“We will look back at 2009 as a watershed in economic history. This is the first time since the war that the world economy has not been led out of a recession by the US consumer.” (Jeremy Beckworth, CIO, Kleinwort Benson Private Bank – see second linked article below) How has the Chinese economy fared during the global recession? What policies has it pursued and how successful have they been? Will Chinese growth continue and how will this impact on the rest of the world? What economic risks does China face? These are questions that the following articles consider.
Array of figures adds to optimism over China economy Reuters (15/10/09)
Look East for the land of opportunity Jeremy Beckwith, Portfolio Adviser (14/10/09)
Greenback Woes Boost China’s Global Muscle Money Morning (15/10/09)
China Rises Amid Global Economic Crisis Manufacturing.net (13/10/09)
Why China must do more to rebalance its economy Financial Times (22/9/09)
China economic growth accelerates BBC News (22/10/09)
Chinese economy grows at fastest pace in a year Telegraph (22/10/09)
China’s 3Q growth accelerates to 8.9% pace Los Angeles Times (22/10/09)
Questions
- Examine whether Chinese inward investment to the UK is desirable for UK companies and employees.
- Why is a more powerful Chinese economy a ‘mixed blessing’ for the USA?
- In what ways is the Chinese economy ‘distorted’? Explain why this matters.
- Why is it encouraging that China’s current account and balance of trade surpluses have been shrinking?
- What effect would an appreciation of the yuan (or ‘renmimbi’) have (a) on the Chinese economy; (b) on the rest of the world? What would determine the size of this effect for any given appreciation?
- Why must China do more to rebalance its economy?
The post below considered the pound and now we look closer at some other international currencies and their movements. The pound has fallen, but what about the euro and the US dollar? What about the Japanese yen and the Australian and New Zealand dollars? How are the different currencies inter-related and how do they affect the various macroeconomic objectives? The following articles look at some of the recent movements in currencies. Consider these in relation to economic theory about exchange rates and government policy.
Pound plumbs five-month euro low BBC News (21/9/09)
Australian, N.Z. Dollars fall for third day as commodities drop Bloomberg (21/9/09)
Dollar ready to rise as greenback fades Brisbane Times (21/9/09)
Pound slips on Bank of England warning Times Online (21/9/09)
Canada’s dollar declines for second day on drop in commodities Bloomberg (21/9/09)
Yen firms versus European majors, hitting a 2-day high against pound Forex news (18/9/09)
Data on exchange rates can be found at:
Statistical Interactive Database – interest & exchange rates data Bank of England
Questions
- What have been the general trends in some of the main international currencies?
- The pound has fallen against the euro and the dollar, but what does this mean for the UK economy? And what about the USA and the rest of Europe?
- In the current climate, consider whether a fixed or floating exchange rate would be better for the economy.
- How do changes in exchange rates affect the government’s macroeconomic objectives?
Recent evidence from the Institute of Economic and Social Research shows that the UK economy grew in April and May and that 2009 Quarter 2 figures will also show a rise in output. Although annual growth in GDP will still be negative, as the previous three quarters were all negative, recent growth suggests that the recession might have ‘bottomed out’ and that recovery is beginning.
Of course, it’s early days to tell whether these are real ‘green shoots’ or whether the economy will slide back into negative growth once more, but confidence is returning. One sign of this is the recent appreciation of sterling (see). The following articles look the rise of the pound, why it is occurring and whether the green shoots will flourish or wither.
Pound hits 2009 high against euro BBC News (11/6/09)
Sterling: what’s the outlook now? Telegraph (11/6/09)
Sterling hits year’s high versus euro ThisIsMoney (11/6/09)
Sterling leaves euro in its wake on hopes of UK recovery The Herald (11/6/09)
Jeremy Warner: Recession may be over but not the pain Independent (11/6/09)
Taking stock of the different economic signals Times Online (11/6/09)
Questions
- Why has the pound been appreciating?
- What are the implications of an appreciation of the pound for the UK economy?
- Why is the dollar likely to fall as the prospects for the world economy brighten?
- What evidence is there that the UK economy is now beginning to recover? What will determine whether or not the recovery will be sustained?
China’s rate of inflation has hit an 11-year high, partly due to the cold winter weather destroying crops and pushing up food prices. However, inflationary pressure has been growing for some time with rapid economic growth and the resultant pressure on resources. This is despite six increases in interest rates in the past thirteen months.
Families feel pinch as inflation threatens economic miracle Guardian (25/2/08)
Chinese inflation soars to an 11-year high Times Online (20/2/08)
Chinese inflation hits 11 year high Times Online (19/2/08)
Questions
| 1. |
Explain the principal factors that have led to the increase in inflation in China. |
| 2. |
“Policymakers in China will likely try to tighten monetary policy further, with more reserve requirement ratio hikes, faster Chinese yuan appreciation, and more heavy handed controls over bank lending.” Discuss the likely effectiveness of these policy measures. |
| 3. |
Assess the extent to which changes in food prices will affect the overall level of aggregate demand in the Chinese economy. |
In March 2007, the pound reached a record high against the dollar. This made it an excellent time for UK tourists to visit the USA with prices appearing relatively low thanks to the exchange rate. These exchange rate values also affected the balance of payments of both the USA and the UK and the article below looks at the economic impact of the high exchange rate against the dollar.
Why everything’s almost free in America (and why it won’t last) Guardian
(23/4/07)
Questions
| 1. |
Explain the principal reasons for the change that has taken place in the exchange rate in recent years. |
| 2. |
“On a PPP basis, a pound should buy $1.60”. Explain what is meant by this statement. |
| 3. |
“My bet is that within a year the rate will be closer to $1.60 than $2. Maybe a lot closer.” Assess the impact of this possible outcome on economic growth and inflation in the UK. |
| 4. |
Examine the likely impact of the high exchange rate on the balance of payments situation of (a) the USA and (b) the UK. |