Consumer Spending 2008 / 2009

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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%

consumer spending

 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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Minimum Wage in UK to rise to £5.73

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The government has announced that the National Minimum wage will rise to £5.73 for workers over 21 – by the end of 2008. This means for a worker on a 40 hour week, their take home pay will be £229 per week. This also attracts top up benefits from the government in the form of family tax credits.

Trades Unions had suggested that the Minimum wage should rise to £6.75 a rate, a rate which would lift workers out of needing government benefits. Employers, predictably, were happy that minimum wages have only increased in line with inflation.

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Council Tax Payments and Pensioners

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Readers Comment: I’m a pensioner. Since introduction my Council Tax has increased by 103%,my pension by 29%. Mine is the sole income,why should I pay the same as a family of 4 all working and living in a house in the same tax band;does only one of them receive help from the police, firebrigade, does only one of them create rubbish? No local (income) tax is the only fair answer but apart from Lib Dems is any other party prepared to talk about it. Bill Davies – Discuss

Thanks for comment Bill. It is interesting to see feedback from someone’s personal perspective. From my perspective the Council tax is unfair and poorly designed. It was rushed through with the idea  that – anything other than the poll tax must be better. Well, it isn’t the poll tax, but, that is hardly an endorsement. Given how important local tax is and how much it effects people’s living standards, it is suprising that it makes so little impact on the current political scene. The only time we see it on the news is when some 90 year old is threatened with jail for non payment of council tax.

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Tesco Compared to Sainsburys

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There was a time when the market leader in UK supermarkets was Sainsbury’s but in the past few years Tesco has shot ahead. Some of the reasons for Tescos dominance

Clever Marketing. I am always impressed by how Tesco’s knows exactly how to get me to go shopping there again. If I haven’t been shopping for a  few weeks, they will send vouchers giving me £5 off my next £30 shop. The really clever thing is that usually I spend £20-£25 on a shop at Tesco. Not only do they get me to go shopping, but I spend an extra £5. (My house always has piles of food boxes, I need to buy to get some minimum order delivery )

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UK Industry and Competitiveness – Evaluation

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Readers Question. EVALUATE THE LIKELY ECONOMIC EFFECTS OF A FALL IN THE UK’S COMPETITIVENESS.
I know some points, such as deficit on current account, slower economics growth etc. However, I don’t know how to evaluate and write a conclusion on this one. Can you please help me?

This is definitely the more difficult part of the exam. I think most A2 students will find some of these ideas harder to think of in an exam. Some evaluation ideas could include

1. Lower economic Growth.

Lower competitiveness makes exports less attractive, therefore there will be a fall in exports causing lower economic growth.

However.

  1. Economic Growth could still occur due to strong consumer demand. The UK’s manufacturing export sector has been decreasing in importance; now, it only contributes a relatively small % to the UK’s growth. In recent years, it has been consumer spending which has kept growth high (despite an increasing current account deficit)
  2. Does the fall in competitiveness extend to all sectors of the economy? Maybe the UK is losing competitivenes in manufacturing exports, but retains a competitive advantage in financial sector. Therefore, there is still room for growth from these other sectors.
  3. The fall in growth will effect some sectors and regions of the economy more than others.

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Unemployment and Inflation in UK 2008

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Readers Question: how the unemployment and inflation is related to country’s economy

If we take the example of the UK, we can see differing examples of how unemployment and inflation are related to a country’s economy. The key to this question is what causes unemployment and inflation. There are several different factors, but it is important to consider both demand side and supply side factors.

Unemployment and Economic Growth. The most obvious factor is that higher economic growth will reduce unemployment. Since 1992, the UK has experienced a long period of economic growth, causing a fall in demand deficient unemployment. Unemployment in 2007 was just under 1 million. In 2008, the unemployment rate has continued to fall; it is about 4% of the labour force (depending on which method you use.) However, in the recession of 1981 (negative growth) unemployment rose to 3 million. Unemployment also rose to 3 million   in 1992.

UK  Unemployment v Inflation 1981 – 2010

% annual change in growth and inflation.

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Financial Derivatives and Risk Management

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Readers Question: How and why do firms use derivatives to hedge risk?

Financial derivatives are a mechanism for managing risk. They involve options to buy or sell at a certain price in the future. This means that a firm can guarantee being able to buy or sell a contract at a certain price.

Why Firms Use Financial Derivatives.

The main reason firms use financial derivatives is that  it is way to manage risky price movements. In a way derivatives are a type of insurance and enable them to ‘hedge’ against adverse price fluctuations. This is important in volatile commodity prices or when exchange rates may be volatile.

It is ironic that financial derivatives are often considered to be ‘risky speculation’ when there intended purpose is to insure against volatile markets. Of course, derivatives can be misused by speculators. Rather than insuring against positions, derivatives can be used to gamble on a way one increase in stock markets e.t.c. But, the initial purpose of derivatives is to reduce risk.

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M&S to Charge for Plastic bags

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I was interested to hear that Marks and Spencers will be charging for plastic bags. The idea could be a clever marketing ploy. Most M&S customers have quite an inelastic demand. It is the kind of customer who is quite happy to pay £3 for a ready made meal. If you ready to pay 50% …

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