With all the concerns recently about Greek and Italian debt and about the whole future of the eurozone, you would be forgiven for thinking that the problems of the UK economy had gone away. This couldn’t be further from the truth. Problems are mounting and pessimism is growing.
First there is the problem of a contracting eurozone economy. This will directly impact on the UK as almost half of UK exports go to eurozone countries. Second there is the impact of the government expenditure cuts, most of which have still not taken effect yet. Third there is the fact that, with the combination of inflation over 5% and nominal pay typically rising by no more than 2%, real take-home pay is falling and hence too is the volume of consumer expenditure. Fourth, there is the increasingly pessimistic mood of consumers and business. The more pessimistic people become about the prospects for their jobs and incomes, the more people will rein in their spending; the more pessimistic businesses become, the more they will cut back on investment and economise on stock holding.
Forecasts for the UK economy have become considerably bleaker over the past few weeks. These include forecasts by the National Institute for Economic and Social Research (NIESR), the accountancy network BDO, Ernst & Young’s ITEM Club and the CBI in its SME Trends Survey and November Economic Forecast. The Treasury’s latest Forecasts for the UK Economy, which brings together forecasts by 29 different organisations, also shows a marked increase in pessimism from September to October.
So is it now time for the government to change course to prevent the economy slipping back into recession? Do we need a Plan B? Certainly, it’s something we’ve considered before on this news site (see Time for a Plan B?). The latest call has come from a group of 100 leading academic economists who have written to the Observer. In their letter they spell out what such a plan should contain. You’ll find a link to the letter below and to other articles considering the proposals.
The letter
We economists have a Plan B that will work, Mr Osborne Observer letters (29/10/11)
Articles
Plan B: the ideas designed to restart a stalled UK economy Observer, Daniel Boffey and Heather Stewart (29/10/11)
Plan B could have been even more aggressive, but it would definitely work Observer, Will Hutton (29/10/11)
The economy: we need Plan B and we need it now Observer editorial (30/10/11)
If tomorrow’s growth figures disappoint, Plan B will be a step closer, whatever David Cameron says The Telegraph, Daniel Knowles (31/10/11)
Plan B to escape the mess we are in Compass, John Weeks (7/11/11)
The report
Plan B; a good economy for a good society Compass, Edited by Howard Reed and Neal Lawson (31/10/11)
Questions
- What are the main proposals in Compass’s Plan B?
- How practical are these proposals?
- Without a Plan B, what is likely to happen to the UK economy over (a) the coming 12 months; (b) the next 3 years?
- Why might sticking to Plan A worsen the public-sector deficit – at least in the short term?
- What are the main arguments for sticking to Plan A and not easing up on deficit reduction?
- Find out what proportion of the UK’s debt is owed to non-UK residents? (See data published by the UK’s Debt Management Office (DMO).) How does this proportion and the average length of UK debt affect the arguments about the sustainability of this level of debt and the ease of servicing it?
- If you had to devise a Plan B, what would it look like and why? To what extent would it differ from Compass’s Plan B and from George Osborne’s “Plan A”?
The global economic mood is darkening. Levels of consumer and producer confidence have declined and forecasts of economic growth are being downgraded. Mervyn King, Governor of the Bank of England, stated that “this is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever” (see).
So will slow recovery turn into a second recession (a double-dip)? And will recession turn into depression – the persistence of low or negative growth over a number of years? The following articles consider this frightening prospect and whether there are similarities with the Great Depression of the 1930s.
But let’s not be too downhearted. If we all are, the world could end up talking itself into depression. Consumers would seek to claw down their debts and cut back spending; producers would invest less as their confidence wanes; banks would be unwilling to lend. So is there any cause to be cheerful? Well, at least world leaders are increasingly aware of the possibility of world depression and minds are increasingly being focused on how to avoid the situation. The EU summit on 23 October and the G20 summit in Cannes on 3/4 November have EU sovereign debt problems and the global crisis at the centre of their agenda.
But if they do decide to act, what should they do? Is the answer a Keynesian stimulus to aggregate demand through fiscal policy and through further quantitative easing? Or is the approach to act more decisively to reduce sovereign debt and convince markets that governments are serious about tackling the problem – a policy response much more in accordance with new classical thinking and the type of policy that would be recommended by Thomas Sargent and Christopher Sims, winners of this year’s Nobel Prize in Economics?
