prospects for the uk economy in 2012
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Prospects for the UK Economy
A Fragile Economy at Risk of a 2nd Recession
Geoff Riley - tutor2u
Themes
• Are we already back in recession?• A damaging legacy from the slump• Have policies lost their effectiveness?• Macro fragility in a world of external
shocks
Mervyn King on the UK Economy
“We are facing a difficult time ahead with a slow and prolonged adjustment to the consequences of the banking and financial crisis.”
Mervyn King, May 2011
Government wants a balanced recovery
Balanced recovery in
Demand and Output
Investment
Exports
The government wants higher exports and
investment to kick-start a “balanced recovery”
Achieving this looks harder than the coalition expected
Are we already back in recession?
GDP data is backward –looking – not the best guide to whether we are in recession now!
2012 will see falling household demand
Falling real incomesContracting employmentHigher taxes
Real disposable incomes are falling
£ per person, at constant prices
Real Disposable Income and Spending Per Head
United Kingdom, Real households' disposable income per head,, Current Prices, GBP
Consumer spending
Source: Reuters EcoWin
86 88 90 92 94 96 98 00 02 04 06 08 10
7000
8000
9000
10000
11000
12000
13000
14000
15000
16000
£ p
er h
ea
d
7000
8000
9000
10000
11000
12000
13000
14000
15000
16000
2012 likely to see a big squeeze on real take-home incomes
The paradox of thrift
A further rise in household saving will depress demand
Savers have suffered really badly
Millions of savers are suffering from negative real interest rates
Employment sags
Contraction
Growth too weak to create enough jobs
Robert Shiller: The importance of expectations
“Animal spirits" is related to confidence and it refers to the sense of trust we have in each other, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.
The damaging legacy of recession
• Unemployment• Productivity• Fiscal deficit and national debt• Rising inequality• Slower trend growth
Mervyn King on unemployment
“As the experience of unemployment continues, then the more you have to worry about structural unemployment. This is the “fundamental” question driving our thinking about the labour market.“Mervyn King, November 2011
Professor David Blanchflower on Job Creation
David Blanchflower recommends a payroll tax cut and a national insurance holiday for young people under the age of 25 for two years to price them into jobs and get the economy going – as well as the creation of another 100,000 university places in subjects such as science and engineering.
Gross Government Debt – League Table
Source: OBR November 2011
Recession and inequality - Wages
Source: Institute for Fiscal Studies
The Gini Coefficient for the UK
Source: Institute for Fiscal Studies
Mervyn King on economic growth
“What’s important is not whether GDP growth is +0.2 or -0.2 but whether we have a plan in place for how growth is going to pick up. This is not a time to fine tune but to think about the next 6 or 7 years.”Mervyn King, November 2011
Slower trend growth in most OECD nations
What are some of the consequences of a period of prolonged slow economic growth?
Can policy change the cycle?
1. Cuts in policy interest rates2. A huge fiscal deficit3. 20% £ depreciation4. Quantitative Easing
5. Credit Easing6. Project Merlin
Why might policy be ineffective?
Fragile Confidence
Business Cash
Hoarding
Weakness in economies
of our trading
partners
Deleveraging in financial
system
Real interest rates
Raising rates would be a “normalisation” of mon policy
Krugman: Keynes and the Liquidity Trap
Keynes understood the role of monetary policy well. He argued that there were situations in which monetary policy could do no more — and that the world economy he lived in was facing such a situation.
Paul Krugman, NYT, Oct 2008
Some Sources of Domestic UK Fragility
• Fragility of the UK economy– Higher inflation & wage cuts hitting real incomes– High level of household debt left to be repaid– Probability of new wave of asset price deflation– Credit constrained businesses especially SMEs– Fiscal austerity plans at high risk of failure– 700,000 estimated job cuts in the public sector –
will the private sector generate many more?– Export industries at risk from Euro Zone crash
Banks cut their lending
Much bank lending is skewed towards real estate
Not enough to manufacturing businesses
Mervyn King on the banks
“I don’t think the banks are being deliberately obstructive. They are just in the position where their own balance sheets are so weak that they can’t lend,”Mervyn King, November 2011
Many businesses exposed to revenue cuts
A second recession would cut revenues, profits and cash flow. Many businesses are exposed to the risk of a second demand shock in the UK economy. Important for policy makers to respond to this
5 Long Term Constraints on UK Growth
Weaknesses in education & training outcomes
Low research and development spending as a share of GDP
Volatile and regressive housing sector hit labour mobility
Few small/medium businesses export to emerging countries
High long-term unemployment
SLOWGrowthAhead
An optimistic note on which to finish
Half of the components in the Airbus 380 are designed and manufactured in the UK. The fuselage comes from Germany and the French assemble and screw the pieces together!
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