Archive for August, 2009
Friday, August 28th, 2009
The population of the UK rose by 408,000 in the year to mid-2008, giving a total of 61,383,000. This amounted to an increase of 0.7%. This compares with a growth rate of 0.2% from 1981-91; 0.3% from 1991-2001; and, 0.5% since 2001. This is an increase of two million people living in the UK in the past 8 years.
Why such an increase? Was it all due to increased immigration? Well, actually it wasn’t. For the last ten years net migration has been the main contributor to population change, but last year it was due to “natural change”. This refers to the difference between births and deaths. In fact we experienced a falling death rate and an increasing birth rate. Natural change last year accounted for 54% of the growth in population.
The changes over the last ten years can be seen in the figure below.
 Components of population change in the UK. Source:ONS
The increase in the birth rate came as something of a surprise – although probably not to the women who gave birth! The Total Fertility Rate (TFR) for 2008 gives an average of 1.97 children per woman in England and Wales. This is the seventh consecutive increase following on from a low point of 1.63 in 2001. The TFR has not exceeded the current level for 35 years.
It appears that there have been increases in fertility rates in all age groups. Surprisingly the biggest percentage increase of 5.0% was in the group of women aged 40 and over. The number of live births to women in this category has doubled over the past ten years and reflects the increasing number of women enjoying careers before motherhood and the growth in IVF treatments. There was also a continuing rise in the number of children born to mothers who themselves were born outside of the UK, reaching 24% of the total. This compares with 14% ten years ago.
The increase in fertility rates can be seen as a positive factor for the UK economy as many advanced countries are experiencing an increasingly ageing population. This will mean that in years to come we will a growth in our workforce which implies that there will be greater contributions through the tax system to enable us to support those in retirement.
Net migration contributed to 186,000 of population growth in the year to mid-2008. There was a fall in UK residents emigrating, probably affected by the crash in the housing market and the current difficulty in selling. Also, the ubiquitous “Polish plumber” seems to be making his way home. The figures show that the number of people entering the UK from the eight countries of Eastern Europe which have joined the EU since 2004, fell by 28% to 79.000. At the same time, those returning home increased by over 50% to 66,000.
Many of these immigrants only planned to come to the UK for a short period and the recession has persuaded them to go back home. Also, the government has been operating a strict points-based system for immigrants from outside the EU which has also contributed to a slowdown in immigration growth.
Tags: fertility rates, Immigration, Population
Posted in Immigration, Population | No Comments »
Thursday, August 27th, 2009
Just when we were seeing some positive signs of recovery it appears that business is not joining in – at least as far as capital investment is concerned. Business investment for the second quarter of 2009 is 10.4% lower than the previous quarter and 18.4% down on the same period last year, according to figures just published by the ONS.
These declines were seen in most industries, with private sector manufacturing down 16.8% and private sector non-manufacturing down 9.7%. When we compare the figures with the same quarter of 2008 we can see that the overall fall of 18.4% was mainly from private sector and public corporations non-manufacturing investment which fell by 18.4% and private sector manufacturing investment which also fell by 18.4%. Within these figures construction fell by 47% and other services by 21.4%.
The trend of business investment over the past thirty years can be seen in the figure below.
 Source: ONS Business investment is obviously very important to the economy but the graphic shows just how volatile it is. There is an interesting article in the Bank of England’s quarterly bulletin in the second quarter of 2007 which is entitled: Understanding Investment Better.
In this study it shows that investment is responsible for about 10% of GDP and that between 1971 and 2006, annual business investment growth was twice as volatile as that of household and government consumption, exports, imports and overall GDP.
Business investment makes up 60% of total investment and is obviously an important element in aggregate demand along with government expenditure, consumption, and exports minus imports. However, it is also an important part of aggregate supply since investment net of depreciation determines the growth of the capital stock, and thus future production.
It has been shown that the degree of uncertainty and financial constraints both have important effects on business investment. One can understand why, at the present moment, firms are reluctant to invest although at the same time there are numerous opportunities for those willing to be most adventurous.
Tags: aggregate demand, aggregate supply, business investment, economic growth
Posted in Investment, economic growth | No Comments »
Wednesday, August 26th, 2009
There has been a huge rise in the number of working-age people who are living in workless households. The Office for National Statistics defines a working-age household as one that includes at least one person of working age – either a man aged 16-64 or a woman aged 16-59. A workless household is then defined as a working-age household where no-one aged 16 or over is in employment.
