No 246: UK Inflation Breaking News

OCTOBER UK Inflation figures just announced - 11.1%, the highest in 40 years.

No 245: What Bond Traders Really Want

FASCINATING article from the Guardian, particularly a must-read for SFC2s. Rishi Sunak is currently arguing that only austerity measures will pacify the financial markets. This seems to suggest otherwise....

https://www.theguardian.com/business/2022/nov/14/is-austerity-the-only-way-for-jeremy-hunt-to-reassure-the-markets?

No 244: UK Interest Rate Rise Explained in Less Than 3 Minutes

AS MENTIONED in post 241, last week the Bank of England put up its Base Rate of Interest by 0.75% to 3%, the highest since 2007. As this video from Sky News explained, the aim is to reduce Aggregate Demand and therefore inflation, though doing so will also contribute to a recession that could last until 2024.

Some economists are questioning whether this is right approach, while others say that tacking inflation first is essential. What do you think?

https://www.youtube.com/watch?v=ymRstbXFNAg 

No 243: World's Largest Duty-free Mall

AN interesting article from "Forbes" - Hainan in China has just opened the world's largest duty-free mall. It extends over 280,000 square metres, and if that is difficult to imagine, it is equivalent to 55 hockey pitches! Over 800 brands are represented.

Obviously this has not been just opened in order to please those of us who like shopping. Revenues from this source are very important for the economy of Hainan, especially since Chinese citizens can shop there duty-free. Before Covid it was a very popular destination for this reason. As the article questions, will this profitability return?

https://www.forbes.com/sites/kevinrozario/2022/10/29/hainan-has-another-duty-free-mall-it-is-the-biggest-in-the-world/

No 242: Cost of living crisis effects on demand

A MASSIVE economic issue like the cost of living crisis does have many Macro impacts, but the Micro effects can be quite interesting too.

One of these is that consumer demand patterns changes as we look to buy products that we think will help us save money in the long run. I remember a recent former Prime Minister (clue: hair) getting ridiculed for suggesting consumers buy a new kettle for £50 to save us £5 a year on electricity. Recently, however, the products of choice include air fryers and electric blankets, both of which, as described in the article below, have seen rises of demand in the UK of over 200%. 

https://www.cnn.com/2022/10/28/energy/uk-air-fryer-energy-bills/index.html

No 241: Bank of England Base Rate Now at 3%

IN December last year, the Bank of England Base Rate of Interest was 0.1%. After last Thursday's increase of 0.75%, it now stands at 3%. 

The speed and extent of these increases of course mirror the high rates of inflation the UK has had during 2022. As I am sure you are familiar with, higher interest rates mean more households save and fewer borrow to spend on Consumption. Also, fewer firms borrow money to spend on Investment. Taken together, this reduces AD which should also cause the Price Level to fall.

As the article linked to below mentions, another effect is that UK Exchange Rates should rise. The mechanism is via "hot money flows" - flows of financial investment money that moves around the world looking for the best interest rate. If UK interest rates rise, more hot money financial investors want to deposit money on the UK. They need to convert currency into Pounds to do this, leading to more demand for Pounds and thus a rise in the "price of Pounds", that is, the exchange rate.

Since Stronger Pound = Imports Cheaper, Exports Dearer, this reduces the Net Trade (X-M) balance, meaning lower AD and a lower Price Level.

It is essential in an essay on the effects of higher interest rates on inflation to mention the C and I effects. Mentioning the effect on X-M is a good way to get even higher marks, as long as you understand it fully and have enough space to explain it properly.

Full article:

https://www.thisismoney.co.uk/money/mortgageshome/article-11385431/What-0-75-rate-hike-means-mortgage-savings.htmlhttps://www.thisismoney.co.uk/money/mortgageshome/article-11385431/What-0-75-rate-hike-means-mortgage-savings.html

No 240: Apple "Watch" #1

THIS post is very important for my Micro students particularly. For both A-level and IB Paper 1 you will need to know your own real-life Micro examples, and to do this, we will be following stories about Apple.

Here are 3 to start us off.

(1) EU orders Apple to get rid of Lightning cables: arguing that it excludes competitor cable makers and is inconvenient for consumers, the European Union is making Apple switch its iPhones and iPads from Lightning Cables to USB C.

Apple argues that Lightning Cables work better, allow more innovative products to be linked to them, and that switching away from them would create more e-waste.

