The Economic Outlook

If you had read economic forecasts in January, the consensus was that 2020 was going to be a good year. Economic growth, unemployment and living standards were predicted to improve and shareholders were expecting high share prices as profits increased.

Things have changed in a way that no one could have expected. Data suggests that, in March, which only included one week of the lockdown, we had a 5.8% GDP drop, the fastest monthly economic contraction ever recorded, causing a 2% contraction overall in the first quarter and there are forecasts that, in Quarter 2, GDP will fall by 30%. If these predictions are correct, the world will be looking at the largest decline in economic activity since at least the 1920s and probably longer.

So what is likely to happen next? There is discussion about whether our current recession is likely to be V, U, W or L shaped. V is what the government is hoping for – a sharp decline followed by a sharp recovery; U is a sharp decline with a long period of low activity followed by a recovery, W is the sharp decline followed by a series of small recoveries and declines until an eventual recovery and, the worst scenario is L – the sharp decline followed by no recovery in the immediate future. Predicting the likely outcome is not helped by a lack of data since much macroeconomic data is based on surveys which are likely to be inaccurate, especially in the current situation where so many businesses are only slowly reactivating themselves.

There is also much discussion about likely short and long-term changes as the UK moves out of lockdown. In the short term what will happen to interest rates is unknown. Central banks have reduced interest rates both to reduce the cost of the current government borrowing and to keep their economies buoyant but there is the danger that if investors lose confidence in an economy, it will be necessary to increase interest rates to compensate for greater risk. What will happen to inflation is also uncertain. Governments have injected billions into their economies and, given that supply is limited, what will happen when relaxations are further reduced and more shops open is unknown. Another influence on inflation will be what happens to the exchange rate. Again, confidence is crucial since, if foreign investors lose confidence in the UK, then sterling will fall, increasing the cost of imports.

There are also several unknown long-term factors. Will the trend of working from home continue, possibly on a smaller scale (Twitter has decided to give its employees the opportunity to do this)? Although this is not possible for many workers, even if some in major cities worked a day or two from home, it might be enough to reduce congestion and pollution.  Similarly, if more people are working from home, might they be encouraged to move further away from where they work and will companies down-size their offices and therefore what will happen to city property prices.

What will happen to business travel as we have got more used to on-line conferencing?

What will happen to on-line shopping? Will it drop back to previous levels or is the decline in physical shopping and the rise of on-line shopping going to be permanent?

Another long-term question is what will happen to globalisation as businesses discover problems with having long supply chains which can be disrupted and governments are seeing the dangers of relying on imports of such things as PPE as domestic manufacturing capacity has declined?

Finally, what will the crisis do to our views of the value of key workers and government spending in key areas? Care workers and nurses are relatively low paid and the crisis has revealed the impact of a decade of austerity on their activities.


In case you missed it, 6 weeks ago, 20th March, was World Happiness Day, which seems a little ironic given what has happened since then. This dates back to 2012, when the United Nations passed a resolution recognising World Happiness Day, sponsored by Bhutan. This is unsurprising since, in the early 1970s, they adopted Gross National Happiness as a more important objective than Gross Domestic Product, with all major new projects having to measure their impact on the country’s Gross National Happiness before being approved. The UN motion was recognition that there was dissatisfaction with measuring wellbeing by looking solely at GDP and countries should be seeking to measure a wider view of welfare which includes health, education, sustainability, equity, etc. David Cameron, when elected Prime Minister in 2010, promoted this approach and, in 2011, the UK’s Office for National Statistics carried out its first happiness survey to measure well-being. Like other such surveys, they asked four questions –  how satisfied are you with your life, to what extent do you feel things you do are worthwhile, how happy did you feel yesterday and how anxious did you feel yesterday – and  people answered on a scale of 10 (very) to 0 (nil). Their recent survey (March 2018 to March 2019), found a slight improvement in average happiness from 7.52 to 7.56, with the greatest improvement coming in London. While the answers to these questions are subjective, by comparing them over time we can see how people’s perceptions change.