Between April and June 2009 there was an incredible rise in the number of working age people living in workless households of 500,000 people – which raised the total number to 4.8 million. At the same time, the number of children in workless households rose by 170,000 to 1.9m.
 1.9 million children now live in households where no-one works
The workless household rate, which is the percentage of households in which no adults work, increased by 1.1 percentage points to 16.9%. This is the highest rate since 1999 and the largest year-on-year increase since 1997.
This means that more than one in six homes in the UK have no-one who is working, and this does not include student or pensioner households. Not surprisingly, the workless household rate was highest for lone parent households at 40.4% and for one person households at 30.1%. However, the employment rate for lone parents was 56.7% which was up 0.4 percentage points on a year earlier. This has been a gradually increasing trend and compares with 44.6% in 1997.
The government has made great efforts to target lone parents and those on long-term sickness benefits to get back into employment and has had some success. However, the current recession has obviously undermined these efforts. With fewer and fewer vacancies it is getting increasingly difficult to offer people appropriate work.
One particular problem is the increasing number of children who are living in homes where no-one works. This situation is making it harder for the government to meet its targets on reducing child poverty.
Tags: child poverty, lone parents, poverty, working age, Workless households
Posted in Workless households, unemployment | No Comments »
Tuesday, August 25th, 2009
In June 2009 the euro area saw a rise in the industrial new orders index by 3.1% compared with the previous month. This is in sharp contrast to the May figure which showed a fall of 0.5%.
However, taking all 27 countries of the EU together, industrial new orders actually fell by 0.4% in June, after rising 0.5% in May. When the more volatile elements of industrial orders are removed, such as ships, railway & aerospace equipment, there is a more moderate result. In fact industrial new orders grew by 1.9% in the euro area and by 1.1% in the EU.
These are promising figures and seem to show that EU manufacturing industry is coming out of recession as new orders suggest that output should begin to rise. However, the overall picture needs to be kept in context. When we compare June 2009 with June 2008 we see that industrial new orders fell by 25.1% in the euro area and 24.0% in the EU27.
There were also sharp differences between countries in terms of new orders. There was strong double digit growth in Ireland (14.8%), Bulgaria (13.8%) and Hungary (13.1%). But, Denmark saw a decrease of -29.9%, with Poland falling -6.7% and Lithuania -4.9%.
There is a patchy response across Europe where figures are available showing total orders rising in eleven countries, falling in eight, and remain stable in Portugal.
Tags: EU, eurozone, industrial orders, recession
Posted in European Union, recession | No Comments »
Monday, August 24th, 2009
The Bank of England has just published its Trends in Lending report which seems to present nothing but bad news. It says that in the second quarter of 2009 total net lending to businesses fell across all the main industrial sectors. Gross lending (not allowing for any repayments) fell from £42.9bn in the first quarter of 2009 to £27.3bn in the second, showing a downturn of 36%.
It was particularly difficult for small businesses to raise money, although the major UK lenders suggested that there was little demand coming through. By contrast, larger companies were obtaining money in the bond and equity markets rather than borrowing from banks.
There was also a stabilisation in net consumer credit flows at very low levels. Lenders said that they had yet to detect any significant signs of an increase in the demand for consumer credit.
The Bank of England also released the latest money supply figures which showed that the key measure of broad money, M4, rose by 1% in July compared to the previous month. This follows a fall of 0.3% in June and suggests that quantitative easing, which began in March, may at last be having an effect on the amount of liquidity in the economy.
Other positive news came from the Council of Mortgage Lenders which said that mortgage approvals had risen 26% in July. Although the bad news is that this level is still 38% down on the same month in 2008.
Tags: Bank lending, consumer credit, M4, Money Supply, mortgage lending
Posted in Bank of England, Lending, Money Supply | No Comments »
Friday, August 21st, 2009
The good news is that the government is painting the town red. The bad news is that it is with the red ink they are using to write the government’s borrowing needs – needs that we are all going to have to pay for, one way or another, in the years to come.
We have already gone from bad to worse. Now we have gone beyond “worse” according to the latest government figures for public sector net borrowing.
July is normally a good month for the public finances. It is one of the month’s in which the government receives a quarterly payment of corporation tax from businesses. Analysts were typically expecting a deficit of about £500m. But their expectations were sadly off the mark. The official figures for public sector net borrowing in July showed a deficit of £8bn, which compares with a surplus of £5.2bn in the same month last year. This means that total net borrowing for the fiscal year to date since April 2009 now totals £54.7bn which is £20bn up on the same period last year. At the same time total revenues received were £24.1bn compared with £44.1bn last year.
