A detailed analysis of the prospects for the UK economy in 2012 from Geoff Riley at tutor2u. Among the key themes explored by Geoff are:
Are we already back in recession?
A damaging legacy from the slump
Have policies lost their effectiveness?
Macro fragility in a world of external shocks
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Prospects for the UK Economy in 2012
1. Prospects for the UK
Economy
A Fragile Economy at Risk of a 2nd Recession
Geoff Riley - tutor2u
2. Themes
• Are we already back in recession?
• A damaging legacy from the slump
• Have policies lost their effectiveness?
• Macro fragility in a world of external
shocks
3. Mervyn King on the UK Economy
“We are facing a difficult time
ahead with a slow and
prolonged adjustment to the
consequences of the banking
and financial crisis.”
Mervyn King, May 2011
4. Government wants a balanced recovery
Exports
Invest
ment
Balanced
recovery in
Demand
and Output
The government wants
higher exports and Achieving this looks harder
investment to kick-start a than the coalition expected
“balanced recovery”
5. Are we already back in recession?
GDP data is backward –
looking – not the best
guide to whether we
are in recession now!
20. Robert Shiller: The importance of expectations
“Animal spirits" is related to
confidence and it refers to the
sense of trust we have in each
other, and our sense of the
extent of corruption and bad
faith. When animal spirits are
on ebb, consumers do not
want to spend and businesses
do not want to make capital
expenditures or hire people.
21. The damaging legacy of recession
• Unemployment
• Productivity
• Fiscal deficit and national debt
• Rising inequality
• Slower trend growth
23. Mervyn King on unemployment
“As the experience of
unemployment continues, then
the more you have to worry
about structural
unemployment. This is the
“fundamental” question driving
our thinking about the labour
market.“
Mervyn King, November 2011
27. Professor David Blanchflower on Job Creation
David Blanchflower recommends
a payroll tax cut and a national
insurance holiday for young
people under the age of 25 for
two years to price them into jobs
and get the economy going – as
well as the creation of another
100,000 university places in
subjects such as science and
engineering.
35. Mervyn King on economic growth
“What’s important is not
whether GDP growth is +0.2 or -
0.2 but whether we have a plan
in place for how growth is going
to pick up. This is not a time to
fine tune but to think about the
next 6 or 7 years.”
Mervyn King, November 2011
36. Slower trend growth in most OECD nations
What are some of the
consequences of a
period of prolonged slow
economic growth?
39. Can policy change the cycle?
1. Cuts in policy interest rates
2. A huge fiscal deficit
3. 20% £ depreciation
4. Quantitative Easing
5. Credit Easing
6. Project Merlin
40. Why might policy be ineffective?
Weakness in
Business economies Deleveraging
Fragile
Cash of our in financial
Confidence
Hoarding trading system
partners
42. Krugman: Keynes and the Liquidity Trap
Keynes understood the
role of monetary policy
well. He argued that there
were situations in which
monetary policy could do
no more — and that the
world economy he lived in
was facing such a
situation.
Paul Krugman, NYT, Oct
2008
45. Some Sources of Domestic UK Fragility
• Fragility of the UK economy
– Higher inflation & wage cuts hitting real incomes
– High level of household debt left to be repaid
– Probability of new wave of asset price deflation
– Credit constrained businesses especially SMEs
– Fiscal austerity plans at high risk of failure
– 700,000 estimated job cuts in the public sector –
will the private sector generate many more?
– Export industries at risk from Euro Zone crash
46. Banks cut their lending
Much bank lending
is skewed towards
real estate
Not enough to
manufacturing
businesses
48. Mervyn King on the banks
“I don’t think the banks are
being deliberately obstructive.
They are just in the position
where their own balance sheets
are so weak that they can’t
lend,”
Mervyn King, November 2011
50. Many businesses exposed to revenue cuts
A second recession
would cut
revenues, profits
and cash flow.
Many businesses
are exposed to the
risk of a second
demand shock in
the UK economy.
Important for
policy makers to
respond to this
51. 5 Long Term Constraints on UK Growth
Weaknesses in education &
training outcomes
Low research and development
spending as a share of GDP
SLOW
Volatile and regressive housing
sector hit labour mobility
Growth Few small/medium businesses
export to emerging countries
Ahead High long-term unemployment
52. An optimistic note on which to finish
Half of the components in the Airbus 380 are designed and
manufactured in the UK. The fuselage comes from Germany and
the French assemble and screw the pieces together!