The latest UN Report found that, for the third year in a row, Finland is the happiest country in the world, having overtaken Norway in 2018, while the UK is 13th and the least happy country is Afghanistan.

Country Happiness Rankings 2020

  1. Finland
  2. Denmark
  3. Switzerland
  4. Iceland
  5. Norway
  6. Netherlands
  7. Sweden
  8. New Zealand
  9. Austria
  10. Luxembourg

For the first time, the UN looked at the happiest cities and, not surprisingly Finland’s capital Helsinki was top, followed by Aarhus, Denmark and Wellington, New Zealand. London was the UK’s happiest city, coming 36th in the UN rankings.

Another well-known measure is the Happy Planet Index which considers wellbeing, using the world Happiness Survey but supplementing it by considering life expectancy, inequality and the impact the average inhabitant makes on the environment. Their results (2016) are very different to the UN analysis with Costa Rica first, followed by Mexico and Columbia and Chad last, preceded by Luxembourg.

Some parts of the world have gone even further. Maryland, in the USA, uses a Genuine Progress Index  which starts with GDP and then adjusts it by adding  a value for invisible “goods” e.g. leisure time, volunteering, & housework and subtracting a value for “regrettables” e.g. , inequality, pollution, commuting time and crime prevention spending such as burglar alarms.

With so many different measures, it is not surprising that there are so many different rankings. Possibly the only definite fact is that welfare is hard to measure.

Globalisation, international trade and the coronavirus.

Last month Tesla finished the first Model 3 cars produced in its new Chinese factory in Shanghai and their production provides useful examples of economic theory in action.

International trade theory suggests that producers making complex products often make them initially close to home, e.g. the Tesla factories in Nevada and New York state, where there are the designers and engineers on hand to deal with production difficulties. Another example is Dyson shifting its manufacturing plant from the UK to Malaysia while maintaining its research and design facilities in the UK. Once the product is refined and the production process is running smoothly, it is possible to outsource production to areas of the world where costs are lower in order to take advantages of those areas’ comparative advantage.

The Tesla factory is the first wholly foreign-owned car plant in China and, from starting construction to producing the first finished cars took less than a year – significantly faster than such a product in the UK. However it is worth noting that the initial negotiations according to Elon Musk, took “years”.

The Chinese-made cars are cheaper than imported models ($50,000 compared to $63,000) and, as production increases and more local components are used, costs will fall further, possibly as much as 20%.

Apart from making it easier to tap the potential in the Chinese market, the ability to produce in China means that the factory’s output would avoid possible tariffs on US exports. In the future, cars might be exported from China to consumers in the UK who would benefit from lower prices.

The above example shows the benefits of international trade and globalisation. However news this week of the effects of the coronavirus shows the reverse situation highlighting the dangers of increased interdependence through global supply chains. Jaguar Land Rover has announced that it could run out of components from China within two weeks. Apple has similarly announced that its iPhone supplies are suffering because of the problems in China where Foxconn workers, the business which assembles phones, have been told to stay away from work because of the virus. In addition, as the Chinese economy has grown, and it now accounts for 16% of world GDP, as well as its role in world supply, its slowdown also impacts on demand elsewhere in the world.

Should economists be worried about the coronavirus?

The coronavirus has been in the news this weekend with the 35,000 people in different countries being affected. In addition, the business pages of many papers are expressing concern about the implications the coronavirus might have on Western economies – what economists refer to as an economic shock – with the Federal Reserve Bank talking of a risk to the global economy. This is because of the increasing importance of China in the world today. Not only is it the second largest economy, accounting for 19.7% of world GDP, it also demands a staggering 69% of world mineral production. 20% of world tourism spending is linked to China, both inward and outward, with the Japanese economy predicted to experience a £17.3bn cost from the virus. Cathay Pacific, a Hong Kong based airline, has asked 27,000 staff to take a three-week unpaid holiday while, in the UK last year 415,000 visitors from China spent £714 million in UK hotels, shops, restaurants, etc. One estimate in the newspapers suggests every 22 visitors from China to the UK creates an additional job.

