stimulus plan – The Sloman Economics News Site

17 December 201018 December 2010

Is there a Plan B for the UK economy?

The government’s plan for the UK economy is well known. Reduce the public-sector deficit to restore confidence and get the economy going again. The deficit will be reduced mainly by government spending cuts but also by tax increases, including a rise in VAT from 17.5% to 20% on 1 January 2011. Reductions in public-sector demand will be more than offset by a rise in private-sector demand.

But what if private-sector demand does not increase sufficiently? With a fall in government expenditure, reduced public-sector employment and higher taxes, the danger is that demand for private-sector output may actually fall. And this is not helped by a decline in both consumer and business confidence (see, for example, Nationwide Consumer Confidence Index). What is more, consumer borrowing has been falling (see Consumer borrowing falls again) as people seek to reduce their debt, fearing an uncertain future.

So does the government have a ‘Plan B’ to stimulate the economy if it seems to be moving back into recession? Or will it be ‘cuts, come what may’? The Financial Times (see link below) has revealed that senior civil servants have indeed been considering possible stimulus measures if a return to recession seems likely.

Over in Threadneedle Street, there has been a debate in the Bank of England’s Monetary Policy Committee over whether an additional round of quantitative easing may be necessary. So far, the MPC has rejected this approach, but one member, Adam Posen, has strongly advocated stimulating demand (see The UK inflation outlook if this time isn’t different, arguing that the current high inflation is the result of temporary cost-push factors and is not indicative of excessively strong demand.

So should there be a Plan B? And if so, what should it look like?

Articles
Gus O’Donnell’s economic ‘Plan B’ emerges BBC News, Nick Robinson (14/12/10)
Sir Gus O’Donnell asks ministers to consider possible stimulus measures Financial Times, Jim Pickard (14/12/10) (includes link to article by Philip Stephens)
Gus O’Donnell urges Treasury to prepare ‘Plan B’ for economy Guardian, Patrick Wintour and Nicholas Watt (14/12/10)
Unemployment, and that ‘Plan B’ BBC News blogs, Stephanomics, Stephanie Flanders (15/12/10)
Inflation wars (cont’d) BBC News blogs, Stephanomics, Stephanie Flanders (16/12/10)
Don’t overreact to UK inflation – Bank’s Posen Reuters, Patrick Graham (16/12/10)
Bank of England’s Adam Posen calls for more quantitative easing The Telegraph, Philip Aldrick and Emma Rowley (29/9/10)
Don’t overreact to above-target UK inflation rate, cautions Posen Herald Scotland, Ian McConnell (17/12/10)
Posen calls for calm as inflation fears rise Independent, Sean O’Grady (17/12/10)

Data
OECD Economic Outlook OECD (see, in particular, Tables 1, 18, 27, 28 and 32)
Forecasts for the UK economy HM Treasury
UK Economic Outlook PricewaterhouseCoopers
Employment and Unemployment ONS
Inflation Report Bank of England

Questions

What are likely to be the most important factors in determining the level of aggregate demand in the coming months?
What are the dangers of (a) not having a Plan B and (b) having and publishing a Plan B?
Why is inflation currently above target? What is likely to happen to inflation over the coming months?
What are the arguments for and against having another round of quantitative easing?
What else could the Bank of England do to stimulate a flagging economy?

22 October 200929 December 2009

The China syndrome (updated)

“We will look back at 2009 as a watershed in economic history. This is the first time since the war that the world economy has not been led out of a recession by the US consumer.” (Jeremy Beckworth, CIO, Kleinwort Benson Private Bank – see second linked article below) How has the Chinese economy fared during the global recession? What policies has it pursued and how successful have they been? Will Chinese growth continue and how will this impact on the rest of the world? What economic risks does China face? These are questions that the following articles consider.

Array of figures adds to optimism over China economy Reuters (15/10/09)
Look East for the land of opportunity Jeremy Beckwith, Portfolio Adviser (14/10/09)
Greenback Woes Boost China’s Global Muscle Money Morning (15/10/09)
China Rises Amid Global Economic Crisis Manufacturing.net (13/10/09)
Why China must do more to rebalance its economy Financial Times (22/9/09)
China economic growth accelerates BBC News (22/10/09)
Chinese economy grows at fastest pace in a year Telegraph (22/10/09)
China’s 3Q growth accelerates to 8.9% pace Los Angeles Times (22/10/09)

Questions

Examine whether Chinese inward investment to the UK is desirable for UK companies and employees.
Why is a more powerful Chinese economy a ‘mixed blessing’ for the USA?
In what ways is the Chinese economy ‘distorted’? Explain why this matters.
Why is it encouraging that China’s current account and balance of trade surpluses have been shrinking?
What effect would an appreciation of the yuan (or ‘renmimbi’) have (a) on the Chinese economy; (b) on the rest of the world? What would determine the size of this effect for any given appreciation?
Why must China do more to rebalance its economy?

Tag: stimulus plan

Questions

Questions