UK Economy Update – Is the party over?

Depending on which economic commentator you read, the UK economy is either heading for problems or is set to continue on a reasonably steady path for some time to come. What is particularly interesting (to an economist!) is that the different predictions do not result from different data but from different interpretations of the same data.

On the downside, inflation has jumped from 2.3% to 2.7% and is predicted to rise further because of the fall in sterling since the Brexit vote last June. Consumers are also suffering as real earnings are £1,700 lower than they were before the Crash and are likely to fall over the next two years as inflation exceeds wage increases.

Economic growth has slowed because of a cut-back in consumer spending which is   partially the result of higher import prices following the fall in the value of the pound since June and might also be a reflection of falling confidence in the UK economy among consumers. It grew by only 0.3% January to March, compared with 0.7% in the last three months of 2016 while the figures for GDP per head are 0.1% and 0.5% respectively.

On a more positive note, the UK is still the 5th largest economy in the world (but is predicted to be overtaken by India before the end of the year) and unemployment is down from 4.7% to 4.6%, the lowest since 1975. It was not long ago that we thought 5% was the lowest we could hope for without causing a major increase in inflation. Wages, which we would normally expect to be rising fast given the slow level of unemployment, are rising at about half their rate of  increase before the financial crisis. However this is is not totally beneficial since a reason they are rising so slowly is the low level of UK productivity which fell in the first quarter of 2017 compared to the last quarter of 2016.

The balance of payments deficit dropped significantly in the last quarter of 2016 as export orders for manufacturing have increased following the fall in the value of sterling. Unfortunately, this might have been a temporary improvement since the first quarter of 2017 saw the deficit in goods increase as imports rose and exports fell. The deficit in goods AND services also rose for the first quarter to £10.5bn, almost double the previous quarter’s figure of £5.7bn. Concern over the increase in house prices has eased since they are currently rising at their slowest rate for four years; however they are still currently averaging 6.1 x average earnings compared with a long-term average of 4.3 x average earnings. The peak was in 2007 (just before the Crash) when they reached 6.4 times earnings. If the housing market slumps over the next few years then this will have a significant impact on the economy from its impact on associated spending (furniture, white goods, carpets, etc), the wealth effect and the impact on consumer and business confidence.

The latest Bank of England forecasts show the economy growing well, averaging 1.8% over the next three years, but these are based on the Government managing to negotiate a “smooth” Brexit, with the implication that a problem with the negotiations will result in lower growth, inflation rising no higher than 2.8% and slower consumer growth being compensated by higher business investment and exports, two areas where the UK has failed in over recent years.

It is difficult to take into account are the economic shocks which we might face over the next few months. For example what will happen to confidence in America if there are serious revelations about another member of President Trump’s team being involved with Russia. Then,  if the American economy slows, what will that do to UK exports?What will happen to business confidence, and hence investment,  over the next two years as leaks about Brexit negotiations hit the news headlines? What will China do over the next few years in terms of global expansion?

Not to worry. As Keynes wrote in 1923 – “In the long run we are all dead”.

 

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Book review of ‘Economist Naturalist’

‘The Economist Naturalist: Why Economics explains almost everything’, by Robert H Frank (Professor of Management and Economics at Cornell University.) is a book which can be comprehended by people who does not study economics as an academic subject because it contains lots of interesting practical problems. Moreover, the narrative style of interpretation enables the reader to connect them with real life situation rather than unnecessary diagrams or professional terminologies.

The most engaging part of the book is that some of the phenomenons really raised my curiosity to find out the economic theories behind it. As demonstrated by the front cover of this book – Why is milk sold in rectangular containers, while are soft drinks are sold in cylindrical ones? In the beginning I did not regard it as something links with economics as it appears rather friendly than those we read in the textbooks. However, the reason behind it not only linked with economics but also psychology, history and practical experiences – the answer is for you to find out from reading the fascinating book.

Alternatively, Frank can be vague about his explanations of economic phenomenon. As demonstrated in his example of drive-up cashpoint machines that have Braille dots, some readers argue that the reason behind it is the regulation rather than opportunity cost. Despite a brief explanation, Frank does not attempt to add these alternative reasons into account. I think an economic phenomenon requires a variety of reasons to be fully established.

Overall I rate this book as 4 / 5 because after reading this book, economics is not something that is on the moon for me anymore, it illustrates a rational dimension approaching to human behaviour.

Book review: End the Depression Now! by Paul Krugman

Book review ‘End This Depression Now.’