China now accounts for 13% of world trade. Wuhan, the region where the outbreak started, is prominent in world car production. Honda, Toyota and General Motors have factories there and many of these are currently closed to prevent workers travelling to work and catching or spreading the disease. Similarly, many shops are closed and Chinese branches of Western stores, particularly luxury products, such as Burberry, Estee Lauder and Canadian Goose have talked of falling sales in China as Chinese citizens stop shopping for such luxuries and the number of foreign tourists to China drops significantly. Ralph Lauren has closed 55 of its 110 stores in China. China is the world’s largest oil importer, daily consuming as much as the UK,  France, Germany, Italy, Spain, Japan and South Korea, and, as China’s economy slows oil prices have dropped with analysts comparing it to the fall as a result of the financial crisis

Apart from direct effects, China factories have a major impact on world supply chains, assembling products and producing components from everything from cars to iPhones. Fiat Chrysler, the Italian-American carmaker, has said that it could shut one of its plants on the Continent if the disruption continues while Sony and Nintendo have both talked of unavoidable delays in the supply of some of their products.

As Chinese production slows and both its exports and imports decrease, world growth will fall. Whether this is a temporary blip or a permanent drop will depend on how serious the epidemic turns out to be. However there is an upside – in China demand for  contraceptives and  Netflix subscriptions are both booming.

Why economists do not like Xmas

Economics is sometimes called the gloomy science and economists are not the most popular people at parties. Tell someone you are an economist and their eyes glaze over and they go off to talk to someone more cheerful like an undertaker. One could possibly blame Thomas Malthus and his 1798 work  ‘An Essay on the Principle of Population’ for this since, in it, he argued that population grows exponentially (2, 4, 8, 16, 32, etc) while food production grows arithmetically (2, 4, 6, 8, 10, etc) so the former would outstrip the latter and war, disease or starvation would occur to restore a balance.

Although it has not enhanced their popularity, economists have looked at the benefits of giving presents at Xmas and come up with the conclusion that such activities involve a significant waste of resources for society. This was originally suggested in 1993 by Joel Waldfogel who wrote “The Deadweight Loss of Christmas”. He argued that, at Xmas, we are making choices for other people and since we have less information about their desires than they do, we are unlikely to buy what they would ideally purchase for themselves. Therefore the most efficient way of celebrating Xmas is either by giving cash or for potential recipients to improve the level of  information in the market by producing a list of one’s desired gifts.

However there is an argument that donors receives a benefit from giving gifts which they would not receive simply by passing over an envelope of cash since the gift reflects the amount of time spent in searching for the ideal present.

Although not recommended as a recipe for a harmonious family Xmas, an economist might suggest that, in order to maximise utility, rich people ought to forget about giving their family presents or money but should, instead, donate the money to those with a lower income since, for those on low incomes, the utility they gain from receiving money will exceed the loss in utility experienced by the donors.



gifts are frequently worth less to the recipient than they cost the giver and therefore there is a deadweight loss to society. Giving gift token are also inefficient, as judged by the discount rates they are sold at on eBay after Xmas. Therefore the most efficient way



The 2019 Nobel Prize

This year’s Nobel Prize has been awarded to Abhijit Banerjee, Esther Duflo (only the second woman to be awarded an economics Nobel prize) and Michael Kremer  for their new approach to investigating the most effective ways of  alleviating global poverty in developing countries.  They use experiments to determine the most effective ways of reducing poverty.

In the words of the Awarding Committee,  “one of humanity’s most urgent issues is the reduction of global poverty, in all its forms. More than 700 million people still subsist on extremely low incomes. Every year, around five million children under the age of five still die of diseases that could often have been prevented or cured with inexpensive treatments. Half of the world’s children still leave school without basic literacy and numeracy skills.This year’s Laureates have introduced a new approach to obtaining reliable answers about the best ways to fight global poverty. This year’s Laureates have introduced a new approach to obtaining reliable answers about the best ways to fight global poverty. In brief, it involves dividing this issue into smaller, more manageable, questions – for example, the most effective interventions for improving educational outcomes or child health.”

