UPDATE: The state of the European economy

Recently, Europe’s economy has avoided appearing on many of our news screens what with other international affairs such as Russia/ Ukraine, Syria and Iraq in the headlines for probably my entire summer holidays. But that doesn't mean that the European economy is all hunky-dory and the recession is a thing of the past.

This post is an update of what is actually going on in Europe right now, giving you three key case studies: Italy, France and Germany.

Italy

·      Triple dip recession – GDP fell by 0.2% in the second quarter of 2014

·      12.6% unemployment rate

·      43% youth unemployment

·      Little political will to do anything about it

France

·      Rising budget deficit

·      Last quarter’s GDP growth: 0%!

·      Chance of going back into recession, was also 0% in the quarter before last

Germany

·      GDP fell 0.2% in the last quarter, the first GDP contraction this year

·      Manufacturing sector slow down

·      Geopolitics is affecting growth: Russia’s embargo on European food imports is apparently affecting 9.5m European farmers, and is affecting Germany’s trade

Key points to note about Europe right now:

·      Low inflation.

Average Euro Area: 0.4%

Deflation in 8 Eurozone countries including the PIGS (Portugal, Italy, Greece and Spain)

Country in Eurozone	Inflation rate
France	0.4%
Italy	-0.1%
Germany	0.8%
Spain	-0.5%
Greece	-0.3%
Portugal	0.4%

Why is this a problem?

·           Increases the real value of debt which means that government debt increases making it harder to pay off and increasing the likelihood of needing another bail out

·           Taxes will have to rise eventually to fund the increased debt accumulation which means businesses will have a higher tax burden à leaving some Eurozone countries

·           There is danger of falling into a deflation trap where prices just keep falling. This is called a deflation spiral.

·      High unemployment

·      High government debt

·      Political upheaval

·      Geopolitics with Russia

·      Lack of political union

Different countries in the Eurozone want different things and have different views with how situations should be handled, e.g. with Russia, which makes it hard to manage economic policy and introduce austerity measures where needed.

What can be done?

·           Keep interest rates low – increasing interest rates will just decrease inflation more

·           “Quantitative Easing lite”: the European Central bank buys assets to stimulate the economy and help inflation rise

Anything else?

·           Role of competition in markets:

o   There was a period of very low inflation during the late 19^th century in Germany and the UK

o   Analysis shows there was competition in markets and businesses operated in a competitive environment

o   Competition restricts wage growth because there are many companies in the same industry offering the same job and the same wage. This is happening now!!!

o   A competitive market means that firms are unwilling to increase the price of goods and services – preventing inflation from rising. This is happening now!!!

o   It is therefore hard to increase inflation. This is happening now!!!

Another Contribution to the Business Cycle

Read an interesting article on the BBC about the cost of bank holidays, according to research from The Centre for Economics and Business Research (CEBR).

Each bank holiday costs the economy £2.3m and that means the economy could gain an extra £19bn if bank holidays were scrapped. This can be a contribution to the business cycle (see here) because bank holidays reduce GDP. If the economy was suffering a downturn, the loss of GDP can cause the economy to worsen from a downturn to a recession. For the UK, especially at a time where we are not experiencing strong growth, forecasters are predicting the worst from the working days that are lost.

15% of the economy, which includes pubs, clubs, restaurants, cafes and visitor attractions, do well on bank holidays and 45% of the economy suffers, which includes offices, factories and building sites, where people do not go to work on the bank holiday. The areas that benefit do not balance out the loss of productivity from the services sector of the economy.

Do read the full article for more information.

Inflation for January 2012

Inflation fell to 3.6% in January, as forecasters predicted. Read more on the Financial Times. The ease in inflation may give signs that this 'stagflation' that the economy has been experiencing may be shifting away. The coming months will tell how unemployment will change in response (Phillips Curve). Inflation faces downward pressure from the effects of higher unemployment, slow exports markets (due to the Eurozone) and lower energy prices (causing a rise in imports).

A further £50bn Quantitative Easing that the MPC authorised earlier this month shows that there is still deficient demand in the economy and it may continue to stay low. Thus economists are predicting more QE to keep inflation from falling below the government's 2% target.

Growth in 2012

This chart here shows the predictions for growth worldwide along with the reasons for it. Read it to learn more case study examples and improve your knowledge of the world economy, ready for 2012!

The World Tonight on Boxing Day!

