The UK economy starts 2013 after one of the longest periods of economic stagnation on record. GDP has been flat for the past two years, and real GDP is still way below the 2008 peak.
Despite the depressing picture of economic growth, unemployment (7.9%) is much lower than might be expected given the sluggish nature of economic growth. However, if we count under-employment (e.g. working fewer hours than would like) and disguised unemployment, then the picture is much less promising.
Consumer confidence remains low as most people have been affected by the unwelcome combination of high inflation and low wage growth. Inflation fell in 2012, but in 2013, we again may see some unwelcome return of cost-push inflation – prices rising despite the output gap.
There are many who say the solution to gun crime in the US, is to have more guns. A republican Congressman stated, if only school teachers were armed, the Newtown tragedy could have been averted or at least death toll reduced (People who want to arm the teachers). Would you like to teach economics in the US, you will get a free fire-arm and round of ammunition? – no thanks.
In the UK, there is a reluctance to arm even the police – because despite their best intentions, on the rare occasions when guns are used innocent people have sometimes been caught in the crossfire. If the police were armed, people wouldn’t feel safer. Nor is there any compelling evidence they need to be armed.
After, the terrible tragedy in Newtown (and so many others) it is really hard to understand why anyone would want to support a gun culture where guns and ammunition are so freely available. But, in the US, the days following the massacre have seen a surge in gun sales.
There is an element of game theory to gun control. The best outcome is for no one to have guns. But, once the gun ownership rate goes up, many feel they have to get one too. There becomes an arms race. Now, there are 90 guns for every 100 Americans, and yet the appetite shows no signs of decreasing. The more guns there are in circulation, the more people feel they need to have one. No one particularly wants to be the first to let go of their arms. Guns are also big business, since 1990 the sale of legal guns alone has averaged about $3.5bn a year.
Readers Question: What is the importance of bank lending to the UK economy?
Bank lending plays an important role in influencing levels of consumer spending, investment and economic growth.
When bank lending reduced at the start of the credit crunch in 2008 – this decline in bank lending was a significant factor in causing the 2008 recession.
Source: News Release – Quarterly Bulletin 2012 Q4
This graph shows that lending to UK households and business was growing rapidly during the period 2000-2008. However, the credit crunch caused a precipitous fall in the growth of bank lending. Bank lending fell from growth of +10% to negative growth during 2010 and 2011.
Readers Question: In this era, Inflation had gotten really high specially in countries like Pakistan. Hows will the Inflation level go down ? or will it even let the country develop ? Inflation is one of the several problems that the Pakistan economy faces. The good news is that inflation has been falling in the past two years. But, it is still one of the highest in the region; and in addition to inflation, there are also other inter-related problems the Pakistani economy faces.
Pakistan has a forecast of real GDP growth of 3.25% in 2013 – but, given the rise in the population, this growth is insufficient to improve living standards. Real GDP per capita growth has been stagnant in recent years. (real GDP per capita – measures output per person)
Inflation in Pakistan
Inflation peaked at 20% in 2009 and has now fallen to just under 7% at the end of 2012. However, many expect inflation to increase back up above 10% – because of cost-push factors.
Causes of Inflation in Pakistan include:
Rising energy prices.
Rising food prices. Agriculture is one of the mainstays of the Pakistan economy with 45% of the labour force employed in agriculture. However, the country has faced food shortages, pushing up food prices.
Earlier in the year, many were speculating the Euro was a risk of breaking up. Up step Mario Draghi with his promise to ‘save the Euro whatever it takes’
Under Mario Draghi, the ECB have done two things to help reassure bond markets:
Long term refinancing for banks – helping to avoid liquidity crisis in banks spilling over into sovereign debt crisis.
Outright monetary transactions – the willingness to buy an unlimited amount of bonds (in exchange for a country implementing strict fiscal rules)
These policies have helped see bond yield differentials narrow, and there is now more optimism the Euro will survive.
However, it’s curious in the FT article on the Euro crisis FT Person of the year – Mario Draghi , that there is not a single mention of the word ‘unemployment’ or ‘recession’. Just a repetition that Mr Draghi insists austerity can work.
“To give up now, as some suggest, would be tantamount to waste the great sacrifices made by the citizens of Europe,” he says. He also has no time for suggestions that surplus countries such as Germany should inflate away some of their competitive edge. “Inflation is not a policy tool; one does not toy with inflation.”
It does leave you wondering, how exactly do European policy makers judge success?
Following on from a recent post about companies who avoid paying tax. It’s interesting to try and understand why some companies have been much more vulnerable to protest about the issue – but some companies seem almost insulated from protest.
For examples, Starbucks has been hit by high profile boycott. Protesters from UK Uncut have been making their voice heard both outside and inside Starbucks across the country. (It has proved good news for Costa, who have recorded a record jump in sales over recent weeks – Costa attract 4m customers a week at Guardian)
It seems there is a certain receptivity to boycotting a high street coffee shop like Starbucks. In Oxford, if you don’t want to go to Starbucks, there are three Costas all within a couple of minutes walk. As a result of the furore over tax payments, Starbucks brand image has definitely been adversely affected. According to Market research, Starbucks is now less trusted than Parliament (link) and only slightly more than News International.
However, interestingly, Amazon has been much less affected by the fallout than Starbucks. It’s much harder to organise a boycott of online companies. It’s more fulfilling to go on the high street and offer a physical protest. As a customer, there is a strong incentive to join in the boycott.
But, while we are happy to walk a few extra metres to buy a different coffee, when it comes to the new monopoly Goliath’s of the modern age – Amazon and Google, would people feel strong enough about tax avoidance to look for alternatives?
Readers question: What will happen if the UK has its credit rating reduced from AAA to AA?
Do you remember all those sub-prime mortgage bundles which caused the credit crisis? These mortgage bundles which later proved to be almost worthless were, for a considerable period, given a AAA credit rating by rating agencies. Even Greece, now on the verge of insolvency, maintained an A credit rating until May 2009. (Bond yields at Datosmacro) What did a credit rating of A mean for Greece? It meant the credit rating agencies didn’t really know what was coming quite soon. (nor the rest of the market either)
Credit rating agencies have no greater ability to predict future defaults and financial flows than anyone else in the market. Someone once described fiscal policy like driving a car by looking out of the rear view mirror. (You can only look at past data.) To some extent, it’s the same with credit rating agencies. They are looking at data taken from the past.
If a credit rating agency moves a country from AAA to AA-, it doesn’t really add any extra data to investors and buyers of bonds.
Because credit ratings are a highly visible signal, they can perhaps gain more political importance than they perhaps deserve. A triple AAA credit rating sounds good. Plus, it’s much easier to explain to the public than the ‘merits of expansionary fiscal policy in a liquidity trap’.
