The economic sentiment indicator for April 2010 published by the European Commission continues to show confidence in the UK economy rising. The UK experience mirrors that across the European Union. The increase in the level of confidence in the UK economy seen in April, as measured by responses to questions posed to businesses and consumers, was the fifth consecutive monthly rise in sentiment.
There is, however, something of a divergence between the moods of UK businesses and consumers. Consumer confidence fell very slightly in April, which follows on from a small fall in March. These falls might reflect some uncertainty amongst consumers induced by the UK general election and, in particular, the extent of future fiscal tightening. In contrast, general business confidence rose in April, especially in the construction and manufacturing sectors.
Nonetheless, confidence is considerably higher across both consumers and businesses than it was a year ago. The increase has been of such magnitude that the economic sentiment indicator has now been above its long-run average for two months in a row. We would perhaps be rather naïve to expect this trend to continue, not least because of the financial rebuilding that households, banks, business and, of course, government will be pursuing. Therefore, it will be fascinating to see how enduring the current levels of confidence are and whether the slight weakening in sentiment amongst UK consumers is a sign of things to come.
Articles
Euro-zone economic sentiment rises in April MarketWatch, William Watts (29/4/10)
EU economic, business sentiment indicators ‘improving’ – poll Sofia Echo, Clive Leviev-Sawyer (29/4/10)
Euro economic sentiment up in April France24, AFP (29/4/10)
Data
Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- Why might the trends in business and consumer confidence be diverging?
- What do you think economists can learn from tracking the patterns in economic sentiment?
- What factors do you think are likely to impact on the sentiment amongst consumers and businesses in the months ahead?
On 21st April the IMF published its latest World Economic Outlook. It forecasts that the output of the world economy will grow by 4.2% in 2010, following last year’s 0.6% contraction, and by a further 4.3% in 2011. However, the Foreword to the report identifies considerable economic uncertainties. In particular, it identifies ‘fiscal fragilities’ and, hence, a ‘pressing need’ for fiscal consolidation. But, it also points to the need for policies ‘to buttress lasting financial stability’.
The IMF notes that Europe has come out of the recession slower than other parts of the world. For the EU-27 it is predicting growth of 1.0% this year, following a contraction of 4.1% last year, but with growth remaining at 1% in 2011. The UK is forecast to grow by 1.3% this year, following a contraction of 4.9% last year, and by a further 2.5% in 2011. Therefore, economic growth in the UK is forecast to be stronger than that across the European Union in both 2010 and, in particular, in 2011.
If we look at the expected growth in some of the principal components of the UK’s aggregate demand we see signs of a ‘rebalancing’. Firstly, household spending, which contracted by 3.2% last year is expected to rise by 0.2% in 2010 and by 1.4% in 2011. Secondly, general government current expenditure, which grew by 2.2% last year, is forecast to grow by 1.3% this year but, as the expected fiscal consolidation kicks in, will fall by 1% in 2011. Thirdly, gross fixed capital formation (capital expenditures) which fell by some 14.9% in 2009 is forecast to fall this year by a further 2.6%, before growing by 4.7% in 2011.
Report
World Economic Outlook, April 2010 IMF
Articles
IMF Raises 2010 Growth Outlook, Says Government Debt Poses Risk Bloomberg Businessweek, Sandrine Rastello (22/4/10)
GDP figures: what the experts say Guardian (23/4/10)
IMF cuts UK forecast in blow to Gordon Brown The Telegraph, Angela Monaghan (22/4/10)
IMF maintains U.K. 2010 forecast at 1.3 per cent Bloomberg, Svenja O’Donnell (21/4/10)
Global recovery faster than expected, says IMF BBC News (21/4/10) )
IMF nudges up world GDP view; fiscal fears mount Reuters, Lesley Wroughton and Emily Kaiser (21/4/10)
Data
World Economic Outlook Reports IMF
World Economic Outlook Databases IMF
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- What economic uncertainties do you think might affect the forecasts of economic growth for both the world and UK economies? Would you expect these uncertainties to be less or more significant in the UK?
- What do you understand by the term ‘fiscal consolidation’? Why do you think the IMF are highlighting this as a concern?
- Why do you think growth across Europe has been lagging behind other parts of the world? What might explain why growth in the UK is expected to be above that across Europe over the next two years?