Merry Christmas to everyone!!! Hope that you all got what you wished for, but also that you've have been busy revising for January exams!

The World Tonight had a special report on the global economy and the free market. Listen here from 7 minutes  30 seconds. Listen out for case studies and recent news to back up your arguments in the exam.

What does the UK's economic growth tell us about the impact of cuts?

This blog was created to help you find resources for your exams, as well as providing specific exam revision notes, so below is the link to an article that talks about government cuts and their impacts on society.

http://www.rsablogs.org.uk/2011/adam-lent/growth-data-impact-cuts/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+rsaprojects+%28RSA+blogs%29

 
Make notes about what you read, and notice that the view of Adam Lent conveys that government cuts have not yet stifled growth.

BBC programme called 'Your Money and How They Spend It'

There is a really good programme by the BBC's political editor, Nick Robinson. It concerns itself with the fiscal policy of the UK in the past and the future. It describes the government's decisions in the allocation of resources and how the government spends our money. The programme is on the link here and is broadcast every Wednesday at 9pm on BBC2.  The issues discussed include:

• Politics
• UK's budget
• Ageing population
• Winter fuel allowance
• Pensions
• NHS
• Financial crisis 2008
• Tuition fees
• Inequality
• Infrastructure spending

Please watch it, there are case studies that you can use in your exam and some statistics that, if you learn, will make your exam answers different than others. It is also useful to know about previous governments' fiscal policies. The extra knowledge that you will receive will definitely be beneficial.

Case Study for Supply Side Economy

A new government scheme has been launched today to tackle our sluggish economic growth. 'Business Link' (for more information and research, visit their website) has started a new scheme called 'My New Business' to give advice to potential entrepreneurs. Could this be a potential supply side policy aimed at shifting our LRAS curve rightward?

Read this short article which explains the potential benefits the scheme will bring to our economy. Click here.

To find out more about supply side policies and supply side economics, see my notes posted here!

The New Global Economics

On Monday 14th November, one of a two part programme will be on at 8:00pm about the future of the global economy. The show will be broadcast by Martin Wolf, the chief economics commentator of the FT, where he'll discuss the short and long run effects and how things will be changing in the world.

Please do listen to it, if you can't then listen on iplayer when convenient for you, because this programme will give you valuable analysis that you can use in your exam and possible case studies...etc. To find out more about the programme, click here.

The Credit Crunch

For those of you who are unsure what the 'credit crunch' is, and how it started, watch this simplified, but concise video that explains it.

http://www.youtube.com/watch?v=wGxmgwUWNr0&feature=related

To summarise, occurring in 2008, the credit crunch was the result of over lending to people who are high risk and thus the inability of debtors to pay back their loans. In a simplified version, banks make money through a process called credit creation, lending more than is initially deposited. They know that people will deposit money back into the bank that they borrowed from and so can afford to lend more than they have (given a low liquidity ratio: the proportion of their assets - savers' money - that they keep).

UK Growth Figures

Today it emerged that the UK economy has grown 0.5% in the third quarter of this year. Economists predicted a 0.4% growth rate, beating expectations. My verdict: at least it's not negative growth!

These two articles here and here, are good readings explaining the recent ONS figures.

State of the World Economy

Just an article from The Economist about the future of the world economy. Worth a read. Print it out, highlight it...etc.

Here's the link:

http://www.economist.com/blogs/freeexchange/2011/09/world-economy?fsrc=nlw|pub|09-28-11|publishers_newsletter

Global Economy

For those of you who have been watching the news recently, you should know that there is fear that the global economy could double-dip which the USA in serious risk. Below is a summary of the main uncertainties the global economy faces.

The IMF says…

· There is sluggish economic growth

· Governments need to rethink their policies

· The UK growth forecast needs to be reduced (and George Osborne said so too). Economic growth in the UK has been revised to a mere 1.1%

· Deficit reduction plan needs to be delayed

Eurozone

· Italian credit rating degraded

· Protests in Greece

· 40% of our exports go to the eurozone.

All advanced economies are facing tough times.

The UK government should focus more on capital spending (spending on infrastructure). This will stimulate the economy because infrastructure provides the correct conditions for business and enterprise to flourish. It will create jobs in the short run and long run, and should increase economic growth in the long run.

It's good to be on the ball with all the latest economic news.

Word of the Day

GDP

Gross Domestic Product measures the value of all the goods and services produced within the economy.