The global economy has been in a recession since December 2007, but have we now passed the worst of it? Whilst companies are still going bankrupt, unemployment is still rising, the housing market is still looking pretty gloomy and government debt surely can’t go up anymore, there are indications that we’ve reached the bottom of the recession. There are murmurs that the economy may start to recover towards of the end of the year.
But, of course, economics wouldn’t be economics if there wasn’t considerable disagreement. Many still believe that the worst is yet to come. According to the OECD, the recession is ‘near the bottom’. Yet, output in the UK is still set to decline by 4.3% in 2009, and by 2010 the budget deficit is predicted to have grown to 14%. Unemployment is at its highest since November 1996, but US consumer confidence is said to be rising and the pound is climbing. Read these articles and make up your mind about the state of the UK and global economy!!
Business and Consumer Surveys (After following link, click on chart) European Commission, Economic and Financial Affairs (29/6/09)
Pound climbs against euro as King sees signs recession easing Bloomberg, Lukanyo Mnyanda, Gavin Finch (20/6/09)
Bank says banking crisis easing BBC News (25/6/09)
First signs of optimism returning to some parts of financial services CBI PRess Release (29/6/09)
Darling and King agreed on tentative recovery Guardian, Ashley Seager (17/6/09)
Sharp contration for UK economy BBC News (30/6/09)
Housing market knocked by price falls Moneywise (22/6/09)
OECD says recession ‘near bottom’ BBC News, Steve Schifferes (24/6/09)
US Federal Reserve says recession is ‘easing’ Telegraph, James Quinn (24/6/09)
Public borrowing at record levels BBC News (18/6/09)
Leading index suggests recession easing UPI.com (18/6/09)
US consumer confidence up in June BBC News (26/6/09)
Blow for housing market as prices fall The Independent, David Prosser (22/6/09)
Most UK businesses freeze pay as recession bites, CBI says Telegraph, Peter Taylor (23/6/09)
Questions
- What are the typical characteristics of a recession? Do the current statistics of the four main macroeconomic objectives fit in with what economic theory tells us?
- Which policies would governments normally implement to get a economy into the expansionary/recovery phase of the business cycle and how do they work?
- Why is consumer confidence so key to economic recovery?
- What type of banking regulation is needed to prevent a similar crisis happening again?
- Movements in the housing market are often seen as indicators of the state of the economy. Why is this?
The Bank of England has extended its policy of increasing the money supply through the process of quantitative easing. After the May meeting of the MPC, the Bank announced that it will increase the amount of assets it is prepared to buy under the ‘Asset Purchase Programme’ from £75 billion to £125 billion. At the same time the ECB has announced that it too will embark on a programme of quantitative easing. The press releases and articles below consider the details.
Bank of England Maintains Bank Rate at 0.5% and Increases Size of Asset Purchase Programme by £50 Billion to £125 Billion Bank of England News Release (7/5/09) (see also interview with Bank of England Governor)
Press conference by Jean-Claude Trichet, President of the ECB and Lucas Papademos, Vice President of the ECB ECB Press Release (7/5/09) (you can also watch a webcast of the press conference from this link)
Bank of England and European Central Bank extend quantitative easing Telegraph (8/5/09) (see also)
Economy to get extra £50bn boost BBC News (7/5/09)
A QE surprise BBC News: Stephanomics blog (7/5/09)
European Central Bank opts for quantitative easing to lift the eurozone far Times Online (8/5/09)
Fighting recession in the eurozone Financial Times (7/5/09)
ECB dips toe in quantitative easing water Guardian (7/5/09)
Quantitative easing: The story so far BBC News site video
Questions
- Explain how quantitative easing is conducted by the Bank of England and the ECB.
- Examine what determines the effect of quantitative easing on aggregate demand.
- Is quantitative easing the same as open-market operations?
- Explain how quantitative easing is likely to affect exchange rates.
Inflation has reached a 16-year high of 5.2% in September 2008 with rising energy bills leading to much of the increase. This puts inflation well outside the target rate for the Consumer Prices Index (CPI), but analysts are convinced that it will fall sharply in the coming months with some predicting inflation to be just 1% by autumn 2009. Even the Bank of England has now agreed that inflationary risks have moved “decisively to the downside” allowing them to cut the interest rate from 5% to 4.5% as part of a globally coordinated interest rate cut.
Rising gas bills send inflation to 16-year high Times Online (14/10/08)
Inflation high but fear of recession grows Guardian (14/10/08)
Inflation soars to 5.2% Guardian (14/10/08)
Fresh storm gathering as inflation surge adds £3bn to welfare bill Times Online (15/10/08)
Rising cost of living prompts further pay strike threats Times Online (15/10/08)
Where now for UK inflation? BBC News Online (14/10/08)
Consumer inflation reaches 5.2% BBC News Online (14/10/08)
Questions
| 1. |
Explain how the CPI is calculated. |
| 2. |
What are the principal factors that have led to the rise in inflation to 5.2%? |
| 3. |
Discuss whether, in the current financial crisis, it is appropriate for the Bank of England’s Monetary Policy Committee (MPC) to be targeting just inflation. |
| 4. |
Explain the transmission mechanism whereby a cut in interest rates will affect inflation. Discuss whether this transmission mechanism will be as relevant in the current financial climate. |
Rising food prices (5.5% increase over the past year) and rising energy costs have led to a rise in overall inflation. The consumer price index rose from 2.5% in March to 3% in April, triggering concerns that the Governor of the Bank of England, Mervyn King, would have once again to write an explanatory letter to the Chancellor for inflation going over its target rate.
Biggest jump in cost of living for six years surprises the city Guardian (4/5/08)
The danger of inflation fixation Guardian (14/5/08)
Dear Alistair …. Guardian (13/5/08)
Rising food prices send inflation surging to 3% Guardian (13/5/08)
Playing the percentage game for high stakes Guardian (9/5/08)
High street prices in biggest surge since 1992 Times Online (29/5/08)
UK inflation jumps to 3% in April BBC News Online (13/5/08)
Questions
| 1. |
Explain the principal factors that led to the sharp rise in the cost of living for April. |
| 2. |
Assess the extent to which inflation may be higher for many groups in society than the consumer price index figures indicate. |
| 3. |
Discuss the extent to which an interest rate increase would help to reduce inflation in a climate of rising food and energy prices. |
The start of 2008 saw oil prices hit $100 per barrel – a new record. This important psychological as well as economic milestone has, as a result, also seen petrol prices rising to over £1 per litre. The increase in prices may prove to be an important factor in determining whether the Bank of England is able to lower interest rates.
The heavy price of $100 per barrel Guardian (4/1/08)
Oil sets fresh record above $100 BBC News Online (3/1/08)
Oil price at record $100 a barrel BBC News Online (2/1/08)
What is driving oil prices so high? BBC News Online (2/1/08)
Global oil industry in figures BBC News Online (2/1/08)
Plenty of oil left in the global tank Times Online (16/12/07)
Oil at $100 threatens to choke economy Times Online (3/1/08)
Videos
Oil prices break $100 barrier BBC News Online
Questions
| 1. |
What are the main factors that have driven oil prices over $100 per barrel. |
| 2. |
Using diagrams as appropriate, illustrate the changes that have taken place in the oil market. |
| 3. |
Assess the likely impact of the increase in the oil price on the major UK economic targets. |
| 4. |
Discuss the extent to which the Bank of England will need to take account of higher oil prices in its decisions on interest rates. |