Two reports on business confidence in the UK have just been published. The first, by Lloyds TSB Commercial, is its twice-yearly Business in Britain Report. The second is the Quarterly Economic Survey by the British Chambers of Commerce. Both reports paint a mixed picture about business confidence.
First the good news: the export sector is booming. Demand for exports is being boosted by (a) the depreciation of the pound, with the sterling exchange rate index some 20% lower now compared with the start of 2008 and (b) rapid economic growth in China, India and many other developing countries. Not surprisingly many exporting companies are looking to a bright future and are willing to invest.
Now the bad news. Domestic demand for many products is declining, especially services. This is not surprising given the rise in VAT, cuts in public spending and consumers cautious about their employment and income prospects in the coming year. With rapid cost-push inflation from higher oil and commodity prices, real incomes are set to fall and with it the level of real consumer demand (see Bosses gain – workers’ pain).
So where is the economy heading? The mixed picture painted by the two reports mean that the economy is likely to remain on the cusp. But with the export sector being much smaller than the domestic market, worries are likely to persist that economic growth may well slow significantly and the economy might return to recession. The main hope is that the restocking and replacement investment that follow a recession may be enough to provide just enough extra demand to avoid the ‘double dip’.
Articles
UK Business Confidence Hit By Domestic Demand Fears-Survey NASDAQ, Emma Haslett (4/1/11)
More doom and gloom as business confidence falls? Management Today, Nicholas Winning (5/1/11)
Smaller businesses do not share optimism Financial Times, Brian Groom (5/1/11)
New Year business confidence hit by domestic demand fears The Telegraph, James Hurley (5/1/11)
UK’s fragile services sector risks undermining recovery, BCC warns The Telegraph, Philip Aldrick (11/1/11)
Companies fear double-dip recession Oxford Mail, Andrew Smith (10/1/11)
Firms ‘planning investment freezes’ Press Association (4/1/11)
Surveys paint bleak picture for British economy Reuters, David Milliken (11/1/11)
Kern Says U.K. Services Industry Growth Is `Mediocre’ Bloomberg, Watch Video, David Kern (11/1/11)
UK economic growth rate slowing, BCC says BBC News (11/1/11)
Reports
Business in Britain, December 2010 Lloyds TSB Commercial (January 2011)
Quarterly Economic Survey, Q4 2010: Summary British Chambers of Commerce (January 2011)
Quarterly Economic Survey, Q4 2010: Tables British Chambers of Commerce (January 2011)
Data
Interest Rates and Exchange Rates Bank of England (for sterling effective exchange rates)
Economic and Labour Market Review Office for National Statistics (see Tables Chapter 1, worksheets in Table 1.03 for components of aggregate demand)
Business and Consumer Surveys European Commission, Economic and Financial Affairs (see latest ESI – Economic Sentiment Indicator, Table 1)
Questions
- Summarise the findings of the two reports.
- Using the data in Table 1.03 of the Economic and Labour Market Review, calculate the percentage of UK GDP accounted for by each of the main elements of aggregate expenditure.
- Why is the manufacturing sector as a whole experiencing relatively strong economic growth?
- If the service sector shrank by x% and the manufacturing sector grew by x%, what would be likely to happen to the rate of economic growth in the economy? What else would you need to know to establish the precise rate of economic growth?
- The BCC said both the government and the Bank of England must “act forcefully to support growth”. What measures would this include?
- If real wages fall, what could cause real aggregate demand to rise in these circumstances?
- What is likely to drive the level of investment in the coming months?
For most people, buying a new car is a luxury and in times of hardship it is a luxury that many cannot afford. Sales of new cars did grow during 2010 by 1.8% compared to the previous year, although the end of the car scrappage scheme in March 2010 did see a fall in sales. Sales went from being 19.9 per cent up on 2009 in the first half of the year, to being 13.8 per cent down for the remainder of 2010. On top of this, they are predicted to fall by some 5% over the coming 12 months.
Part of the explanation of this trend is the VAT rise. While an extra 2.5% is hardly noticeable on many every day items (as we saw when VAT was reduced to 15%), it will have a much larger effect on more expensive items, such as cars.
