Petrol prices have been a bone of contention for some time. With household incomes remaining low and the cost of living rising, the fact that average petrol prices have reached their highest level of more than 1.37p per litre on average will undoubtedly put growing pressure on the approaching budget.
There have already been calls for the Chancellor to reduce fuel duty and with this latest data, the pressure will only mount. The problem is, if fuel duty does fall, so will tax revenues and as one of the Coalition’s key objectives has been to cut the budget deficit, this could pose further problems. Even the calls to cut VAT on fuel will also put a dent in the budget deficit.
Although everyone is undoubtedly feeling the effects of these higher prices, the key thing with petrol is its elasticity of demand. Whether the price of petrol was 0.90p or 1.37p per litre, I continue to buy the same amount. Therefore, for me, the price elasticity of demand for petrol is highly inelastic – at least between those prices. After all, if the price increase above say £3 per litre, I might think twice about driving to work!
So what has been driving this increase in prices? Petrol prices are hugely dependent on the cost of oil and on the demand for any product that uses fuel. With growing demand from countries like India and China, as they continue to develop and grow very quickly; the continuing concerns with Iran’s nuclear programme and the political problems in the Middle East, oil prices have been forced up. The future trend in prices will depend on many factors, not least whether or not there is any change in fuel duty in the 2012 budget and whether something like a regulator is introduced to monitor increases in fuel prices. This is definitely an area to pay close attention to in the coming months.
Petrol prices reach record high Independent, Peter Woodman (3/3/12)
Petrol prices hit record high with further rises expected Guardian, Hilary Osborne (2/3/12)
Appeak to regulate petrol prices This is South Wales (3/3/12)
Plea to slash duty as fuel costs soar to record high Scotsman, Alastair Dalton (3/3/12)
Petrol prices hit record high The Telegraph, David Millward (2/3/12)
Diesel prices predicted to reach 150p as petrol hits new record Guardian, Terry Macalister and Hilary Osborne (2/3/12)
Questions
- Which are the factors on the demand side that have pushed up the price of oil and hence petrol and diesel?
- What are the supply-side factors that are causing the rising price of fuel?
- Use a demand and supply diagram to illustrate the effects you have explained in the first two questions.
- In the blog, I mention that my price elasticity of demand is relatively inelastic between 2 given prices. What does this suggest about the shape of my demand curve for petrol? How does this shape affect prices following any change in demand or supply?
- Why is petrol a relatively price inelastic product?
- There have been calls for the government to cut VAT or reduce fuel duty. What are the arguments for and against these policies?
- How effective do you think a petrol price regulator would be?
There has been much talk of a double-dip recession, with many suggesting that the UK economy is already in a recession. However, according to the British Chambers of Commerce (BCC), a recession is not inevitable. Although the businesses surveyed showed that the economy had significantly weakened, John Longworth the Director General of the BCC said that a ‘new recession is not a foregone conclusion’.
Even though many of the figures showed a continued weakening of the economy, the results are still not as bad as they were back in 2008. The concern is that if the weakness continues, as it is predicted to do in the first quarter of 2012, confidence will remain low and then the economy may stagnate and a recession becomes a more likely scenario. Action is needed to prevent this from happening, especially with the eurozone crisis still causing concern. As John Longworth said:
The UK does have the potential to recover and make its way in the world. We have the talent, the energy and the enterprise. All we need is an environment that puts business first.
At the beginning of December 2011, many analysts thought retail sales would remain low, as they had been throughout 2011. However, British consumers came through in the second half of December and retail sales were up by 4.1% compared with a year ago. According to the British Retail Consortium, this Christmas rush should not be seen as a fundamental change in the direction of the economy and will have done little to boost the overall annual sales of most retailers.
Recession ‘not foregone conclusion’ Guardian (10/1/12)
UK economy likely to shrink amid eurozone crisis, says BCC The Telegraph, Angela Monaghan (10/1/12)
UK recession is not yet inevitable, survey says BBC News (10/1/12)
UK risks recession and lengthy stagnation – BCC Reuters, David Milliken (10/1/12)
U.K recession fears build Wall Street Journal, Ilona Billington (10/1/12)
BoE stimulus expansion may not be enough for recovery, BCC says (quick ad before article appears) Business Week, Scott Hamilton (10/1/12)
Questions
- How is a recession defined?
- What data has the BCC used to come to the conclusion that a recession is not inevitable?
- What action is needed by the government to tackle ‘short term stagnation and a lack of business confidence’?
- What could explain the 4.1% increase in sales in December compared with the previous year? Why is this data not thought to represent a ‘fundamental change in the circumstances of UK consumers’?
