Economics help blog – Page 192

Importance of Bank Lending to UK Economy

18 November 201718 December 2012 by Tejvan Pettinger

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.

bank-lending-uk — 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.

Economic Problems Facing Pakistan

17 January 201817 December 2012 by Tejvan Pettinger

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.
Read more

How to Measure Success in the Eurozone?

18 November 201714 December 2012 by Tejvan Pettinger

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.

bond-yields-oct-12-fr-it

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?

Unemployment Compared – Portugal and Spain v UK and US

18 November 201713 December 2012 by Tejvan Pettinger

A quick look at a comparison between the economies of Portugal and Spain, with the economies of the UK and US.

Four countries with very different paths of unemployment.

Would People Boycott Google and Amazon over Tax?

18 November 201712 December 2012 by Tejvan Pettinger

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.

respect-starbucks

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?

How Important are Credit Ratings?

21 January 202011 December 2012 by Tejvan Pettinger

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’.

Wages Declining as a Share of National Income

18 November 201710 December 2012 by Tejvan Pettinger

The ILO recently produced their growth and wages report for 2012/13. This suggested that across the developing world, labour markets are being characterised by falling real wages and a decline in labour’s share of national income. In particular:

Real wage growth has been flat – even negative in the past few years.
There is an increasing gap between productivity growth and wage growth. Wages are not rising along with productivity.
Wages are becoming a smaller share of national income.
In 16 developed economies, labour took a 75% share of national income in the mid-1970s, but this has dropped to 65% in 2007. It rose in 2008 and 2009 – but only because national income itself shrank in those years – before resuming its downward course. (Wages in developed world shrink at Guardian)

Real Wage Growth

real-wage-growth-world

It is common to refer to the low wages of China, but wages in China have roughly tripled in the past decade – meaning China has one of best wage growth rates in the world.

However, if we look at just developed economies, we see even lower wage growth.

Real Wage Growth – developed economies

real-wage-growth-developed-economies

The global credit crisis has also resulted in increased inequality. Wage income is declining as a share of overall national output. Improvements in labour productivity are not being matched by real wage growth. This graph below shows the increased divergence between wage growth and productivity.

How Valuable is the Oxbridge Interview Process?

18 November 20178 December 2012 by Tejvan Pettinger

radcliffe camera

It’s the time of the year, where here in Oxford we see an influx of nervous Oxford interview applicants. It brings back ever-distant memories of when I had an interview for PPE back in the mid 1990s. It was quite exciting and at the same time nerve racking. My own interview was quite mixed. Politics and economics seemed fairly reasonable. Philosophy was impossible. But, my inability to understand philosophic logic didn’t stop me from being admitted. In a way the interview was actually a pretty good guide to how I did at Oxford. Scrapping a pass in philosophy in the first year. But, after being able to concentrate on economics and politics in second and third year, I did quite well.

Apart from going a complete blank in my philosophy interview, I don’t have too many memories of the interview process. I tend to now look back on it with rose tinted glasses. I think coming to Oxford was quite exciting compared to going to school in Bradford. (no offence to my Yorkshire roots, but as a city, Oxford is just a little more beautiful)