 The government has posted net borrowing figures which are even deeper in the red.
The BBC quoted a Treasury spokesman as saying: “In the first half of the year, the whole world was in a steep recession and that affected the public finances here in the UK.” Well, thank goodness I have a degree in Economics or I just wouldn’t have been able to follow that explanation. But what are you going to do about it?
The reason we are worse off than anticipated is due to the steep drop in tax revenue that is coming in compared to the rise in benefit payments which are going out. Corporation tax receipts were 38% down on the same month last year, whilst VAT income fell by almost 34% – in part due to the reduction in VAT from 17.5% to 15% which was introduced last December. On the other side of the coin, the cost of net social benefits rose 10% on the same month a year ago, reflecting the rise in unemployment, with those claiming jobseekers allowance now totalling around 1.5 million.
Few commentators now believe that the chancellor will reach his target of £175bn in net borrowing for 2009-2010. Many now think that it could reach £200bn which would be around 15% of GDP. This would be a level which has never, ever been reached in the UK before during peacetime. Two hundred billion pounds in borrowing? I must mention that to my bank manager the next time she queries my account.
Tags: government spending, Public Finances, public sector net borrowing, taxation
Posted in Public Finances, government borrowing, government spending | No Comments »
Thursday, August 20th, 2009
After four quarters of continuous decline in GDP, the 30 advanced nations of the OECD showed that growth had stabilised in the second quarter of 2009. Well, if we are being completely truthful, they recorded a contraction of -0.002%, but this compares with a fall of 2.1% in the previous quarter.
As far as the major seven countries of Japan, UK, US, Germany, France, Italy and Canada are concerned there was a marginal fall in GDP of 0.1% compared to the previous quarter. (Canada was not actually included in these figures as its GDP rate has not yet been published).
The variation in these major countries can be seen in the figure below.
It can be seen that there was quite a variation between countries. Japan is leading the way with a 0.9% rise in GDP, with France and Germany both showing a 0.3% increase. On the other hand, Italy, the US and the UK were all still showing falls in GDP in the second quarter.
However, the news is still broadly positive. The Chief Economist of the IMF, Olivier Blanchard was quoted as saying: “The recovery has started. Sustaining it will require delicate rebalancing acts, both within and across countries.”
Good news for the UK economy came from the CBI’s industrial trends survey just published. According to the survey 32% of UK manufacturers said they expected the volume of output to fall over the next three months, while 27% said it should increase. Although the resulting balance of -5% represents a slight fall in output, it is the least negative prediction since June 2008 (+2%).
Tags: GDP, growth, OECD, recession
Posted in GDP, OECD, economic growth, recession | No Comments »
Wednesday, August 19th, 2009
The consumer price index (CPI) for July was 1.8%, which was exactly the same as it was in June, and remained within the government’s 2% target. The CPI saw some downward pressure on prices from food, soft drinks, restaurants and hotels but these offset by rises in the prices of games, toys, hobbies and recorded media such as DVDs and computer games.
At the same time, the Retail Prices Index (RPI), which includes housing costs such as mortgage interest payments, actually increased, whilst still remaining negative. It rose from -1.6% in June to -1.4% in July. In other words it showed that prices were still falling but a decreasing rate.
The latest trend is shown in the figure below.
 Source: ONS
Even more interesting was the fact the “core inflation” which removes more volatile costs such as energy and food prices, rose from 1.6% to 1.8%. Many economists regard the “core inflation” figures as being a strong indicator of basic trends within the economy.
So what does it all mean? To some degree it could be considered good news. If prices are remaining “sticky” in general, it may suggest that there is more demand within the economy than previously thought, and that this may be a good marker that we are moving out of recession. After all, the CPI figure for the EU was 0.6% in June compared to the UK’s 1.8% and Germany and France both moved out of recession in the second quarter.
At the very least it suggests that deflation is not going to be a problem for the UK. In fact, it casts doubt on the Bank of England’s prediction that CPI inflation would fall below 1% later in the year. We would expect inflation to start to rise again in 2010 as the government reverses its reduction in VAT, and raises it back up from 15% to 17.5% next January. Also, earlier cuts in energy bills, mortgages and other products will start to fall out of the annual index, which will increase the various measures of inflation.