Thinking outside the 1930s box BBC News blogs, Paul Mason (7/10/11)
Britain faces slowest recovery in a century Guardian, Katie Allen (12/10/11)
The Depression: If Only Things Were That Good New York Times, Sunday Review, David Leonhardt (8/10/11)
Recovery has ‘stalled’, say leading economists Financial Times, Sarah O’Connor (11/10/11)
Nobel prize in economics Republica, Opinion (Nepal), Sukhdev Shah (11/10/11)
Questions
- In what ways is the current global economic situation similar to that in the early 1930s?
- In what ways is it different? Do these differences provide more or less cause for hope for avoiding a global depression?
- Explain the following quote from the first article above: “I think that we face the quite real prospect that the market is removed as the determining mechanism for setting the price of capital within the eurozone at the sovereign level.This would put internal credit creation back under the control of the state.”
- How is the supply side of the economy relevant to (a) the short-run prospects for economic growth; (b) the long-run prospects?
- If technological progess slows down, what will be the implications for employment and unemployment? Explain.
- How is policy credibility relevant to the success of the decisions made at G20 and EU summits? (See last aricle above.) How would a Keynesian respond to the analysis of Sargent and Sims?
The UK Supermarket industry is intensely competitive. It’s hard to slot it directly into a specific market structure, but it has many characteristics of an oligopoly – a market dominated by a few firms with intense competition, both price and non-price.
This competititve aspect of the market structure has become even more important as trading conditions become harsher. The latest development sees Sainsbury’s announcing its price promotion – it will match certain prices offered by Tesco and Asda in a bid to attract customers from its rivals.
The supermarket industry has a history of intense price wars and we can only expect them to increase. This is certainly in the interests of customers, as we face ever decreasing prices. It’s a market in which it certainly pays to shop around and compare prices. The following articles consider the latest developments in one of the most competitive markets out there.
Sainsbury’s joins price cut battle The Press Association (9/10/11)
Sainsbury’s follows rivals in price promotion BBC News (9/10/11)
Every basket helps, as supermarkets battle for shoppers Independent, Laura Chesters (9/10/11)
Sainsbury to extend price match trial Financial Times, Andrea Felsted (7/10/11)
Tesco profits grow but UK sales subdued BBC News (5/10/11)
Sainsbury’s to launch price match scheme The Telegraph, Harry Wallop (7/10/11)
Retail bully boys must not protect themselves unfairly Financial Times, Sarah Gordon (7/10/11)
Questions
- What are the characteristics of an oligopoly? To what extent do you think that the supermarket industry fits into an oligopolistic market structure?
- Are the price wars being carried out by Tesco, Sainsbury’s and Asda in the interests of consumers?
- What aspects of non-price competition have been undertaken by the big supermarket contenders? On what factors does the relative success of these pricing strategies depend?
- What might explain the growing presence of fast food companies in the top 100?
- How could the supermarkets use the concept of elasticity in determining the most effective pricing strategy?
- How has the economic climate affected the supermarket industry? Would you expect the impact to be smaller or larger than that in other sectors of the economy? Explain your answer.
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?
Friday 5 August 2011 saw the end of a very bad fortnight for stock markets around the world. In Japan the Nikkei 225 had fallen by 8.2%, in the USA the Dow Jones had fallen by 9.8%, in the UK the FTSE 100 was down 11.6% and in Germany the Dax was down 14.9%. In the first five days of August alone, £148 billion had been wiped off the value of the shares of the FTSE 100 companies and $2.5 trillion off the value of shares worldwide.
But why had this happened and what are likely to be the consequences?
The falls have been caused by the growing concerns of investors about the health of the global economy and the global financial system. There are worries that the European leaders at their summit on 21 July did not do enough to prevent the default of large countries such as Spain and Italy. There are concerns that the US political system, following the squabbling in Congress over raising the sovereign debt ceiling for the country, may not be up to dealing with the country’s huge debts. Indeed, the rating agency, Standard & Poor’s, downgraded the USA’s credit rating from AAA to AA+. This is the first time that the USA has not had top rating.
Then there are worries about the general slowing down of the world economy and how this will compound the problem of sovereign debt as it hits tax revenues and makes it harder to reduce social security payments. Underlying all this is the fear that the problem of indebtedness that contributed to the banking crisis of 2007/8 has not gone away; it has simply been transferred from banks to governments. As Robert Peston states in his article, linked to below:
The overall volume of indebtedness in the economy is therefore still with us – although it has been shuffled from financial sector to public sector.
And if you took the view four years ago that the quantum of debt in the system was unsustainably large, then you would argue that by propping up the banks, the day of reckoning was being postponed, not cancelled.
… just like the awakening in 2007 to the idea that many of the housing loans and associated financial products were worthless, so there is a growing fear that a number of financially overstretched governments, especially in the eurozone, will not be able to repay their debts in full.