In the past economists used a macro approach to analysing different policies. Therefore, for example, they might observe that a fast-developing economy spent more than others on teachers and books and gave parents money to encourage better attendance in schools. However, they would not have been able to provide an answer to the question of which of these measures was the most effective. What the three Nobel prize winners did was to promote the use of small-scale experiments; for example this might involve one group of randomly-selected schools having more teachers, another group receiving money for text books and a third group giving parents money as a reward for their children’s attendance. By examining the effects of these three experiments, it would then be possible to identify which policies had the greatest impact. They  also used their experiments to investigate why particular policies work well and others do not and therefore to apply their findings more widely. As a result of their work, these sort of experiments have now become common, particularly in the field of development economics.

One such experiment  was to discover the best way to encourage vaccinations of children so they set up a control group of villages, who would have had to travel to a nearby town for vaccinations, a group where mobile vaccination centres visited and a third group where not only did mobile vaccination centres visit but those vaccinated received a payment in the form of lentils (a vegetable). The three groups of villages were in the same region and were selected at random. The result of the trial was that 6% of children in the control group were vaccinated, while 18%  of children in the villages receiving the mobile centres and 39% of children in those also receiving the lentils were vaccinated. The trial also demonstrated that, per child vaccinated, the lentil incentive had such a large impact that it was significantly cheaper per vaccine than just having a mobile centre visit ($28:$56).

The prizewinners have, according to the  Nobel Committee “completely reshaped” the way economists now test policies and they have therefore had a major impact on economic development.



Time is Money?

Last week’s and this week’s blog have moved away from the current state of the UK economy, Brexit, trade wars and other depressing areas and look instead at some of the techniques economists use when making comparisons between different projects.

When comparing alternatives, it is necessary to identify all the costs and benefits – monetary and non-monetary – and compare them. This involves finding a way of expressing them in money terms. Last week’s blog looked at how economists value a human life while this week’s considers the value of travel time (VTT), the amount of money a traveller is willing to pay to save time, measured in pounds per hour. This is important when considering whether to pursue major transport infrastructure projects since savings in travel time are an important benefit to be considered, as well as construction costs, savings in vehicle running costs from shorter or less congested journeys and reductions in accidents and fatalities.

When trying to value time saved by drivers and passengers, we first need to identify whether the journey is for work or non-work, (leisure and commuting) since the two are valued differently. A government paper in 2015 suggested commuting time saved should be valued at £11.21 per hour while leisure time is worth only £5.21. Time spent travelling for business is more complex with an average of £18.23 per hour, considerably more valuable than non-work time. This average contains considerable variations. For example, an hour saved on a business journey by car is worth £25.74 if the journey is more than 100 miles while, if it is less than 20 miles, the value is only £8.21 per hour. Time spent on rail travel, which might be expected to be less valuable because of the opportunity to work on the train, is actually more valuable, with an hour saved on a rail journey of more than 100 miles worth £28.99 per hour. This could be because the government paper takes into account the quality of the travel experience and considers such factors as whether the mode of transport is likely to be early or late and whether, on a train there are many, few or no seats free. Therefore, an hour spent in a car listening to the radio is far less of a cost to the employee than having to travel in a crowded train.

