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EC-111 British EconomyRecent UK Macroeconomic
TrendsDr Catherine Robinson
F26, Richard Price BuildingOffice Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30
Appointments: [email protected]
NOTE: I’M AVAILABLE FOR SPECIAL
OFFICE HOURS ON MONDAY NEXT WEEK: 10.00 TO 12.00
Week 5:1 2
So, the UK policy response•To emphasise international co-operation and co-ordinated fiscal and monetary policy responses to help move the UK and world economies out of recession
•a number of levers during the recession:Bank base rate reduced to 0.5 per centBailing out of some banks and finance to support the balance sheets of the banksValue Added Tax temporarily reduced from 17.5% to 15%Quantitative easing of £200billion – Asset Purchase Facility by which the Bank of England can buy corporate bondsCar scrappage scheme
Week 5:1 3
Into 2009…heading into double dip…
But the market is still jittery (Flash crash of the NYSE in May 2010)
International organisations meeting to define standards in banking (BASEL I – 1980s and non-binding) To raise capital ratios, to improve stability in international
banking and to reduce regulatory differences globally BASEL III (September 2010)
Increased the capital ratio requirements Insisted on new capital buffers
Banks argued that there was a risk of a double dip as a result Banks consolidated and tried to diversify – also M&A
Week 5:1 4
And the currency markets??
Contagion means that currencies are sufferingEuro problems in Ireland, Greece and now Portugal
and Italy…Cyprus problems in the news recently
A country that was developing via two sectors – tourism and off shore banking
Week 5:1 5
How can we ensure this mistake doesn’t happen again?
Regulate the financial sector more effectively Commission a report – the Independent Commission on
BankingSir John VickersReport published in September 2011recommendations on ring-fencing domestic retail banking, 1/6 th
to 1/3rd of banking assets to be within the ring-fenceCompetition in banking sector needs to be improved
“Future of Finance”, 2010Report by LSE stars – Adair Turner, Andy Haldane and lots of
othersHighlights that central banks and governments should shoulder
some of the responsibility for the failure – argue as yet, this hasn’t happened
Week 5:1 6
Financial Services Act 2012
Came into effect on 1st April, 2013
Brings Bank, FSA and treasury under the same umbrella
Criticised in the past for little coordination between the institutions
Week 5:1 7
Management of the financial system
Increasingly understood that the financial system had changed beyond recognition from the 1980s
Many banking investments were obscured, bordering on illegal (Barclays fined £500m by the UK treasury)
Libor scandal extended beyond Barclays in the end
Week 5:1 8
Why are banks regulated in the first place?
Goodhart (2010)Market failures:
Monopoly controlAsymmetric information Externalities (social costs to bankruptcies)
Week 5:1 9
What has happened to our macro variables?
Source: Gregg and Wadsworth (2010)
Week 5:1 10
International variations• Gregg and Wadsworth (2010) group countries into 5 categories on the basis of changes in the GDP and unemployment over the recession:
Those with small falls in employment relative to GDP (UK and Sweden) Those with small falls in employment relative to GDP, having introduced employment subsides (Italy, Germany, Netherlands and Japan) Those with similar employment and GDP falls (France) Those with larger employment falls than GDP (US, Spain and Ireland) Those with little fall in GDP (Australia)
Week 5:1 11
Why did the UK labour market hold up?
Employers entered the recession in fairly good financial shape Able to absorb some of the downturn without shedding jobs
Total hours worked have fallen sharply and the share of part-timers risen
Workers accepted nominal wage moderation early on in the recession
increased chances of finding work if they are made redundant
• The impact on productivity (and international competitiveness) and public finances has been large; hence the cuts
Week 5:1 12
Cost of crisisThe level of debt in most Western Economies is
a direct result of bank bailouts
Severe recessionBank of England policy of “quantitative easing”
Exchange rate system in Europe under threatGreece most obviously Irish IMF loan and the austerity measures Italy, Spain and Portugal also under pressure
Budgetary issues (% of GDP)Slide 30.13
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Country National Debt 2009
National Debt 2014
Budget deficit 2009
Budget surplus
required* in 2014
US 88.8 121.0 -12.3 4.3
Japan 217.4 239.2 -9.0 9.8
Germany 79.8 91.4 -2.3 2.8
France 77.4 95.5 -5.3 3.1
Britain 68.6 99.7 -10.0 3.4
G20 100.6 119.7 -8.6 4.5
*To bring respective national debts back to a maximum of 60% of GDP by 2014
Source: IMF, World Economic Outlook (various)
Week 5:1 14
And now the Euro…Weaker countries within the Eurozone have
suffered – especially GreeceNo longer considered to be a good debtor Agreed to a range of austerity measures for the
foreseeable future in exchange for Euro bailout to prevent national bankruptcy
A wider EU problem The ECB issued €530bn of cheap loans for Banks
to ease liquidity concerns
Week 5:1 15
Failures of macro models?How come no one saw this coming?
Well, some did (but not as many as now claim they did)
Housing market had been overvalued for years in the UK
Savings far too low
Did our macroeconomic models let us down?Over-reliance on inflation targeting?
Argued that MONEY is a glaring omission from existing new Keynesian macro models
Week 5:1 16
There will be other mistakes…
Macroeconomic models will not cover all eventualitiesAbstractions from the real worldSimplificationsBUT still powerful tools
A new focus on risk?The role of credit ratings are also under scrutiny
Week 5:1 17
Road to recoveryOsborne:
Treat the recessionTighten the fiscal belt – balance the budgetReduce government spending – rebalance the UK economyEncourage growth through private sector enterprise and growing
exports Regulatory reform of the financial sector
Balancing the need for reform against the footloose nature of financial intermediaries
Balls: Treat the depression
Looser fiscal policy to encourage growthShort term increase in government spending to get the economy
back on track Tougher stance on financial sector reform
Is the second policy approach viable?
Week 5:1 18
References Griffiths and Wall (2012) Applied Economics, Chapter 21 for UK financial
institutions, Chapter 30 for the basics
Crafts and Fearon (2010) ‘Lessons from the 1930s Great Depression’, Oxford Review of Economic Policy, 26(3), 285-317
Drinkwater, Blackaby and Murphy (2011) ‘The Welsh Labour Market Following the Great Recession’, WISERD Policy Brief
A play by Julian Gough: goat futures explains the housing bubble
For up to date information, have a look at the Economist blog: http://www.economist.com/blogs/blighty
Deeper understanding in the current debates going on: Finance for the Future, LSE Report of 2010, available at
http://www.financeforthefuture.org.uk. This is really tough stuff though, so just read the summary!
Week 5:1 19
ReviewWe have covered a lot
70 years in about 10 hours!
What have we looked at? A bit of theory
Macroeconomic variablesTinbergen’s model Flexible targets
Keynesinan versus monetarism
Inherent tradeoff between macro variables Post war macroeconomic performance in Britain
was not bad, but could perhaps have been betterWhat did post war Britain look like? Capital, labour,
intermediates, employment, output, balance of payments