- What is expected to happen to UK inflation and employment during the first quarter of 2012?
- Why does the eurozone crisis present a problem for confidence and British exporters?
On Tuesday 29 November, the Chancellor of the Exchequer delivered his Autumn Statement. This presented the outlook for the UK economy, with forecasts supplied by the independent Office for Budget Responsibility (OBR). It also contained details of government fiscal measures to tackle various macroeconomic problems, including economic slowdown and high levels of national debt.
The outlook for the UK economy came as no surprise. Things are looking much bleaker than a few months ago. The OBR, along with other forecasters, has downgraded its predictions of the UK’s growth rate. Although it is still forecasting positive growth of 0.9% this year and 0.7% in 2012, these rates are well below those it predicted just eight months ago. In March it forecast growth rates of 1.7% for 2011 and 2.5% for 2012.
To make things worse, its growth forecasts are based on the assumptions that the eurozone crisis will be resolved with little or no effect on the UK. But even if that were so, the debt reduction plans in the eurozone are likely to drive the eurozone back into recession. This, in turn, will impact on UK exports, more than 50% of which go to eurozone countries.
The OBR forecasts that national debt will be 67% of GDP this year and will rise to 78% by 2014/15 but then start to fall. Government borrowing is forecast to be £127bn this year, falling to £120bn in 2012/13 and then more substantially each year after that to £24bn in 2016/17.
So what measures were included in the Autumn Statement? These are detailed in the articles below, but the key ones were:
• a programme of credit easing, which will underwrite up to £40bn in low-interest loans for small and medium-sized businesses.
• £5bn of public money to be invested in infrastrucuture projects and a further £5bn in the next spending round. Agreement had been reached with two groups of pension funds to invest a further £20bn of private money in infrastructure projects.
• an additional £1.2bn for capital investment in schools.
• A cap on public-sector pay increases of 1% per year for the two years after the current two-year pay freeze.
The following videos and articles give details of the forecasts and the measures and give reactions from across the political spectrum.
Webcasts
George Osborne: Key points from chancellor’s speech BBC News, Andrew Neil 29/11/11)
Autumn Statement 2011: George Osborne – my plan to ‘see Britain through The Telegraph on YouTube (29/11/11)
UK economy slows to crawl Reuters (29/11/11)
George Osborne’s autumn statement – video analysis Guardian, Larry Elliott (29/11/11)
Autumn Statement: Osborne reveals state of UK economy BBC News, Nick Robinson (29/11/11)
Autumn Statement: Why is the deficit not shrinking? BBC News, Hugh Pym (29/11/11)
Autumn Statement: Robinson, Flanders and Peston analysis BBC News, Nick Robinson, Stephanie Flanders and Robert Peston (29/11/11)
Can the UK economy be ‘re-balanced’? BBC Newsnight, Paul Mason (29/11/11)
Articles
Autumn Statement 2011: main points The Telegraph, Rachel Cooper (29/11/11)
The Autumn Statement at a glance WalesOnline, Rhodri Evans (30/11/11)
Autumn Statement Summary 2011 TaxAssist Accountants (29/11/11)
Into the storm The Economist (3/13/11)
A battalion of troubles The Economist (3/12/11)
Weapons of mass construction The Economist (3/12/11)
Mr Osborne’s unwelcome statement BBC News, Stephanie Flanders (29/11/11)
£30bn of extra cuts keep Osborne on track, just BBC News, Paul Mason (29/11/11)
Autumn Statement 2011: Commentators give their verdict The Telegraph (30/11/11)
Autumn Statement 2011: concern remains but ‘Plan A-plus’ welcomed The Telegraph, Graham Ruddick (29/11/11)
Autumn statement: George Osborne’s cutting fantasy is over Guardian, Robert Skidelsky (29/11/11)
Hoarding for the apocalypse? I really wouldn’t blame you Guardian, Zoe Williams (30/11/11)
Reports and data
Autumn Statement 2011 – documents HM Treasury (29/11/11)
Economic and fiscal outlook – November 2011 Office for Budget Responsibility (29/11/11)
Autumn statement 2011: the key data you need to understand George Osborne’s speech Guardian DataBlog (29/11/11)
How much will the autumn statement cost and how will the economy change? Guardian DataBlog (29/11/11)
Questions
- Compare the OBR’s March and November 2011 forecasts.
- What factors explain the differences in the two sets of forecasts?
- For what reasons might national debt in the future turn out to be higher or lower than that forecast by the OBR?
- What will be the impact on aggregate demand of the measures announced in the Autumn Statement?
