From the desk of Mr Carr……………..

Mr Carr has kindly put together this macroeconomics digest:

Half Term Macro-Economic Update

Inflation fell from 0.5% to 0.3%. Combined with a 2.1%pa rise in wages, this confirmed rising real living standards. However with the effects of falling oil and food prices stripped out, it is about 1.3%

Unemployment fell from 5.8% to 5.7% (LFS) the lowest since 2008 – a drop from 2.7m to 1.86m in two years with 103,000 new jobs created in the last three months of 2014, twice as many as forecast. The number of vacancies has reached 718,000 and the proportion of the labour force in work has also reached a record.

The balance of payments deficit reached a record 6% of GDP last year. This is only viable as long as investment from overseas into the UK continues, which it is doing in the form of foreigners buying expensive property and offices or foreign firms taking over UK businesses.

Government borrowing is on course to meet its target of £91.3bn for 2014-5 following higher than expected tax receipts last month. However total public sector debt (the “national debt” ) reached £1.46 trillion, 79.6% of GDP.

The CBI upgraded its UK growth forecast from 2.5% to 2.7%. However growth is taking place with little increase in productivity and this is one reason why earnings and tax receipts remain low and the budget deficit is higher than was predicted. Output per person in the private sector is roughly similar to what it was 6 years ago, rather than being about 15% higher which is what we would have expected had normal trends been followed. Productivity is in the news as Chuka Umunna, the shadow business secretary suggested UK workers were only 80% as productive as French. In 2013 we were actually 14% less productive than France, partly because our labour laws are more flexible, making it easier and cheaper to hire and fire workers. As a result France has invested more in machinery (capital deepening)- 22% of GDP invested in France versus 16% in the UK. However unemployment was almost twice as high in France and GDP per head about the same at $45,000. Productivity is not easy to increase, particularly in the short run, requiring investment, improvements in education and training, infrastructure, competition and R & D.

Chinese inflation fell to 0.8% providing more evidence that the Chinese economy is in slowdown. Although part of the explanation is due to falling energy prices and low food prices, some is due to low international demand causing over-capacity in the Chinese manufacturing sector.

The Economics of the Premier League – A Case Study in Cartels?

In most industries if the producers grouped together and then sold their product in co-operation it would be a cartel, and illegal.  Indeed, as this link shows when a group of French hotels did so they found themselves in real trouble with the authorities:

However, you could argue that a group of football clubs has done the same thing, and reaped huge financial rewards:

The case of the premier league’s recent sale of television rights is an excellent example of an inelastic good and the benefits to producers of working together, rather than in competition.

Quantitative easing

To gain a better understanding of quantitative easing (QE) follow this link to watch a film from The Daily Telegraph website:

The debate on whether QE has had a positive effect on the real economy or whether it has simply inflated prices in asset markets might well prove inconclusive but you need to be able to evaluate the policy, so follow these links for some arguments in favour and against QE:

In favour


In summary

Overall it might take time to understand the full consequences of QE, particularly on inflation.  However, some have argued that thanks to the liquidity trap created by very low interest rates the Bank of England had no alternative.