This encapsulates a recurring argument between Apple and Regulators: government organisations claiming it is in Apple's interests to tie consumers into products that are not compatible with any other company's, whereas Apple arguing their products are more innovative and effective than others'.

Full article: appleforcedtousbc

(2) Spotify and Meta Vs Apple: both companies have accused Apple of anti-competitive behaviour through their rules about phone apps. They claim that Apple deliberately creates rules for other companies' apps that make them harder to consumers to use, making their own apps seem more user friendly and therefore more popular (e.g Spotify vs Apple Music).

Full article: spotifymetavsapple

(3) Apple's Revenue Increases: despite - or maybe because - of these accusations of anti-competitive behaviour, Apple's Quarter 2 earnings for this year are up 8%. The main area of growth was in its sales of laptops.

These results are particularly strong since competitors like Amazon and Meta have recently announced large falls in revenue.

This to me indicates two strengths of Apple compared to others. First, they have an extremely loyal consumer base who still continues buying their products even in poor economic times. Second, that they benefit from diversity of products. For example, Netflix relies solely on the popularity of its media streaming for its revenues and profits, whereas for Apple, its streaming service Apple TV is only one source of money and so if it is unprofitable, other parts of the company can make up for that loss.

Full article: applerevenueincreases

No 239: Zuckerberg hits iceberg?

NOW let's not all cry, but Mark Zuckerberg and Meta (his company that includes Facebook) are in trouble.

As this excellent article from The Economist explains, Facebook use is declining while the replacement business for it, the "Metaverse" is not proving as popular as predicted:

https://www.economist.com/business/2022/10/16/how-much-trouble-is-mark-zuckerberg-in

*****A reminder that all CLC students can get a FREE digital subscription to The Economist. Register with your CLC email and choose a "Gift Subscription." Talk to your Econ teacher if you are having any difficulties. 

No 238: Vegan meat firm CEO loses job after biting nose

BEHIND the quite amusing headline - that the head of Beyond Meat, leading meat substitute producer, has left the company after biting another man's nose (see https://www.bbc.co.uk/news/business-63260645.amp ) - there is a less flashy but nonetheless interesting Micro story.

As well as their CEO, Beyond Meat have also axed 20% of their workforce. They are blaming the cost of living crisis, saying that customers are switching to real meat, which is in fact cheaper than Beyond Meat products.

This raises a number of QI Micro questions. Does this mean that real meat is an inferior good (a product whose demand increases when consumers' incomes fall) when compared to meat substitute products? Why, during Covid, when many people also had reduced incomes, did the exact opposite happen? Why were people prepared to pay the extra then?

In fact, I had some Beyond Meat burgers recently. They were really good, perhaps the best vegan burgers I've ever had. However, I only bought them because they were 50% off - the original price of £4.50 for two burgers seemed too much to me.....

No 237: Glastonbury too expensive?

TICKETS for 2023 Glastonbury will be £340 compared to £285 for this year's festival.

Emily Eavis, co-runner of the Festival has cited extra costs due to supply chain problems in getting equipment and raw materials, difficulties in finding labour, and musicians needing to be paid more as their own costs rise. The general high rate of inflation has also contributed since anything the Festival needs to buy is likely to have gone up by at least 10%.

Not everyone agrees this is justified, and other festivals have not raised their ticket prices as much.

Whatever your opinion about it, we can all agree that there will not be any problems selling the tickets. A couple of pieces of Micro theory help explain this: a fixed supply and highly inelastic demand.

Last year, 2.4 million people registered for tickets. Due to local council regulations, no more than 210,000 people can attend the festival and when the spaces for staff and performers are accounted for, there will be only 135,000 general sale tickets available when they go on sale very soon for the 2023 event (on 3rd November).

You might argue that there are substitutes in the form of the many other festivals available, and indeed many people who fail to get tickets for Glastonbury 2023 will buy tickets for alternative events instead. But most of those people will try again next year, simply because that although there are alternatives, most people view them as poor substitutes compared to Glastonbury.

Sadly I cannot comment since I have never been. It is always on during school term!

****Challenge: using a supply and demand diagram, explain the reasons why Glastonbury 2023 are 19% more than for 2022. Hint: what slope will the D curve have due to inelastic PED? What slope will the fixed S curve be? 

Full article: https://www.theguardian.com/music/2022/oct/18/glastonbury-2023-ticket-prices

No 236: Gold, no so good anymore?

