Investment in the UK in quarter 2 2009 fell by the largest amount since records began in 1965. Why has this happened and what does it tell us about the determinants of investment? Does it mean that businesses are short sighted or risk averse, or does the lack of investment reflect a lack of finance in the aftermath of the credit crunch. The following articles look at the data and what they signify.
British business investment plunges most in 44 years Telegraph (27/8/09)
Business investment falls sharply in Q2 Reuters (27/8/09)
Economy shrinks less than thought BBC News (28/8/09)
UK GDP contracts less than expected Telegraph (28/8/09)
For the ONS data see:
Business Investment: 10.4% down in second quarter 2009 ONS (27/8/09) and
Business investment: Provisional results – 2nd quarter 2009 ONS Statistical Bulletin (27/8/09)
Questions
- Chart the quarterly percentage change in business investment and quarterly economic growth on the same diagram. (See the second ONS link above and also Gross domestic product: Preliminary estimate – 2nd Quarter 2009 and GDP growth (revised estimate).
- Why has investment fallen so dramatically?
- Is the pattern of investment and GDP growth consistent with the accelerator theory?
- To what extent is investment a leading or a lagging indicator of economic activity?
Banks appearing in the news has become commonplace in the past year or so. Everyday, there has been something newsworthy happening in the banking sector, whether in the UK or abroad. A recent development in this sector is Barclays agreeing to sell its fund management division, BGI, to Blackrock for £8.2 billion. Barclays says that there are strategic reasons for the sale, which undoubtedly add to the 8.2 billion other reasons. This deal will put the bank in a strong position to make acquisitions next year in creating the world’s biggest asset manager. It will also allow Barclays to weather any further storms on the horizon. The articles below look at recent developments.
Blackrock in £8.2 billion Barclays deal BBC News (12/6/09)
Blackrock and a hardplace The Economist (12/6/09)
Bob Diamond: The builder of Barclays Telegraph, Louise Armitstead (13/6/09)
Barclays offloads fund management business BGI to Blackrock for £13.5 billion Telegraph, James Quinn (12/6/09)
Inside Look: Blackrock buys Barclays fund unit for $13.5 billion Bloomberg, youtube (12/6/09)
Sovereign wealth funds back BlackRock move to acquire Barclaysd Global Investors Telegraph, Louise Armitstead, James Quinn (12/6/09)
Blackrock targets Barclays firm BBC News (8/6/09)
Questions
- What are the ‘strategic reasons’ behind Barclays’ decision to sell its fund management division?
- The Blackrock and a hardplace article talks about the benefits of economies of scale. What does it mean by this?
- What are the advantages and disadvantages of combining fund management with banking and creating such a large business?
- Given that Barclays’ fund management, BGI is a successful part of its business, does their agreement to sell it put them in a stronger position?
- What will be the likely impact of this deal on the economy? Consider who will be (a) the winners and (b) the losers.
Setanta is a sports broadcaster that emerged from an Irish dance hall in West London in the 1990s. Since 2004 it has grown rapidly, acquiring major sporting rights and acting as something of a rival to Sky. However, Setanta has now gone into administration following the collapse of talks with a US investor, its failure to pay a number of sporting organisations and the loss of its English Premier League games. Having less than 60% of the annual subscribers needed, and competing against Sky, it is hardly surprising that this broadcaster has now exited the industry. But, what are the reasons behind this collapse? Marketing, advertising, pricing, the recession or dominance by its competitors? What will be the impact of this bankruptcy on its employees, the Pay TV market, sporting organisations and its customers?
Offer made for stake in Setanta BBC News (12/6/09)
Troubled sports channel stops broadcasting CBBC Newsround (24/6/09)
Setanta goes off air with loss of more than 200 jobs Guardian, James Robinson, Leigh Holmwood (23/6/09)
Blavatnik offers Setanta lifeline BBC News, Robert Peston (12/6/09)
Last-ditch effort to save Setanta BBC News (9/6/09)
Football’s minnows braced to take full force of Setanta collapse Guardian, Owen Gibson (24/6/09)
UFC: After Setanta divorce where now: Bravo, Viring, Channel 5 or Sky? Telegraph, Gareth Davies (23/6/09)
Setanta sports taken off air in Britain Times Online, Dan Sabbagh (23/6/09)
Questions
- How was Setanta able to expand so quickly? Is this part of the reason for its failure?
- Premium content, such as Premier League matches, is already dominated by BSkyB. What does the collapse of Setanta mean for the structure of the Pay TV market?
- What reasons could explain Setanta’s inability to attract sufficient subscribers? Is its collapse a consequence of the recession, or are there other factors? What are they?
- Who will lose out from Setanta’s bankruptcy? Think about all those connected with Setanta. What will happen to the Scottish Premier League, which has paid the SPL clubs out of its own pocket? Will it get this money back?
- Do you think there were any other options open in a bid to rescue Setanta? If Ofcom had stepped in to regulate the industry, would it have made a difference?
The following articles look at a recently published book by George Akerlof of the University of California, Berkeley, and Robert Shiller of Yale. They examine the role of what Keynes called ‘animal spirits’ and is the title of the book.
The motivation to make economic decisions (to buy, to sell, to invest, etc) may not be ‘rational’ in the sense of carefully weighing up marginal costs and marginal benefits. Rather it can be one of over-optimism in good times or over-pessimism in bad times. Just as individuals have ‘mood swings’, so there can be collective mood swings too. After all, confidence, or lack of it, is contagious. This motivation that drives people to action is what is meant by animal spirits.
But are animal spirits a blessing to be nurtured or a curse to be reined in? Should governments seek to constrain them?
An economic bestiary The Economist (26/3/09)
Good Government and Animal Spirits Wall Street Journal (23/4/09)
Irrational Exuberance New York Times (17/4/09)
Animal Spirits: A Q&A With George Akerlof Freakonomics: New York Times blog (30/4/09)
Questions
- Describe what is meant by ‘animal spirits’ and their effects on human behaviour.
- Why may animal spirits make economies less stable?
- How may animal spirits help to explain exchange rate overshooting?
- Discuss whether governments should seek to constrain animal spirits and make people more ‘rational’? Also consider what methods governments could/should use to do this?
The first linked article below is from the American business magazine Forbes. It looks at the economics of football (‘soccer’) signings and, in particular, that of Robinho by Manchester City. In September 2008 the club was bought by an Abu Dhabi investment fund, controlled by Sheikh Mansour bin Zayed Al Nahyan, for £210 million. But does the investment in new players make good business sense?
Also, what should determine whether a club sells a player? The third link below considers this issue. The link is to the Embedding Threshold Concepts (ETC) site at Staffordshire University. ETC was funded by the Higher Education Funding Council for England’s Fund for the Development of Teaching and Learning (FDTL). The site has a number of teaching and learning resources.
City of Dreams Forbes (8/4/09)
Man City beat Chelsea to Robinho BBC Sport (1/9/08)
Selling footballers: the economic viewpoint ETC reflective exercise
Questions
- Was it consistent with the goal of profit maximisation for Manchester City pay Real Madrid £32.5 million for Robinho? Was it consistent with the goal of profit maximisation for Real Madrid to sell him?
- If Real Madrid had decided to keep Robinho, how would you estimate the cost of doing so?
- What difficulties are there in developing Manchester City into a ‘global brand’?
- In what sense are the top Premier League clubs a ‘self-perpetuating oligopoly’?