Consumer confidence returning?

Consumption is by far the largest component of Aggregate Demand. Around two-thirds of the total. Therefore rising consumer confidence will be good news for the economy as it struggles out of the double dip of this recession.

Consumers have been shell shocked since 2009. Real income is down due to low wage rises and inflation which is higher than the wage rises (in the public sector and some industries wages have been frozen or even fallen in money terms). Also the uncertainty associated with the recession, the Eurozone crisis and government cuts has led to a higher savings rate.

Currently the economy needs short-run growth desperately. Just using up more of the idle resources of the economy will help a lot. Output and employment will rise and there is then a good chance that a sustainable rate of growth will emerge. Households spending more will allow this to happen.

So the news from Visa that shoppers have spent more in September (around 3%) is great news. One swallow does not make a summer, but it really is a good sign.

The BBC report the figures and speculate on whether the economy has really turned the corner here.

A new initiative on an admission of failure

The political conference season always brings some populist policy announcements. So Vince Cable has provided the embattled LibDem's with one to try and cheer them up (they currently lag UKIP in the polls).

The idea is unusual in the sense that it is the fourth of its type and two of previous ones were also announced this year. Essentially it is another attempt to help businesses borrow funds and so grow.

Leaving aside the previous, presumably inadequate, measures this one involves a new government owned bank. It will have £1bn of public money and some private sector money. It hopes to help small and medium sized businesses to borrow long term (around 10 years).

The problem, as before, is that the high street banks (such as Lloyd's and HSBC) are short of cash and risk averse. They are reluctant to lend to small and medium size businesses long term and so these firms cannot undertake new projects that take years to repay their investment.

The aim is to provide greater certainty.

Certainty for the high street banks - they can pass loans on to this new 'CableBank' and remove the risk from their balance sheets. In this case they will be much happier to agree long term loans as they remove the risk of default.

Certainty for small and medium sized businesses as they can borrow at an agreed rate for a period that makes investing safer. No firm wants to have the risk of losing their funding or seeing a hike in interest rates part way through an expansion.

So overall this will help? Like all supply-side policies it will take time to work. It will be 18 months before this bank can start operating and then more time before enough loans can be made to really make a difference. If the economy isn't growing by then nothing may help!

The BBC report the scheme here and there is a link to Robert Peston's blog where he doubts its effectiveness

Business confidence continues to hold back economic recovery

Today there is depressing news on business confidence. It is, according to one survey, at a twenty year low.

Business confidence is by far the most important determinant of investment. It outweighs the influence of interest rates significantly.

If the outlook of firms improves and they start to expect better business prospects they will invest. If the invest then Aggregate Demand will rise and probably by a multiplied amount. And so the recovery will be formed.

But the survey says that business confidence is falling not improving. And so the dreaded double dip continues.

The Guardian reports the survey here

Growth now the key issue

 For those who are just starting Economics this week it will be important to get a sense of perspective on recent economic events.

It would have been hard not to have noticed that times are tough due to a global recession that started in 2008. Despite a period of recovery the world economy is shrinking again with a particular crisis in the EU.

The causes of the crisis and why it has gone on so long are a matter of debate. It is far too complex a subject for this post. However consequences of the present situation are very serious and worth pointing out.

Households are worse off because:
1. Incomes are rising slowly or not at all.
Inflation - the rate at which prices are rising - is higher than the rate at which incomes are rising meaning everyone is worse off in real terms.
2. Unemployment is high.
Some people are therefore earning far less than before the recession, concentrating the costs of the recession on those who are unlucky enough to have lost their jobs and can't get another one.

Firms are worse off because:
1. Households and firms have less money to spend.
So firms have lower sales and they have little confidence that new investments will make a profit. So the new jobs we need are not being created.

The economy is worse off because:
1. There is less investment by firms and so low growth.
Firms must have confidence to invest and low demand and a shrinking economy mean this is missing.
2. The government have lower tax revenues and higher expenditure.
Governments get money from taxes on income and spending, both are lower in recession. But expenditure rises on things like unemployment benefits. So there is less money to spend on hospitals, schools and other services that makes life better for everyone.

This is a very brief overview of the problems. The article below highlights the problems of the current growth position and the pressure of government to act to improve the situation.

The Guardian article is here

When is a double dip not a double dip?

The Office for National Statistics (ONS) reported that GDP fell for the second successive quarter (January to March) and so the press have heralded a recession. The much feared 'double dip'.

What are the implications of this? The most important is the impact on confidence. Consumer and business confidence is incredibly low and this will do it no good at all. We can expect people to save more and firms to hold back on investment. This is going to reduce the rise in AD over the coming months and that will hamper recovery.

An important question about the data has to be asked however. The definition of a recession as 'two quarters of falling GDP' is not a technical one. It was coined by the semi-technical press and has now passed into the literature as if it is true. Actually it is at best a guide in order to point out that a single quarter of falling GDP is not a trend. So is this definition accurate?

Actually a better definition of a recession is six months of continuously falling GDP. That is GDP falls in each month of the six. The problem of ONS data is that it is based on calender quarters, January to March, April to June etc. But this means it is quite possible for two bad months, say December and January, to make GDP appear to fall in two quarters, while in fact there was growth in four and the current trend is still for growth.

In this case it is not at all clear that there is a recession, and it is not even certain that the Jan to March figure won't be revised back to very low growth. In addition a recession usually is accompanied by rising unemployment, and yet the latest figures show falling unemployment.

What is clear is that the news alone is potentially damaging, especially as the idiot Balls will cynically exploit figures he knows to be exceptionally dodgy and encourage the very behaviour that will further damage the recovery.

The BBC page shows the news in context here

Fall in Real GDP can't be good news

The UK economy shrunk last quarter by 0.2%. This should be a period of recovery and growth after the recession and so not at all what was hoped.