It was expected that people thinking of buying a new car would try to beat the VAT rise and so car firms hoped for a surge in sales during December. However, this did not occur and with VAT at 20% during 2011, car prices will rise: a £15,000 car will cost an extra £320. Another contributing factor to the lower than expected sales in December was the snow. Retail sales in December collapsed by 37.5%, where as fleet sales, which are less likely to be affected by the adverse weather rose by 5.1%. Similar patterns were seen in Spain, Italy and France, but in Germany sales were up by 7% on the year from December 2009.
The good news for the UK car industry is that the second half of 2011 is expected to see growth, so there may be some recovery. Furthermore, UK-built cars have seen a rise in sales – up by 17%. Finally, as petrol prices continue to rise, it is hoped that this might encourage people to trade in their less efficient old cars for more fuel-efficient new cars. This will certainly be an industry to watch over the next few months.
Snow hits new car sales Telegraph, Graham Ruddick (8/1/11)
UK new car sales to fall in 2011, says industry BBC News (7/1/11)
Mixed end to the year for European car sales Independent (7/1/11)
Car sales set to stall? Daily Mirror, Clinton Manning (8/1/11)
UK new car sales rose 1.8pc in 2010 despite end of scrappage scheme Telegraph, Amy Wilson (7/1/11)
New car sales increased in 2010 Telegraph, Chris Knapman (7/1/11)
Car registrations fall 18% from year ago Financial Times, Norma Cohen (7/1/11)
Questions
- What type of tax is VAT? Illustrate the effect of such a tax on a diagram and explain why the higher the price of the good, the bigger the impact of the VAT rise. How might this impact inflation?
- Why are car sales expected to fall in the UK over the coming year? Given this expected trend, what might we expect to see in terms of car prices?
- What impact might rising petrol prices have on new car purchases? What figure would you expect to see for cross elasticity of demand?
- How might the expected decline in car sales affect the UK economy over the next 12 months?
- What type of market structure is the car industry? (Think about the characteristics of monopolistic competition and oligopoly.)
- How did the car scrappage scheme help car sales?
- What might explain the different trend seen in the German car industry?
Just how large is the UK’s Gross Domestic Product and how quickly is it growing? Well, the latest Quarterly National Accounts from the Office for National Statistics show that the value of our economy’s output in Q3 2010 was £365.9 million. When measured across the latest four quarters, i.e. from the start of Q4 2009 to the end of Q3 2010, the total value of our economy’s output was £1.440 trillion. Across calendar year 2009 the UK’s GDP is estimated to have been £1.394 trillion.
When analysed in terms of the expenditure on the goods and services produced in the latest four quarters, household final consumption contributed £910.4 billion towards Gross Domestic Product. In other words, household expenditure over these four quarters was equivalent to 63% of GDP, exactly in line with its average since 1948. This only serves to demonstrate just how important the spending by households is for our short-term economic prospects.
Another important expenditure-component of GDP is gross capital formation. This is capital expenditure by the private and public sector and is estimated to have been £202.9 billion over the latest four quarters, equivalent to 14% of GDP. This is an important component because as well as affecting current levels of GDP, it also affects our economy’s potential output. This points to changes in capital expenditure having both a demand-side and a supply-side impact. Interestingly, the long-term average share for gross capital formation in GDP is around 18% and so about 4 percentage points higher than is currently the case.
So we now have a number which reflects the size of our economy: a little over £1.4 trillion. But, what about the rate at which the economy is growing? This time we have to be a little careful as to which GDP numbers we are using. The numbers we have so far considered have been measured at current prices and so at prevailing prices. When analysing the rate of economic growth, rather than analyse GDP at current prices, economists look at GDP at constant prices. By doing this we can immediately see whether the volume of output has increased. This is important because in the presence of price rises, an increase in the value of output could occur even if the volume of output remained unchanged or actually fell. For instance, in 1974 the volume of output or real GDP fell by 1.3%, but because the average price of our domestic output (known as the GDP deflator) rose by 14.8%, GDP measured at current prices rose by nearly 13½%.
