Entries Tagged 'uk economy' ↓

There is an interesting opinion poll in today’s Times. It shows people’s response to different questions about state of the UK economy.

The report is giving importance to the anecdotal evidence of consumers, such as - Are you spending more on clothes than this time last year.

In this article. - Statistics and Outlook for UK economy, I Looked at the merit and limitations of using opinion polls such as this.

One thing for certain is that in tomorrow’s budget these results are unlikely to be used by the Chancellor. He will spend time referring to the official statistics, which paint a much more positive outlook for the UK economy.

Given the high levels of consumer debt in the UK, this consumer pessimism is likely to cause a significant downturn in spending and economic growth.

Do you agree with the gloomy outlook painted in these opinion polls?

Readers Question: i was wondering if u could give me some insight on how these macroeconomic factors will affect household consumption in 2008/2009. thanks

Consumer Spending in the UK

This graph shows the strong correlation between consumer spending and economic growth. Since 2005, consumer spending has continued to increase at an average of about 3%

 Factors that Will Affect Consumer Spending in 2008/09

1. Interest Rates 

With high levels of debt in the UK (see debt UK), any change in interest rate will have a big impact on consumer spending. If interest rates fall, mortgage holders will face lower mortgage payments therefore they will have more disposable income. Interest rates are forecast to fall, therefore this could maintain reasonable levels of consumers spending however:

• due to credit crunch many banks are not passing on B of England base rate cuts to their customers.
• The bank have hinted interest rates may not fall very much, because of rising cost push inflation.
• Lower interest rates may not boost spending if other factors have a stronger impact in detering spending

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Readers Question: Which Financial Institutions are most exposed to a recession in the UK?

A recession in the UK could hit several financial institutions quite hard. This is because of the nature of the current economic downturn which is likely to be focused around the previously booming housing market and service sector. In the 1981 recession, it was mainly manufacturing which suffered from high interest rates and high exchange rates. But, in a future recession, the service sector could be much more affected.

Institutions affected by a recession

Banks. The major UK banks would certainly survive a recession. However, there profits would be reduced. A recession is likely to cause a further rise in bankruptcies, mortgage defaults and loan defaults. Therefore, UK banks would have to write off a lot of bad debts.

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Readers Question: I’m doing my A level coursework on the economic policies of the Margaret Thatcher governments and what happened from them. The only problem is, I don’t really know where to look for information about it and statistics. Please could you tell me what the results were of each policy, like the rise in VAT, poll tax, privatisation etc.

Unfortunately, I don’t have time to find statistics. Also the economics of the Thatcher era is a vast topic. The above question is quite open ended, in this case it might be worth planning the coursework into different sections with clear titles.  I think the most interesting aspects are the 2 reasons of 1981 and 1991, which can be both attributed to policies of the Thatcher government.

I have written on these recessions before:

• The Economy under Mrs Thatcher 1979-84 
• The Lawson boom of the 1980s 
• The recession of 1991 
• Download growth comparisons of UK and other European countries during Thatcher Year’s

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I asked my Economics students to conduct a questionnaire, asking people in the street various questions about Economics. One Question was:

What do You consider to be the Most Serious economic problem Facing the UK at the moment. These are the most popular responses to far.

1. House Prices (50% of responses)
2. Government Debt
3. Ignorance because of fear
4. no response
5. No Problems

What I would consider the most serious Economic Problem:

1. High levels of consumer debt / bankruptcy Continue reading →
   

When I began studying economics as an A Level student I found it interesting to examine the mistakes of politicians. One thing that struck me was that politicians often seemed to have a very poor understanding of basic economics.

Of course, it is easy to be wise after the event, but here I wrote an essay about the Lawson boom and the mistakes that were made. In a nutshell the problem with the Lawson boom was.