Which brings us to the consequences. Key to the answer is confidence. If governments can reassure markets over the coming days and weeks that they have credible policies to support highly indebted countries in the short term and to sustain demand in the global economy (e.g. through further quantitative easing in the USA (QE3)); and if they can also reassure markets that they have tough and credible policies to reduce their debts over the longer term, then confidence may return. But it will not be an easy task to get the balance right between sustaining recovery in the short term and fiscal retrenchment over the long term. Meanwhile consumers are likely to become even more cautious about spending – hardly the recipe for recovery.
Videos
Markets turmoil: What you need to know BBC News, Jonty Bloom (5/8/11)
Turmoil on stock markets persists as share prices fall BBC News, Robert Peston (5/8/11)
Global stock market crash – video analysis Guardian, Larry Elliott and Cameron Robertson (5/8/11)
S&P downgrade US AAA credit rating BBC News, Marcus George (6/8/11)
U.S. loses AAA credit rating Reuters, Paul Chapman (6/8/11)
U.S. loses AAA credit rating from S&P CNN (5/8/11)
US loses AAA rating ITN (6/8/11)
Shares slump amid euro fears Channel 4 News, Faisal Islam (4/8/11)
What triggered the turmoil? Financial Times, Sarah O’Connor and Edward Hadas (5/8/11)
Fears eurozone woes will spread BBC News, Stephanie Flanders (5/8/11)
Articles
FTSE 100 tumbles in worst week since height of the crisis The Telegraph, Richard Blackden (5/8/11)
Global recession fears as stock markets tumble to nine-month low The Telegraph, Alistair Osborne (3/8/11)
Global markets on the brink of crisis Guardian, Larry Elliott (5/8/11)
A week of financial turmoil: interactive Guardian, Nick Fletcher, Paddy Allen and James Ball (5/8/11)
Turmoil on stock markets persists BBC News (5/8/11)
Bank worries bring echoes of 2008 BBC News, Stephanie Flanders (5/8/11)
The origins of today’s market mayhem BBC News, Robert Peston (5/8/11)
Time for a double dip? The Economist (6/8/11)
Rearranging the deckchairs The Economist (6/8/11)
High hopes, low returns The Economist (4/8/11)
The debt-ceiling deal: No thanks to anyone The Economist (6/8/11)
Six years into a lost decade The Economist (6/8/11)
Debt crisis Q&A: what you need to know about Standard & Poor’s credit rating The Telegraph, Richard Tyler (6/8/11)
U.S. Will Roll Out QE3 After S&P Rating Cut, Li Daokui Says Bloomberg (6/8/11)
China flays U.S. over credit rating downgrade Reuters, Walter Brandimarte and Gavin Jones (6/8/11)
US credit rating downgraded to AA+ by Standard & Poor’s Guardian, Larry Elliott, Jill Treanor and Dominic Rushe (5/8/11)
Reaction to the US credit rating downgrade Guardian (6/8/11)
Market turmoil and the economics of self-harm Guardian, Mark Weisbrot (5/8/11)
Week ahead: Markets will sort through credit downgrade Moneycontrol (6/8/11)
S&P Statement
S&P statement on lowering US long-term debt to AA+ Guardian (6/8/11)
Stock market indices
FTSE 100: historical prices, 1984 to current day Yahoo Finance
Dow Jones Industrial Average: historical prices, 1928 to current day Yahoo Finance
Nikkei 225 (Japan): historical prices, 1984 to current day Yahoo Finance
DAX (Germany): historical prices, 1990 to current day Yahoo Finance
CAC 40 (France): historical prices, 1990 to current day Yahoo Finance
Hang Seng (Hong Kong): historical prices, 1986 to current day Yahoo Finance
SSE Composite (China: Shanghai): historical prices, 2000 to current day Yahoo Finance
BSE Sensex (India): historical prices, 1997 to current day Yahoo Finance
Stock markets BBC
Questions
- Why have share prices been falling?
- Does the fall reflect ‘rational’ behaviour on the part of investors? Explain.
- Why does ‘overshooting’ sometimes occur in share price movements?
- Why has the USA’s credit rating been downgraded by Standard & Poor’s? What are the likely implications for the USA and the global economy of this downgrading?
- How is the downgrading likely to affect the return on (a) existing US government bonds; (b) new US government bonds?
- Why might worries about the strength of the global recovery jeopardise that recovery?
- To what extent has the debt problem simply been transferred from banks to governments? What should governments do about it in the short term?