- What will be the impact on aggregate supply of the measures announced in the Autumn Statement?
- Why may a recession impact not just on aggregate demand but also on long-term aggregate supply?
- Why may increased pessimism by both consumers and producers make it more difficult for the government to meet its macroeconomic objectives?
This autumn has been one of the mildest on record. Whilst this may be very nice for most of us, certain industries have been suffering. For example, gas and electricity consumption is down as people delay turning on their heating. One sector particularly badly hit has been clothing. Sales of winter clothes are substantially down and many retailers are longing for colder weather to boost their sales.
Of course, this is not helped by consumer incomes. With inflation at around 5% and average (pre-tax) weekly earnings currently rising by less than 2%, real incomes are falling. In fact over the year, even nominal disposable incomes are down 2.1%, given the rise in national insurance and income tax. And the problem of falling incomes is compounded by worries over the future state of the economy – whether it will go back into recession, with further falls in real income and rises in unemployment.
It’s no wonder that retailers are longing for some cold weather and for their customers to return from the seaside or their garden barbecues to the shopping malls. Look out for the ‘sales’ signs: they’re beginning to spring up as desperate retailers seek to attract wary customers.
Webcast
Retailers slash prices in Christmas build-up BBC News, Tim Muffett (25/11/11)
Articles
Winter woes: warm weather means shoppers aren’t buying as much Guardian, Zoe Wood (21/11/11)
Shoppers urged to be savvy as Christmas sales last for weeks The Telegraph, Victoria Ward (21/11/11)
Data
Earnings tables: Labour Market Statistics ONS (November 2011)
Personal Income and Wealth ONS
Price Indices and Inflation ONS
Personal Inflation Calculator (PIC) ONS
Questions
- Identify the determinants of demand for winter clothing.
- How responsive is demand likely to be to these determinants (a) over a period of a few weeks; (b) over a period of a few months?
- What factors should a retailer take into account when deciding whether to make pre-Christmas discounts?
- Assume that you are employed but are afraid of losing your job in a few months’ time. How would this affect your consumption of (a) seasonal goods; (b) durable goods; (c) day-to-day goods?
- What longer-term strategies could retailers adopt if they predict tough trading conditions over the next two or three years?
The UK and US governments face a conundrum. To achieve economic recovery, aggregate demand needs to expand. This means that one or more of consumption, government expenditure, exports and investment must rise. But the government is trying to reduce government expenditure in order to reduce the size of the public-sector deficit and debt; exports are being held back by the slow recovery, or even return to recession, in the eurozone and the USA; and investment is being dampened by business pessimism. This leaves consumer expenditure. For recovery, High Street spending needs to rise.
But herein lies the dilemma. For consumer spending to rise, people need to save less and/or borrow more. But UK and US saving rates are already much lower than in many other countries. You can see this by examining Table 23 in OECD Economic Outlook. Also, household debt is much higher in the UK and USA. This has been largely the result of the ready availability of credit through credit cards and other means. The government is keen to encourage people to save more and to reduce their reliance on debt – in other words, to start paying off their credit-card and other debt. That way, the government hopes, the economy will become ‘rebalanced’. But this rebalancing, in the short run at least, will dampen aggregate demand. And that will hardly help recovery!
In the following podcast, Sheldon Garon discusses his new book Beyond Our Means. He describes the decline of saving in the USA and UK and examines why other countries have had much higher saving rates.
‘He also seeks to explain why high interest rates didn’t encourage saving in the boom years and why current levels of relatively high inflation haven’t stopped savings rates shooting up again in Britain.’
Living beyond our means Guardian: the Business Podcast, Sheldon Garon talks to Tom Clark (2/11/11)
Questions
- Why have saving rates in the UK and USA been much lower than those in many other countries? How significant has been the availability of credit in determining savings rates?
- Why have saving rates increased in the UK and USA since 2008/9 despite negative real interest rates in many months?
- Explain what is meant by the “paradox of thrift”. What are the implications of this paradox for government policy at the present time?
- Why may it be difficult to have a consumer-led recovery in the UK and US economies?
- What is the life-cycle theory of consumption and saving? How well does it explain saving rates?
- Can people be given a “nudge” to spend more or to save more? If so, what nudges might be appropriate in the current situation?
- Why do countries with a more equal distribution of income have higher saving rates?
- What is the relationship between the saving rate and (a) the rate of inflation and (b) the real rate of interest? Why is this the case?
Petrol prices have been a bone of contention for some time. With household incomes remaining low and the cost of living rising, the fact that average petrol prices have reached their highest level of more than 1.37p per litre on average will undoubtedly put growing pressure on the approaching budget.