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?
Throughout the credit crunch and since then, one of the major problems in the global economy has been a lack of lending by banks. A key cause of the credit crunch and many of the debt problems countries and people face today is because of people living off borrowed money. In the past, credit was so easy to obtain – people could receive a mortgage for more than 100% of the value of their property. However, when more and more people began to struggle to make their monthly mortgage repayments, the banking crisis began and since then mortgage lenders have become increasingly wary about who they lend to and how much.
The Bank of England has said that in the coming months it will become even harder to obtain mortgages, as banks become increasingly wary about who becomes their customer and potential home buyers put off even applying for a mortgage. Although mortgage approvals are at a 2-year high, they still remain significantly below their pre-crisis level. Indeed, the Bank of England said:
“Lenders expected the proportion of total loan applications being approved to fall over the coming quarter with some lenders commenting that they had revised down expectations for households’ disposable incomes and hence the affordability of taking out new secured loans.”
As part of this new rationing of mortgages, lenders are requiring applicants to put down larger and larger deposits and so for first time buyers, getting on to the property ladder is becoming more and more of a dream. The property market has been suffering from this mortgage rationing as house sales are down below their pre-crisis level. The housing market is crucial to any economy, as so many other sectors and hence jobs depend on it. If mortgages remain scarce and the required deposit so high, the UK housing market is likely to remain stagnant and this will certainly prove damaging for the prospects of the UK economy in 2012.
Articles
Mortgage approvals hit new two-year high The Telegraph, Angela Monaghan (4/1/12)
Mortgage approvals up but overall lending weak Reuters (4/11/12)
Mortgage rationing becomes worse, Bank of England says BBC News (5/1/12)
Mortgage demand fell in Q4 2011, say lenders Mortgage Strategy, Tessa Norman (5/11/12)
Mortgage lending still stagnant, Bank figures show BBC News (4/11/12)
BoE: Lending to be tighter in Q1 2012 Mortgage Introducer, Yuan Phoon (5/11/12)
Data
Lending to Individuals Bank of England
Questions
- Why are mortgages being rationed?
- Why is the housing market so important for the UK economy?
- Which other sectors of the economy employ people whose jobs are dependent on a buoyant housing market?
- Why has the Bank of England said that in the coming months it will become harder to get a mortgage?
- Why would increased mortgage lending be a much needed stimulus for the UK economy?
- Using an aggregate demand and aggregate supply diagram, show how rationing of mortgages and other loans will affect the UK economy.
The Brazilian economy is an emerging superpower (see A tale of two cities), but even its growth slowed in the second quarter of the year, although the economy still appears to be growing above capacity. In reaction to that latest economic data, the central bank slashed interest rates by 50 basis points to 12%. The Central Bank said:
‘Reviewing the international scenario, the monetary policy committee considers that there has been a substantial deterioration, backed up, for example, by large and widespread reductions to the growth forecasts of the main economic regions.’
Rates had previously been hiked up 5 times in the year to tackle rising inflation, which has been some way above its inflation target. Such tightening policies have become commonplace in many emerging economies to prevent overheating. However, following this reversal of policy, questions have been raised about the independence of the central bank, as some politicians have recently been calling for a cut in rates, including President Rousseff himself. As Tony Volpon at Nomura Securities said:
‘They gave in to political pressure. The costs will likely be much higher inflation and a deterioration of central bank credibility…It has damaged the inflation-targeting regime.’
Many believe the rate cut is premature and the last thing the economy needs given the inflationary pressures it’s been facing. Huge spending cuts have been announced to bring inflation back under control, together with the previous rate rises, so this cut in interest rates to stimulate growth is likely to put more pressure on costs and prices. Only time will tell exactly how effective or problematic this new direction of monetary policy will be.
Brazil’s growth slows despite resilient consumers Reuters, Brian Ellsworth and Brad Haynes (2/9/11)
Brail in surprise interest rate cut to 12% BBC News (1/9/11)
Rousseffl’s ‘Risky’ rate cut means boosting Brazil GDP outweighs inflation Bloomberg, Arnaldo Galvao and Alexander Ragir (2/9/11)
Brazil makes unexpected interest rate cut Financial Times, Samantha Pearson (1/9/11)
Brazil rate cut stirs inflation, political concerns Reuters (1/9/11)
Questions
- What is the relationship between the macroeconomic objectives of inflation and economic growth?
- Why are there concerns that the recent reduction in the interest rate may worsen inflation? Do you think that a decision has been made to sacrifice Brazil’s inflation-targeting regime to protect its economic growth?
- Why are there questions over the independence of the central bank and how will this affect its credibility? What are the arguments for central bank independence?
- Growth in Brazil, although lower this year, still remains very strong. Why has the Brazilian economy been able to continue its strong growth, despite worsening economic conditions worldwide?
- What type of inflation are emerging economies experiencing? Explain how continuous hikes in interest rates have aimed to bring it back under control.
- What is meant by overheating? How will the central bank’s past and current policies contribute towards it?