The latest ONS figures show that real GDP grew by 0.7% in the third quarter 2010. For the record, GDP at current prices (nominal GDP) grew by 0.9%. The 0.7% increase in GDP in volume terms is down on the 1.1% figure for Q2. While this appears to constitute a reasonable rate of economic growth we can see from the articles below the concern amongst commentators that this third estimate of growth for Q3 had seen a downward revision from the previous estimates of 0.8%. Nonetheless, when compared with Q3 2009, the output of the UK economy in Q3 2010 is estimated to have grown by 2.7%. This is the strongest annual rate of economic growth since the third quarter of 2007.
Despite its relatively low historic share of GDP, gross capital formation was the most rapidly growing expenditure component in Q3, increasing by 5.2% over the quarter and by 16.6% over the latest four quarters. Household spending grew by 0.3% over the quarter and by 2% over the latest four quarters. Meanwhile, government final consumption, i.e. those government purchases not classified as capital expenditures, fell by 0.4% over the quarter and by 1.3% over the latest four quarters. Finally, the volume of exports rose by 1.5% over the quarter and by 7.5% over the latest four quarters, but the volume of imports increased more rapidly rising by 1.7% over the quarter and by 10.3% over the latest four quarters. This has contributed to a UK trade deficit from the start of Q4 2009 to the end of Q3 2010 of a little over £40.5 billion.
Articles
UK recovery weaker than first thought, official data shows Telegraph, Emma Rowley and Philip Aldrick (23/12/10)
Service sector output dips Financial Times, Chris Giles (23/12/10)
UK’s official economic growth estimates revised down Guardian, Graeme Wearden (22/12/10)
UK economic growth revised down BBC News (22/12/10)
Economic growth weaker than thought Press Association (22/12/10)
UK economic growth in 3rd quarter revised downward Bloomberg, Robert Barr (22/10/12)
Economic growth ‘is lower than we thought’ admits ONS Scotsman, Natalie Thomas (23/12/10)
UK GDP growth: analysts view of the revised data Telegraph (22/12/10)
Data
Latest on GDP growth Office for National Statistics (22/12/10)
Quarterly National Accounts, 3rd Quarter 2010 Office for National Statistics (22/12/10)
UK Economic Accounts, Time Series Data 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
- What do you understand by the terms nominal GDP and real GDP?
- Can you think of any other contexts in which we might wish to distinguish between nominal and real changes?
- The following are the estimates of GDP at constant 2006 prices:
Q3 2009= £322.655bn, Q2 2010= £328.881bn, Q3 2010= £331.222bn Show how you would calculate both the quarterly rate of change and the annual rate of change for Q3 2010.
- What would happen to our estimates of the level of constant–price GDP in (3) if the base year for prices was 1986 rather than 2006? What would happen to the quarterly and annual growth rates you calculated? Explain your answer.
- Explain how gross capital formation could have both demand-side and supply-side effects on the economy? How significant do you think such supply-side effects can be?
- How important for short-term economic growth do you think household spending is? What factors do you think will be important in affecting household spending in the months ahead?
GDP (or Gross Domestic Product) measures the value of output produced within a country over a 12-month period. It is this figure which we use to see how much the economy is growing (or shrinking). We can also look at how much different sectors contribute towards this figure. Over the past few decades, there has been a significant change in the output of different sectors, as a percentage of GDP, within the UK economy. In particular, the contribution of manufacturing has diminished, while services have grown rapidly.
However, there is one specific area that is making a growing contribution towards UK GDP and is expected to see acceleration in its growth rate by some 10% annually over the next few years: the internet. Although the internet is not an economic sector, the Boston Consulting Group (BCG) said that if it was, it would be the UK’s fifth largest sector and according to a report by Google, it is worth approximately £100 billion per year to the UK economy. Furthermore, it is an area in which the UK is one of the leading exporters. The emergence of the internet has transformed industries and individual businesses and the trend looks set to continue. The report by Google found that some 31 million adults bought goods and services online over the past year, spending some £50 billion.