The final way in which time needs to be considered is in how we value costs and benefits accrued at different stages of a project. In a typical infrastructure project, the construction costs are front-loaded while the benefits, such as time saved and revenue generated occur over a longer period. If you were asked whether you preferred £100 today or the same sum in five years, you, along with the majority of the population, would prefer the former, not least because you could put the £100 in a savings account and it would be worth more than £100 in five years. Therefore economists “discount” the value of future costs and benefits and express the costs and benefits in terms of the “net present value” – the monetary value today of future costs and benefits. In a simple example, if the interest rate today were 5% and a project incurred costs of £100m today, the project would need at least £105m of revenue in a year’s time to be viable. In reality, one is not looking at one cost and one revenue figure but a series of figures over many years. The interest rate chosen is crucial since it would require revenue of £161 in five years to cover costs of £100 today at 10% but only £110 at 2% – a figure much closer to today’s borrowing rates. Hence the argument that now is an ideal time for our government to be improving the UK’s infrastructure.

What is the value of a human life?

Imagine you are an economist in the Department of Transport advising the Minister who has to chose between two alternative transport options. One is significantly more expensive than the other but will have a greater impact on road safety because it improves a major blackspot, notorious for fatal accidents between pedestrians and cyclists. Alternatively, if you were working for a health authority, you might have to advise on allocating scarce resource between areas which particularly benefit the elderly, such as hip replacements, or putting the money into areas which benefit other sectors of the population such as paediatrics. Although it might seem difficult and subjective, economists working in these areas have to place monetary values on a human life.

One way of valuing a human life is the VSL (Value of a Statistical Life) which uses  the money a person would pay to save one human life. This is not asking what they would pay to save their life or that of a member of their family or a friend, but the value they would place on an anonymous life. Alternatively, rather than carrying out surveys, economists consider future average earnings. Therefore the value of a life varies according to the age of the people being considered, hence actions which save a child’s life are more valuable than those which benefit the elderly. More problematical, this implies that saving lives in a high-income area is of greater value to society than in a depressed region.  Unsurprisingly, there is very little international agreement about the answer. The UK government figure is around €2.02m while the USA Department of Transport figure is €8.75m, indicating the way the VSL varies according to income levels.

A study in Sierra Leone illustrated this by looking at people’s preferred transport options to get from the capital, Freetown, across water, to the airport. By examining the different methods of travel (ferry, water taxi or  hovercraft) and considering the duration of the journey and the risks involved, the study found that the VSL of an African traveller ($577,000) was lower than that of a non-African traveller ($924,000) which was largely explained by the level of income, with higher income earners choosing the safest method – water-taxi-  even  though it was more expensive and took longer.

A new approach, used particularly in healthcare economics, estimates the “Value of a Statistical Life Year” (VSLY) which measures the value of one additional year of life. If a medical process, such as a heart transplant for an elderly patient, costs £50,000 and increases life expectancy by one year yet costs £60,000 then in economic terms it is not cost-effective. However if the same treatment were provided for a child which increased their life expectancy by fifty years, then it would be extremely cost-effective. This approach has been made more sophisticated by introducing the idea of a Quality-Adjusted Life Year which is defined by NICE (the National Institute for Health and Care Excellence) as:

 “A measure of the state of health of a person or group in which the benefits, in terms of length of life, are adjusted to reflect the quality of life. One QALY is equal to 1 year of life in perfect health.
QALYs are calculated by estimating the years of life remaining for a patient following a particular treatment or intervention and weighting each year with a quality-of-life score (on a 0 to 1 scale). It is often measured in terms of the person’s ability to carry out the activities of daily life, and freedom from pain and mental disturbance.”

The World Health Organisation uses a range of between one and three times per capita GDP of the country per additional QALY while a value of £30,000 per QALY has been identified as the upper limit for treatments deemed cost effective in the UK,  approximately the value of per capita GDP.

Whether this figure is too low is a question for politicians rather than economists.

A Libra Update

Four months ago, Facebook announced the prospective launch of Libra, its global, digital currency which is intended to change the way people (or some of them)  transfer money and make payments. Since then the path to its launch has been rocky. First the French and German banking authorities expressed concern and  suggested they would refuse to allow it to be used and G7 ministers expressed concern that currencies like Libra might  potentially destabilise the international monetary system. The European Central Bank   launched an investigation  to examine  how the currency might impact on competition and Mark Carney expressed concern over  money laundering and data protection.