Prices have been boosted by the fall in the sterling exchange rate which is still 20% below what it was in 2007 and has made imports more expensive. But sterling has been rising in recent months and if this continues will have a downward impact on prices going forward.
So, inflation is not falling as quickly as anticipated, or as quickly as it has in other countries. There are signs of upward pressures in prices but also the possibility that they may have further to fall. All of this increases the pressure on the Monetary Policy Committee to work out just how much upward pressure there is in the economy at the moment and if, or when, they will need to tighten monetary policy by raising interest rates. If they get it wrong, they could send the economy tumbling back into a further recession.
Tags: core inflation, CPI, Deflation, Inflation, Interest rates, MPC, RPI, sterling
Posted in Bank of England, Inflation, Interest rates, sterling | No Comments »
Tuesday, August 18th, 2009
Japan is the world’s second largest economy and yesterday announced a return to GDP growth, with a rise of 0.9% in the second quarter of this year. Given that in the last quarter of 2008 Japan’s growth rate was declining at 13.1% on an annual basis, this appears to be a promising recovery. This news follows on from France and Germany posting positive growth rates in the second quarter, although at a lower rate than Japan.
Why has Japan shown growth when the UK and the US were still in deficit from April to June? There have been two main reasons. Firstly, GDP was boosted by 1.6% through an improvement in net exports – although offset by declines elsewhere. In fact, half of this came from a positive boost of 6.3% growth in exports compared to the first quarter, and the other half by a not so impressive fall in imports of 5.1%. Japan has particularly been aided by the growth in China which showed an increase in GDP of 7.9% in the second quarter, following on from 6.1% in the first three months of 2009. Given that China is Japan’s biggest trading partner, this obviously had an important effect.
Secondly, Japan has seen a huge stimulus package applied by the government amounting to about $260bn. In fact, public investment grew by 8.1% in the second quarter. This is obviously working its way through into the economy and having a positive effect.
So, is Japan leading the way? The answer is probably not. Whilst it is good to have a boost to net exports, the other fundamentals of the Japanese economy are not in such a good state. For example, consumer prices fell by 1.76% in the second quarter, which whilst giving a boost to the volume of goods and services purchased, actually saw a fall in the value of these items. Falling prices is not necessarily the best sign of economic progress.
Also, there will be a second estimate of UK GDP growth in the second quarter on 28 August, and many economists expect the figure to be revised upwards.
On top of this the UK has had to deal with a major failure in its banking system which was far more severe than the effect in Japan, and is now in the process of being rectified, and we can also expect any boost in world trade to have a positive impact on the UK economy in the coming months.
Tags: GDP, Japan, trade
Posted in GDP, International Trade, Japan | No Comments »
Monday, August 17th, 2009
Today the centre-left political pressure group, Compass, and 100 leading public figures launched a campaign to curb excessive pay. They called on the government to establish a High Pay Commission.
The statement says: “The crisis we find ourselves in is one significantly caused by greed. The salaries of those at the top raced away while the median wage stagnated. Inequality grew, and an economic crisis ensued. The unjust rewards of a few hundred ‘masters of the universe’ exacerbated the risks were all exposed to many times over. Banking and executive remuneration packages have reached excessive levels.”
The group claimed that performance pay cycles were too short and that some executives were being rewarded for failure, often at the expense of their own companies and the economy at large. Just as a Low Pay Commission was set up in 1997 to advise on introducing a minimum wage, so a High Pay Commission should be set up to launch “a wide-ranging review of pay at the top.”
Brendan Barber, TUC general secretary argued that: “The growing gap between executive and employee pay has a damaging impact on staff engagement and has created a new class of super-rich that float free from society. The government can no longer afford to ignore this.”
Just yesterday the Chancellor, Alistair Darling, gave an interview on this subject to the Sunday Times, saying that the government was ready to intervene. He said: “I am quite clear that some of the problems we have today were caused by the fact that some traders were incentivised to take risks which neither they nor their bosses fully understood.”
One of the major problems has been one of “moral hazard”. This occurs when traders and bankers receive financial rewards based on the volume of business which they are engaging in, knowing that if they make wrong decisions, their companies are so large that the government would have to intervene. It can be argued that if this view is widespread then any reasonable levels of business caution will go out the window.
The government is waiting for Sir David Walker to deliver an independent review of bonuses and the way companies are run, before making a final decision on whether to legislate.
Tags: Banking, bonuses, High Pay Commission, Low Pay Commission, moral hazard
Posted in Banking, Earnings | No Comments »
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