1. They allowed the economy to grow too fast, above the long run trend rate.
2. This boom caused inflation.
3. To reduce inflation, they used the wrong policy. They choose to target the exchange rate (part of the ERM) rather than inflation and growth directly. This caused interest rates to be higher than necessary.
4. They were successful in reducing the inflation that they had created, but, the cost was a deep recession.
5. The boom and bust was particularly visible in the housing market

Tomorrow, I will write about the recession of 1991, which is of interest given the fact the UK may soon enter into recession.

Lawson Boom of the late 1980s 

The Economy under Mrs Thatcher 1979-84 

Readers Question: What do you understand by the terms ‘monetary policy’ and ‘fiscal policy’? Explain with reference to a country of your choice:-

a) How these policies have been used by the government to try to achieve its objectives

Monetary policy is the attempt to control macro economic variables in an economy (primarily inflation) through the use of interest rates. - Monetary Policy
Fiscal policy is the attempt to influence the level of economic activity through changing taxation and government spending - More on Fiscal Policy

The objectives of the government are:

1. low inflation CPI=2%
2. Strong economic growth, but, not inflationary growth. Increasing long run trend rate of growth
3. reduce unemployment
4. avoid large deficit on current account balance of payments

In the UK, Monetary policy has been given to the Bank of England. Therefore, the Bank of England has independence in setting interest rates. The government only set the inflation target of 2% inflation.

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 Another Case: How Does Japanese Investment effect the UK economy?

• If a Japanese firm (e.g. Nissan) built a factory in the UK. This would be a surplus on the financial account. It counts as long term capital investment
• If the Japanese firm then sold the goods (Nissan cars) from the UK to Europe. This would be a credit(surplus on the UK current account)
• If profits from this Japanese firm were sent back from the UK to Japan,  this would count as a debit (deficit) on the current account.
• A deficit on the current account needs financing by a surplus on the financial account (used to be capital account). Therefore, this long term investment helps finance the UK current account deficit.

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In many ways the economy is in a good position. The main economic indicators suggest a strong and sustainable economy, which offer good prospects for 2008.

• Economic growth, at 2.6% is close to the long run trend rate.
• Unemployment, according to JSA measure, is under 1 million. At 3% of the labour force this is fairly close to full employment. (although the more reliable Labour force survey suggests the true level of unemployment is higher.
• CPI Inflation is 2.1%. This is almost exactly the government’s target of 2% +/-1

The main economic predictions forecast similar statistics for 2008. Economic growth is forecast to continue at around 2.5%. In the latest Bank of England inflation forecast, they predict inflation will rise slightly before dropping back to 2% at the end of 2009.

All these statistics and forecasts suggest that the government is correct to claim that the UK economy is in a very strong position for 2008.

However, there are several trends which suggest that this optimism may be misplaced.

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Yesterday, the Bank of England kept interest rates constant at 5.75% for the fourth consecutive month. However, it looks increasingly likely that the base rate will fall in 2008, possibly to 5%.

Every three months the Bank publish an inflation report, which is a forecast for inflation over the next couple of years.

Despite recent factors causing cost push inflation (oil prices, fuel prices) the outlook for inflation is forecast to be benign. The Bank predict that CPI inflation will be close to the government’s target of 2% by 2009.

Other economic indicators also pointed to a slowdown in the growth of the economy. With slower growth, inflationary pressures will recede and this will enable cuts in interest rates. Evidence of a slowdown comes from:

• Credit Crunch. - Due to shortage of global credit, banks are becoming more reluctant to lend mortgages. However, they are now being more strict in lending credit, even for small purchases. This article at Independent show some examples.
• Borrowing costs increase - despite base rates staying the same. Due to shortgage of credit, banks have increased their standard variable rates. This reflects the increased difficulty of attracting funds.
• surprise fall in retail sales in October
• Falling House Prices. The Halifax have reported lower house prices.
• Predictions of Share price falls (by Mervyn King)
• Slowdown in US economy spreading to rest of economy
• Strong Pound making exports less competitive.