different from weather forecasting?

On 7 April, Brian Lenihan, Ireland’s Finance Minister, introduced an emergency Budget. He forecast that Irish real GDP would decline by some 8 per cent in 2009, that consumer prices would fall by 4 per cent (i.e. substantial negative inflation) and that unemployment, already at 11 per cent, would rise further. So what was his solution? Was it a massive fiscal stimulus to boost aggregate demand and turn the economy around? No: it was precisely the opposite. He announced substantial tax increases and cuts in government expenditure? Was this economic madness, or was there economic sense in the measures? The following articles explore the arguments.

Ireland’s shock therapy has got its merits Independent (9/4/09)
Ireland Faces ‘Challenge of Its Life’ BusinessWeek (8/4/09)
Few crumbs of comfort as incomes take severe hammering Irishtimes.com (10/4/09)
Republic’s Budget cuts ‘for the common good’ Belfast Telegraph (8/4/09)
Ireland unveils budget ‘challenge’ Financial Times (8/4/09)
Ireland unveils emergency budget BBC News (7/4/09)
When fiscal stimulus isn’t stimulating: Stephanie Flanders blog BBC News (7/4/09)
Ireland imposes emergency cuts Telegraph (8/4/09)

Questions

  1. Consider the arguments for and against the fiscal tightening measures adopted by the Irish government.
  2. Should the UK government also adopt a tighter fiscal stance?
  3. How important is investor confidence in determining the success of a Budget?

Given all the attention that the recession has had for months in the media, it may be surprising to find out that in fact Britain only went into recession officially today (January 23rd 2009). This is because, as economists, we have a more precise definition of recession than much of the media. A recession is when there is two successive quarters of negative economic growth. Figures released by the ONS today, show that this is finally the case. The links below give a flavour of the media attention dedicated to this announcement.

Recession Britain: It’s official Guardian (23/1/09)
Countdown to recession Guardian (23/1/09)
No end to the melodrama Guardian (22/1/09)
Recession: we knew it was coming, but we didn’t know it would be this bad Times Online (24/1/09)
Recession: Sector-by-sector breakdown Times Online (23/1/09)
It’s official – Britain is in recession Times Online (23/1/09)
UK in recession as economy slides BBC News Online (23/1/09)
Recession figures heighten the gloom Independent (23/1/09)
UK recession: It’s official and the worst since 1980 Telegraph (23/1/09)
UK recession: How does this one compare to those since 1945 Telegraph (23/1/09)
UK recession: It’s now official Telegraph (23/1/09)

Questions

  1. Explain the principal reasons why the UK has fallen into recession.
  2. Discuss the extent to which the UK recession is likely to be worse than in other countries in Europe.
  3. Analyse whether the policies adopted by the UK government will reduce the length and depth of the UK recession.
  4. Evaluate two further policies that the governmnt could adopt to reduce the depth of the recession.
  5. Assess which sectors of the economy are likely to suffer (a) the most and (b) the least, as a result of the recession.

While deflation was quite common right up to World War II, it has not been seen in the UK since 1947. The podcast considers whether it might return and looks at the impact of deflation on economic activity. There is a short case study on the deflationary years suffered by Japan between 1997 and 2006 and a consideration of policies that might be appropriate to overcome defaltionary pressures.