In the midst of the election campaign we can well imagine that economic data are analysed in minute detail by politicians looking to make political capital. Of particular interest are likely to be the labour market numbers. So here we ‘digest’ a few of the latest numbers from the latest ONS labour market release.
The ONS reports that in the three months to February 2010 the number unemployed in the UK rose above the 2½ million mark to stand at 2.502 million. Of these, 61.2% were male and 38.8% female. The rise of 43,000 on the previous three months (i.e. the three months to November) took unemployment to its highest level since the three months to December 1994.
While unemployment rose, employment fell by 90,000 over the same period to 28.824 million. Of those in employment, 53.2% were male and 46.8% female. Employment levels are now at their lowest since the three months to December 2005. The latest unemployment and employment numbers mean that the number of economically active individuals in the three months to February stood at 31.326 million (53.9% male and 46.1% female), down by 47,000 on the previous three months. Therefore the unemployment rate, which is expressed as a percentage of those economically active, has now edged up to 8% (9.1% amongst males and 6.7% amongst females); it was 6.8% a year ago (7.6% amongst males and 5.9% amongst females) and 5.2% two years ago (5.6% amongst males and 4.8% amongst females).
If we look at the number who have been unemployed for at least one year we see a rather worrying trend with a rise of 89,000 over the past three months to some 726,000. This compares with 486,000 in the same period a year ago and 390,000 two years ago. Another potentially problematic trend is the rise in inactivity rates. The proportion of individuals of working age who are now inactive, so neither employed or actively seeking work, rose to 21.5% in the three months to February (17.5% amongst men and 25.8% amongst females), up from 20.7% in the same period last year (16.2% amongst men and 25.7% amongst females).
Finally, part-time employment fell by 30,000 in the three months to February to 7.671 million. However, it rose by 6000 amongst men to 1.880 million. We now observe that 12.2% of men in employment are employed part-time compared with 43.0% of females in employment. Further, of all part-time workers 24.5% – that’s effectively one-quarter – are male, double the share back in 1984 when these numbers were first recorded.
Articles
UK Unemployment hits 2.5 million mark The Wall Street Journal, Nicholas Winning and Ilona Billington (21/4/10)
UK unemployment at 16-year high Financial Times, Brian Groom (21/4/10)
UK unemployment increases to 2.5 million BBC News (21/4/10) )
Unemployment breaks through 2.5 million Guardian, Graeme Wearden (21/4/10)
UK unemployment surges to 15-year high The Times, Grainne Gilmore (21/4/10)
Data
Latest on employment and unemployment Office for National Statistics (21/4/10)
Labour Market Statistics, April 2010 Office for National Statistics (21/4/10)
Labour market statistics page Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- The current rate of unemployment is 8%. During the downturn of the early 1990s it peaked at 10.7%. What might explain this difference? Do you think the current rate may have now peaked?
- What might explain the rise in inactivity rates? Does this rise have any implications for potential output?
- Does the rise in the number of those unemployed for over a year have implications for our potential output?
- Go back through the commentary: are there any notable gender differences in the figures? What factors might help to explain these?
- In 1984 part-time employment stood at 4.985 million while currently the figure is 7.671 million. Is it possible to explain this growth in part-time employment in the UK?
The consumer prices index (CPI) is used by the government and the Bank of England for measuring the rate of inflation, and in the 12 months to March 2010 it rose by 3.4%. This figure was above the expected rate of 3.1% and well above the Bank of England’s target of 2%. The other major measure of consumer prices, the retail prices index (RPI) rose by even more – by 4.4%.
In order to recover from the recession, the UK economy needs to grow, but as demand begins to rise, this could put further upward pressure on inflation. There are a number of influencing factors that have caused the recent rise in inflation (see Too much of a push from costs but no pull from demand). Large rises in housing, fuel, transport, many household services and food were contributing factors. Many of these factors, however, are thought to be temporary, so it may not be too much of a problem.
And anyway, at least if inflation does continue to rise, it won’t be unexpected!