However, if you can see the BBC graphic in the story below, you will notice that the economy shrunk by 0.5% in the equivalent quarter in 2010. After that growth returned, 'caught up' in fact, so this may not be a return to recession. Remember one observation is not a trend.

What is clear is that growth is pretty flat and nowhere near the levels the economy needs. The Deputy Prime Minister, Nick Clegg, has called for a stimulus measure, raising the tax free threshold to £10,000. This will raise the disposable incomes of all tax payers, but the biggest effect will be on the low paid. They tend to spend a higher percentage of their earnings and so this will raise consumption and boost Aggregate Demand.

Would such a stimulus work? Well it depends on whether the tax cut is spent or saved. Also would a boost of £7 a week really help that much?

The BBC cover the growth figures here

Climate change action needs growth

Climate change is, in my view, a far more important problem than economic recovery. While a second financial crisis might see us moving back to the Stone Age it remains unlikely, but climate change is a certainty and threatens the very survival of the species.

The inaction on climate change globally is therefore quite staggering (although the EU is far ahead of the rest of the world on this). In other countries, such as the US and Australia 'climate change deniers' hold sway and even get some support in the UK as the picture above shows.

In the Guardian Max Boykoff reviews the current situation and explains that before we can get serious and effective action on climate change we need economic growth. The irony of course is that it is economic growth that caused the climate change in the first place. However for politicians to be prepared to commit resources to tackling climate change they need the population to feel well enough off to afford it, otherwise they vote for the guy who promises tax cuts.

Boykoff's article is here

The UK experienced an unwelcome fall in exports in the latest figures reported by the ONS. The trade gap widened as a result.

Perhaps the more surprising thing is that exports had been rising at all. Europe, the UK's biggest trading partner, has been experiencing such problems it would not have been a shock if they had bought less.

The concern for Britain is that, in a time when the UK desperately needs growth, a rise in net exports is an important factor in increasing Aggregate Demand. These figures mean that net exports is effectively reducing AD and so will reduce growth not boost it.

On the bright side imports have risen slightly. While bad for net exports now this can indicate returning consumer confidence and possibly improving disposable income.

The Guardian reports the trade situation here

One million reasons to study harder

The figures released last week of record unemployment of over 2.6 million (8.3%) indicates the economy is stuttering along. Unemployment figures record the economic performance of the past and illustrate the impact of sluggish economic growth. However, the youth unemployment figures (over 1 million for the first time) is even more disturbing as it gives a window into the the productive capacity of the future. The NEETs (Not employed, educated or trained) lend themselves to a bleak future. Opportunities need to be created for the youth otherwise the economy will need to deal with and try to overcome the difficult problem of hard-core or long term unemployment. For you as a student you may be entering the workforce during a very tough economic climate. Education will become a vital bargaining chip in gaining employment.
The Telegraph Article Here

UK economic growth cut to 0.1% for April to June

These figures released yesterday have led to the usual argument over potential policies. These are the usual demand management options. The calls are coming for the government to increase spending and for the Bank of England to adopt QE. It is important to remember the source for the financial downturn which is greatly influenced by the poor economic performance in Europe.

Guardian Article Here

Another GDP growth downgrade

It looks all gloom!

Dr Archer added: "The current softness of the economy and anticipated GDP growth of one per cent in 2011 and 1.5 per cent in 2012 is particularly bad news for Chancellor George Osborne as it is substantially below the OBR's projections of 1.7 per cent growth in 2011 and 2.5 per cent in 2012 on which the Chancellor based his target of reducing the Public Sector Net Borrowing Requirement to £122 billion in fiscal 2011/12."

Read the full article below.

http://www.myfinances.co.uk/news/2011/09/13/oecd-expects-faster-uk-economic-slowdown

Consumer confidence a worry

The level of consumer confidence is a key determinant of Aggregate Demand. Although consumption primarily depends upon income levels households have the choice of how much of that income they put into savings.

When consumers are uncertain they are cautious. Cautious people save 'just in case'. This has the effect of reducing consumption, Aggregate Deamnd falls and there is slower growth, or worse still a recession. The slow growth alone is enough to convince households they were right to be cautious and recovery becomes difficult.

There are two problems that compound this problem at present.

1. Governments are cutting back on expenditure in order to reduce their debt. Government spending is another component of Aggregate Demand and also has a multiplier effect making the cuts here even more effective in reducing real GDP.

2. The banks are being forced to recapitlise their balance sheets. This is because they have had to write off bad debts and the new rules (Basel Accords) that demand a higher proportion of capital to liabilities. This means the banks take the extra savings they receive in deposits and keep them to raise their capital reserves rather than lend it to firms or consumers.

While many welcome the strenghtening of the banks and the reduction in household debt it is not good for the short term.

It is now clear that consumer confidence is falling in Europe. This is a problem as 60% of UK trade is with other EU memebrs and exports are another compnent of AD.

While the double dip recession remains unlikely rapid growth still seems quite a way off.

The Guardian reports on EU consumer confidence here

Plan B- the Portugeuse-style deficit and German Style interest rates

Increasing the British Opposition is asking the Government for a Plan B. They are claiming the economy rescue package is not working. Growth has been sluggish and forecasts have been downgraded. The Opposition has suggesting that this is because of the tight fiscal austerity package (tighter fiscal policy in order to control public debt). The Government, however claims that the low level interest rates (German style interest rates) are far more crucial than a few billion pounds in the budgets bottom line. This leads to an interesting discussion on which policy (fiscal or monetary) is best to deliver growth during a downturn. Please read the article below to get a greater understanding of the issue.

http://blogs.telegraph.co.uk/finance/jeremywarner/100010488/imf-maps-out-a-plan-b-for-the-uk-economy/