The growing interdependence of economies has never been more true than over the past few years. The credit crunch began in the US and gradually spread to the rest of the world. As the saying goes, ‘when America sneezes, the world catches a cold’. The US economy is the largest in the world and with such a close relationship to the UK, its economic situation is critical. GDP growth in the first quarter was a mere 0.4% and in the second quarter, it was revised down from the US Commerce Department’s original estimate of 1.3% to just 1%. This was attributed to weaker growth in business inventories, a fall in exports and less spending from the state and local governments. Personal consumption expenditure and exports did rise, but the increase in the former was hardly noticeable (0.4%) and in both cases, the second quarter increase was significantly down on that in the first quarter.
With GDP growth remaining low, there’s not much better news when it comes to US unemployment, which remained at 9.1% from July. It was expected that a further 70,000 jobs would be created in August, but the latest figures suggest that no new jobs were created. It seems that the data on growth and the components of aggregate demand are enough to bring consumer and investor confidence down. Virginie Maisonneuve said:
‘Companies that are overall doing OK are hesitating to hire and invest further, creating some fragility for the economy… We will need some help from the Fed and the government to avoid a recession.’
President Obama is due to make a speech in which he will outline a new plan to boost economic growth. Crucial to this will be restoring confidence, as without it, businesses will not invest, consumers will save rather than spend, jobs will not be created and growth will remain sluggish. This will do nothing to help the still weak economies of Europe. Indeed, following news of the US job situation, stock markets across the world fell, as fears of recession set in. The Dow Jones opened 2% down, the FTSE 100 ended 2.3% down (although this was also affected by a weakening in the construction sector), markets in Germany, France and Spain were down by over 3% and in Italy by over 4%.
US GDP revised down to 1pc in second quarter as growth stalls Telegraph (26/8/11)
US economy: no new jobs added in August BBC News (2/9/11)
Jobs data confirm US growth fears Financial Times, Robin Harding and Johanna Kassel (2/9/11)
Markets fall on weak U jobs data BBC News (2/9/11)
FTSE falls after weak US jobs data The Press Association (2/9/11)
European stocks knocked by dire US jobs data Reuters (2/9/11)
Fears over US economy cause world market route Economic Times (2/9/11)
FTSE 100 extends losses after poor US non farm payroll figures Guardian (2/9/11)
Questions
- What is aggregate demand? Which component is the biggest engine of growth for an economy?
- Why did markets decline following the data on US jobs?
- Why is the economic situation in America so important to the economic recovery of other countries across Europe?
- Why are there suggestions that the US is underestimating its inflation?
- Why is the US economic data for the second quarter of 2011 so much worse than that of the first quarter? What could have caused this downturn?
- What action could the government and the Fed take to boost confidence in the US economy and stimulate economic growth? Can any of this be done without causing inflation?
Cycling generated £2.9 billion for the UK economy in 2010 – a rise of 28% over 2009. This amounts to an average ‘Gross Cycling Product’ of £233 for each of Britain’s 12½ million cyclists. What is more, the figures are likely to continue growing rapidly in future years. This is the central finding of the LSE report, The British Cycling Economy, authored by Dr Alexander Grous, a productivity and innovation specialist at the Centre of Economic Performance (CEP) at the London School of Economics.
The major benefits to the economy from cycling include the sale of cycles and accessories, cycle maintenance, the generation of wages and tax revenues from 23,000 people employed directly in bicycle manufacture, sales, distribution and the maintenance of cycling infrastructure. There are also health benefits. These are partly the direct benefits to the economy of fewer days taken in sick leave by cyclists (a contribution of £128 million in 2010) and partly the health and well-being benefits to the individual and the saving on healthcare expenditure.
But are enough people being encouraged to get on their bikes? What are the major incentives for people to cycle? The report identifies the following:
• Cycling being made both segment- and gender-neutral, appealing to the widest number of user groups, across all ages and genders;
• Coordinated and preferential traffic signals that facilitate faster and safer journeys;
• ‘Short cut’ routes in dense urban areas and capital cities that join arterial road routes;
• Traffic calming initiatives that include road narrowing and speed restrictions that range from 30km/h to ‘walking speeds’;
• Extensive parking and in some areas, designated women-only spaces with CCTV and enhanced lighting;
• Established bike rental schemes;
• Long-running training programmes for children;
• The prevalence of strict ‘liability laws’ that assume a car driver is responsible in the event of a collision between a car and a cyclist.
Read the following articles and report and then consider, as an economist, how the benefits and costs should be analysed and what policy implications might follow.
Articles
Wheels of fortune: how cycling became a £3bn-a-year industry Independent, Tim Hume (22/8/11)
Cycling worth £3bn a year to UK economy, says LSE study Guardian (21/8/11)
Cycling industry gives economy £3bn boost BBC News (22/8/11)
Growth in cycling ‘boosting economy’, says LSE BBC News (22/8/11)
Britain Gets Back On Its Bike British Cycling (22/8/11)
‘Gross Cycling Product’ worth £2.9bn to UK economy says LSE Road.cc (22/8/11)
Report
The British Cycling Economy: ‘Gross Cycling Product’ Report LSE, Dr Alexander Grous
Questions
- How is the figure of £2.9bn derived? Explain whether it is a ‘value-added’ figure?
- Which of the benefits can be regarded as externalities?
- Are there any external costs from cycling? If so, what are they and how might they be minimised?
- How might incentives be changed in order to encourage more people to cycle?
- Assume that you are a government or local authority considering whether or not to increase investment in cycle paths. What factors would you take into consideration in order to make a socially efficient decision?