What are the benefits for businesses of internet shopping and does it have an impact on the retail outlets on Britain’s highstreets? The answer is undoubtedly yes, but is it good or bad? What does the emergence of this new ‘sector’ mean for the UK economy?
Articles
UK net economy ‘worth billions’ BBC News (28/10/10)
UK’s internet industry worth £100 billion report Guardian, James Robinson (28/10/10)
’Nation of internet shopkeepers’ pumps £100 billion into economy Independent, Nick Clark (28/10/10)
UK internet is now worth £100bn to UK economy Telegraph, Rupert Neate (28/10/10)
Google at 10 BBC News, Success Story, Tim Weber (4/9/08)
Britain’s £100bn internet economy leads the world in online shopping Guardian, James Robinson (28/10/10)
Report
How the internet is transforming the UK economy The Boston Consulting Group October 2010
Government Statistics
United Kingdom: National Accounts, The Blue Book 2009 Office for National Statistics 2009 edition
Questions
- What is the UK’s GDP? How does it compare with other countries and how has it changed over the past 10 years?
- How does internet provision contribute towards growth? Think about the AD curve. Illustrate this on a diagram and explain the effect on the main macroeconomic objectives.
- Is there a problem with becoming too dependent on this emerging sector?
- How has the internet and online environment helped businesses? Think about the impact on costs and revenue and hence profits.
- What explanation is there for the change in the structure of the UK economy that we have seen over the past few decades.
- Will internet shopping ever replace the ‘normal’ method of shopping? Explain your answer.
If you are an Irish resident, you may be feeling very worried! As Irish debt levels reach new heights, the bill will once again fall on the tax payer. Irish government borrowing is almost 12% of GDP, but with two key banks requiring a bail out, government borrowing is expected to treble this figure to some 32% of GDP. The Anglo-Irish bank requires approximately £30 billion and Allied Irish also requires more cash. The Irish Finance Minister said:
‘The state has to downsize these institutions to prevent them becoming a systemic threat to the state itself.’
The Irish have already faced a round of austerity cuts and with the latest banking catastrophe, the next round is about to start. There are concerns that the Irish economy could move into a downward spiral, with more money being removed from the economy causing more people to lose their jobs, which will weaken public finances further and mean that more borrowing will then be required. It is hardly surprising to find a pessimistic mood on the streets of Ireland.
However, with a new interdependent world, this crisis will not only be felt by Ireland. The UK exports a large amount to Ireland – more than to Spain or Italy. With Irish tax-payers facing higher burdens and unemployment still relatively high, UK exporters may feel the squeeze. Other countries on the periphery of Europe, such as Portugal, Greece and even Spain are also feeling the pressure. There are concerns of a ‘two-speed Europe’. Below are some articles about the Irish crisis. Do a search and see if you can find any information on the problems in Greece, Spain or Portugal.
Ireland: a problem soon to be shared BBC News blogs, Stephanomics, Stephanie Flanders (30/9/10)
European recovery hope grows despite Ireland’s swelling deficit Guardian, Richard Wachman (30/9/10)
Ireland bank rescue spurs global debt concerns The World Today (ABC News), Peter Ryan (30/10/10)
Irish debt yields in new record despite better job data BBC News (28/9/10)
Euro Govt-bonds fall after overdone rally on Ireland, Spain Reuters (30/9/10)
Ireland’s love affair with masochism Telegraph, Jeremy Warner (30/9/10)
EU austerity drive country by country BBC News (30/9/10)
Anglo-Irish was ‘systemic threat’ BBC News (30/9/10)
Questions
- What do we mean by government borrowing?
- With such high levels of government debt, what would you expect to happen to interest rates on government debt? Explain your answer.
- When deciding whether or not to bail out the banks, what process could a government use?
- The Irish Finance Minister talks about the institutions becoming a ‘systemic threat’. What does he mean by this?
- Why might the UK economy suffer from the problems in Ireland?
- To what extent do you agree that there is a two-speed Europe, with the core economies, such as France and Germany making good economic progress, but the peripheral economies still suffering from the effects of recession?
- How might the situation in Ireland affect other members of Europe? Will there be an impact on the euro exchange rate?