Articles
UK inflation rate rises to 3.4% BBC News (21/4/10)
A surprise? Definitely. A problem? Possibly. BBC News blogs, Stephanomics, Stephanie Flanders (20/4/10)
Transport costs push UK inflation above 3pc Telegraph, Edmund Conway (21/4/10)
Data
Latest Inflation data National Statistics Online
Consumer Price Indices portal National Statistics Online
Consumer Price Indices, Statistical Bulletin Office for National Statistics
Consumer Price Indices, time series data National Statistics Online
Retail Prices Index: 1948–2010 National Statistics Online
Questions
- Why might the Monetary Policy Committee have to restrict growth to keep inflation manageable?
- What are some of the causes of rising inflation? Why are expectations so important?
- How is the CPI calculated to measure inflation?
- Normally, during a recession, we would expect economic growth to be poor, but inflation to be low and stable. How can we explain both poor growth and rising inflation?
- “Investors know that the UK government has more to gain from an unexpected bout of inflation than almost any other economy.” Why is this?
As noted in the posting about the new high-speed rail link (High-speed rail link is on track), transport issues in the UK are always newsworthy topics and here we go again. This time, though, we look to the sky, where air traffic was halted for five days, from April 14th to 19th. Whilst some flights took off on the morning of the 20th April, further volcanic clouds were expected to ground flights at 7pm. Then, with new scientific evidence suggesting that it would be safe to ease restrictions, flights resumed on 21st April.
A big problem during this period was the uncertainty about how long the disruption might last. And even with the easing of restrictions, there was no certainty that dangerous levels of ash might not return if there was a new bout of activity from the volcano and if winds were unfavourable. One thing that was certain is that it would cost the British and other European economies at a time when they can hardly afford it.
The airline industry is already expected to lose £1.4bn this year and the volcanic cloud is estimated to have cost airlines approximately £130 million per day in lost revenues. The tourism industry has also suffered, although the losses are significantly lower. Countries, such as Kenya, that rely heavily on air freight to transport goods have suffered and businesses have also lost out, owing to cancelled meetings, delays to mail and stranded staff. Customers were angry that they might face extra charges to rebook flights and were having to pay for further accommodation. Whilst the direct effects on economic growth were thought to be only minimal, the long-term effects are uncertain. A drop of between 1% and 2% for European GDP was being suggested.
Airlines have been asking for compensation, in particular BA. After a tumultuous time with strikes, such a disruption could not have come at a worse time. BA has estimated costs of between £15m and £20m per day, due to lost passenger and freight revenues, as well as the need to support passengers trapped abroad.
However, the news was not all bad, especially if you are a rail operator or own a shipping company, as other means of transport have seen a huge rise in demand. Many stranded passengers have railed against the ‘profiteering’ of rail, coach and car-hire companies as prices soared. A case of supply and demand?
Iceland volcano cloud: the economic impact BBC News (19/4/10)
BA seeks compensation for volcano losses Telegraph (19/4/10)
Tourists and economy trapped by the volcano eruption in Iceland Balkans Business News (19/4/10)
Iceland volcano: the impact of the ash cloud on Britain Guardian, James Meikle (18/4/10)
Volcano’s ash cloud causes sporting chaos BBC News (20/4/10)
Travel companies lose millions of pounds with UK tourism next to suffer Independent, Alistair Dawber (20/4/10)
Volcanic ash costing airline £130m a day Channel 4 News (19/4/10)
BA demands government compensation as airlines watch reserves go up in smoke Independent (20/4/10)
British Airway seeks compensation for air chaos (including video) BBC News (19/4/10)
How long will chaos last – and what has it cost? Independent (19/4/10)
Europe counting economic cost of volcano CNBC, Patrick Allen (18/4/10)
How could Europe volcano cloud crisis play out? Reuters, Peter Apps (19/4/10)
Questions
- Who are the main losers from the volcanic ash cloud? Think about businesses and individuals.
- How can other means of transport, such as rail, be seen as a complement and a substitute to air travel?
- How can the economic impact of such disruption be estimated? Can you apply a cost–benefit analysis to this situation?
- Airlines are losing revenue and hence profits. Try illustrating this on a diagram.
- Should the airlines be compensated? If so, how would you propose compensating them? Are there any problems with your proposal?
- If one airline is the sole provider of flights between two locations, does it have a natural monopoly? Explain your answer.
- What is the impact on UK exports and imports? How might the exchange rate be affected?
- Does anyone gain from the volcanic ash cloud? Explain your answer.