Entries Tagged 'uk economy' ↓

Readers Question: During 1995 – 1997 in the UK, mortgage equity withdrawal was negative. What does a negative mew value show? and why was there a negative value during this period in the UK?

Mortgage equity withdrawal occurs when people borrow money against the value of their house.
A common way to withdraw equity is to remortgage your house. This is especially common when house prices are rising because the house is worth more than the initial mortgage. Mortgage equity withdrawal is thus a way to increase borrowing secured against your rising house value.

Net Mortgage Equity Withdrawal is a way to measure the total amount that people borrow against their house, but, don’t use to invest in housing. i.e. people remortgaging to buy a car e.t.c

However, in addition to withdrawing your equity through remortgaging. Consumers also inject money through buying houses and improving the condition of existing houses.

A negative value of MEW means that the value of housing stock is increasing faster than the amount of equity taken out by homeowners.

In 1995, we see the following statistics:

(A) Withdrawal by Mortgages £ million 11,519
(B) Other Equity Withdrawals £ million 17,434

(C) Equity Injected through House Purchase £ million 11,721
(D) Financial Equity Injected £ million 13,045
(E) Dwelling Improvement Investment £ million 10,573

(F) Net Equity Withdrawal £ million -6,386
Source Council of Mortgage Lenders CML pdf
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The banking system in the UK is highly concentrated with the top 10 banks having over 90% of market share.

In recent years, the advent of internet banking has provided a new source of income, but, at the moment the banking system is still dominated by these top 10 banks.

Note: Recent merger of HBOS and Lloyds TSB

This is a rough guide to the biggest 10 British banks.

Some interesting facts about British banks.

• They employ 0.5million people Continue reading →

A.Darling’s first budget is good news for those who don’t drink, smoke or buy SUVs.
No major changes, but these are some of the main features of the budget.

• Cigarettes up 11p a packet of 20.
• Beer up by 4p a pint, wine 14p a bottle, spirits 55p a bottle.
• Duties on alcohol will go up by 2% above inflation for next four years.
• related: Should tax on alcohol rise?

Cars and Petrol

• From 2009, major reform of the vehicle excise duty. For new cars from 2010, the lowest-polluting cars will pay no road tax in the first year. Higher-polluting cars will pay more.

• Funding set aside for road-pricing proposals. (road pricing in UK)

• 2p increase in fuel duty is postponed for 6 months due to high price of oil

• For environmental reasons, fuel duty will rise by 0.5p per litre in real terms in 2010. This is said to be for green reasons, but, is very small % of price.

Housing

• From April, key workers, such as teachers and nurses, will be able to borrow money from shared equity schemes.

• Stamp duty on shared ownership homes will not be required until people own 80% of their home.

• More people should have the chance to have a long-term fixed mortgage, which a report shows can reduce the risks for first-time buyers and can keep them on the housing ladder. (but, not clear whether people will actually take them out)

• Sites for 70,000 more houses have been identified. (But, when they will be built is another matter)

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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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