Gloria Ma

‘End This Depression Now’ by Paul Krugman focuses on analysing the causes and consequences of 2008 Economic Crisis, in order to outline numbers of methods to avoid future depressions.

Throughout the book, Krugman is very much like an existentialist who urges the responsible agents to act spontaneously towards changes in policies making and economic forecast. As he quotes from Keynes: “The long run is a misleading guide to current affairs. In the long we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again.” Hence, Krugman argues that all the economic crisis are avoidable as the economists can proactively make adaptations over time periods. Taking the example of Brexit, “the boom, not the slump, is the time for austerity”, a cut in interest rate and cooperation tax are authentic policies to impose in the U.K. economy – they not only boost the consumer and business confidence but also directly increase consumption and investment to maintain a sound economics growth rate.

The most captivating, or precisely the most admirable part of this book is that Krugman has a visionary prediction of the world politics now: a global lean towards nationalism (extremism) – such as Brexit, Trump’s presidency and the coming up French general election Round 2 – this phenomenon can be simply interpreted by economic factors. It is obvious that Krugman stands aside with the Keynesians, however, this might inevitably set the width of the book rather narrow.
Although Krugman has listed lots of adequate arguments, it is always interesting to hear other monetarists’ solutions upon economic crises.

Overall, I have learnt a great deal from this book, not merely the economists’ theories, and also the responsibilities that rule-setters have to act on. No depressions can indicate the end of the world, there are always solutions and ways to limit the harms.

“The Undercover Economist” Book Review

“The Undercover Economist”, published by Little, Brown, is the bestselling book by author Tim Harford. Harford is an English economist, journalist and broadcaster living in London. Having gained his Masters of Philosophy of Economics at Oxford University, he has become a distinguished economist who is now a senior columnist for The Financial Times.

The main focus of the book is taking ordinary, everyday situations, such as buying a coffee or health insurance, and revealing the truth behind them from an economists perspective. Harford delivers his views in a light-hearted tone without the heavy use of complicated terminology, making his book easy-to-read and engaging while still being highly informative. By breaking down each problem into a simplified example, no matter was ever too complicated to understand. I personally enjoyed exploring economics from a social level and seeing the huge influence economics has on everyday life; particularly Harford’s theories about solving the issues of having private health insurance in comparison to free healthcare (Chapter 5 – The Inside Story) and seeing the extraordinary results of the extremely cleverly-designed UK 3G auctions (Chapter 7 – The Man Who Knew The Value of Nothing).

In my opinion, I think this book could be improved by making fewer assumptions and fictional scenarios in order to explain theories. By making too many assumptions about certain scenarios in order to simplify them creates questions about how realistic the theories really are.

Overall, I would rate this book a 4/5; I enjoyed the wide variety of economic topics explored and I’m sure that every reader will find something in the book that is of particular interest to them. From reading this book I have learned that economics is all around us and the best way to solve a problem is by finding the cause of the problem instead of just finding a solution to it.

‘Think like a freak’ Book review

“Think like a freak” written by Steven D. Levitt and Stephen J. Dubner and published by Penguin Books is the third book written by Levitt and Dubner. It’s predecessors being the extremely popular, “Freakonomics,” and, “Superfreakonomics.” The main focus of the book is to encourage people to look at problems from different perspectives, and in doing so attack the root cause of the problem to eliminate it altogether rather than find short term solutions, which can be applied to both everyday life and specific economic issues too. I thoroughly enjoyed the lighthearted nature of the book and the humorous tone throughout. Further to this I particularly enjoyed the second and seventh chapters named, “The three hardest words in the English language,” and, “What do King Solomon and David Lee Roth have in common?” respectively. The second chapter encourages the reader to ask more questions about fundamental issues which many people often wrongly assume the answer to, as well as presenting the idea that saying “I don’t know” (the three hardest words in the English language according to Levitt and Dubner) is actually more beneficial in the long run than, again, incorrectly presuming the solution. The seventh chapter (supported by the sixth chapter) goes on to explain that in order to correctly assess a situation, one must understand the incentives of all parties involved. The authors understood that many may attempt to disguise their true incentives, therefore, people may act differently than if they were being truthful. As a result of this, the book discussed many ways in which we should try to uncover the true objectives of people, which in turn will be a useful tool when deciphering the incentives and intentions of both consumers and firms. Although there were some references to economic events and theory throughout the book, I believe that the piece should have been more focused on economic policies. The book was very interesting and I learnt a lot from it, however the economic content was actually a lot less than I had imagined it would be.