However a further very large blow has been the announcement by PayPal on Friday that it is withdrawing from the Libra Association (the group of businesses backing Libra which have agreed to invest at least $10 million in the project). Although the reasons behind PayPal’s departure are not clear, it is likely that concerns raised by central banks, such as the Bank of England and the Federal Reserve over the way in which transactions involving the currency will be regulated, might be a major cause. If other key parties, such as Visa and Mastercard also withdraw, then the future of the Libra will be in doubt.


Facebook, Libra and the meaning of Money.

People asked the question “What is Money” talk about cash – notes and coins. Some,  with a historical background, might also talk about precious metals such as gold and silver while others include bank deposits. Economists asked the same question will talk about anything which fulfils the four functions of money – a medium of exchange, (anything which is used to buy goods and services and allows an economy to move away from a barter economy), a unit of account, (allowing the value of goods and services to be related via a common standard – if a loaf of bread costs £1 and a jar of marmalade costs £2, then the latter is worth twice as much as the former), a store of value, (allowing wealth to be saved), and a standard of deferred payments (allowing borrowing and repayments over a long period). Economists are quick to point out that, in today’s economy, 97% of money is held not in the form of notes and coins but in bank and building society accounts and the majority of transactions by value are done via money in bank accounts not cash. As contactless technology becomes more common, the use of cash will diminish even further.

In June, the question of what counts as money moved away from the bottom of the financial pages to the front pages as Facebook announced it was planning to launch a crypto-currency called Libra in 2020. UK users, for example, will be able to change pounds into Libra and use the latter to send money to friends via Whatsapp and Messenger and buy things on-line and in shops. Facebook has joined 27 other companies, including Spotify, Uber, Visa and Vodafone, to establish this new, digital currency which will be run by a subsidiary called Calibra, based in Geneva. According to Mark Zuckerberg, the new currency will be cheap and easy to use and will be of benefit to those people, particularly in developing countries, who do not have bank accounts. In these countries, the plan is that people will be able to go to places where they can change their domestic currency into Libra which they can then spend or send elsewhere. And migrant workers will be able to send Libra back home which their family can then access. Libra charges to transfer money will be significantly lower than those currently levied by banks and firms such as Western Union.

A criticism of cryptocurrencies is that they fluctuate in value enormously. One bitcoin was worth $19,783 on 17th December 2017, by 22nd December, 2017 it had fallen to $13,800 and by 5th February 2018 it was worth only $6,200. Facebook hopes to avoid such volatility by pegging  Libra to a basket of other currencies and it will be backed by a reserve fund, meaning that holders of Libra will be able to change their holdings back into “real” currencies without difficulty.

Facebook has referred to the Libra as a potential global currency; given that the number of active Facebook users in the first quarter of 2019 was 2.38 billion, this is not an exaggeration. However, there are significant issues over the stability of the new currency and its impact on the financial system. Given that the account holders must “buy” Libra with existing currencies, their purchase of Libra could potentially significantly reduce the reserves held in the banking system, causing a reduction in lending.  A key issue for government finance ministers is whether Libra is a currency requiring regulation or simply a new way of making payments which are still based, ultimately, on individual nations’ currencies.

Another issue is how Libra will be regulated. There are concerns over the security of users’ data and the potential for it to be used for money laundering. Finance ministers from the G7 (the world’s 7 major economies) met in July and expressed their concern that the Libra might become a world reserve currency (one used internationally and held by governments as part of their international reserves as gold was and the dollar still is) but would not be subject to regulation. They therefore argue that if Calibra accepts deposits like a bank, it should be controlled as banks are, with regulations over their reserves. However, since the G7 meeting, the Bundesbank (the German Central Bank) has suggested that the new digital currency might significantly reduce the cost of making transactions and force existing current banks to improve their existing, expensive payment systems, which can reach 7% for international movements of money, thereby benefiting consumers and business worldwide.