FOR more than 4,000 years, in times of crisis people bought gold. Whenever other financial investments crashed, the price of gold rose. There has always been some comfort in converting your wealth into gold coins, chains, bracelets or rings, allowing it to be taken with you in times of dislocation.

One of the surprising aspects of the current global economic crisis is that this has not not happened - in fact, gold prices have fallen by as much as 20%.

Why is this? Two main reasons - (1) unlike other financial assets (e.g shares and dividends, bonds and yearly interest) gold does not pay an income; (2) it has been affected by the strength of the US dollar against other currencies.

Most demand for gold comes from countries who do not have the US dollar as their currency. Since gold is priced in US dollars, when the USD gets stronger is value, an investor would have to pay more of their currency to buy gold. On the other hand, the strong dollar makes it attractive to put money into the US economy. The dollar can be expected to do even better over the next few months as more investors look to put their money into it. Also, US interest rates are relatively high. Therefore, buying US government bonds at 3 or 4% rate of interest is a safe and relatively high return investment, when compared to something like gold.

Full article:

https://www.express.co.uk/finance/personalfinance/1673992/Gold-gold-price-meltdown-safe-haven-crash-US-dollar

****Bonus Fun Fact: all of gold in the world would fit into the space of an Olympic sized swimming pool!

No 235: Tesco Meal Deal Price Up

AN interesting sign that inflation in the UK may be becoming a long term problem.

(From BBC news)"Tesco has raised the price of its meal deal as food costs soar.

The sandwich, snack and drink deal will increase to £3.40 for Tesco Clubcard members after more than 10 years being priced at £3. It will go from £3.50 to £3.90 for those without a loyalty card."

Full article:

https://www.bbc.co.uk/news/business-63346320.amp

No 234: A Crazy Month of Events

 NOW that Liz Truss's government is over, this is a good time to summarise the events of the past month, though an economic lens.

The Mini-Budget: Liz Truss and her Chancellor (Kwasi Kwarteng) announce a radical budget, based around tax cuts, many of them favouring the rich, worth £60bn, and spending to support household energy bills of at least £100bn. They refuse to consult with the established authority set up to overview and approve government financial plans - the OBR (Office of Budget Responsibility). The government suggest its plans will help increase UK's GDP Growth Rate to 2.5%, but this is not verified by the OBR.

The Market Reaction: there is extreme doubt in the calculations behind the mini-budget, whether the Growth  Rate will increase that much, how the borrowing will be paid back, and what the future impacts of that borrowing might be. As a result currency markets begin to sell the Pound due to this lack of confidence in the UK economy, and the Pound-Dollar exchange rate falls to almost £1 to $1. Meanwhile, buyers of bonds begin to insist on higher interest rates to lend to the UK government, pushing the rate of 10 Year UK Gilts from less than 1% in January to over 5%.

The Pension Fund Near Collapse: due to complex deals and contracts, the changes in bond rates trigger Pension Funds to get into severe trouble, needing to find huge amounts of money to back themselves up. There is real fear that millions of people will lose their pensions as their funds get into danger of going bust.

The Bank of England Rescue: this danger is so severe that the Bank of England intervene, spending up to £5bn a day on UK government bonds, pushing the rates on them back down and thereby saving the pension funds.

The Rise in Mortgage Rates: banks start to fear that the Bank of England will need to raise its base rate of interest to protect Pound Exchange Rates. They withdraw their new mortgages from the housing market, and reintroduce them at much higher rates. This affects many households, whether they are buying a house for the first time, or need to renew current mortgages.

The First U-Turn: the government withdraws its plan to get rid of the 45% top income tax rate. This would have affected the 160,000 highest earners in the UK, and was a very unpopular suggestion, despite the government's argument that the tax cut would "trickle down" to benefit the rest of the economy. 

Poor GDP and Wage Figures: in a big surprise, GDP Growth from August was announced as being -0.3%. Nobody really expected a negative figure until next year. Real wage growth in August was also negative - the high rate of inflation being far above average wage rises.

The Chancellor Is Sacked: after massive pressure, Kwarteng loses his job. Some commentators say that it seems unfair to blame the ex-Chancellor completely for the turmoil since Liz Truss argued for all these economic policies when she was campaigning to be leader.

The Second U-Turn: very soon afterwards, it is announced that the plan to keep Corporation Tax at 19% has been abandoned, and instead it will go up to 25% as was previously planned.

The New Chancellor Changes Almost Everything: the new Chancellor, Jeremy Hunt is a more moderate and experienced figure. He announced that almost all of the tax cuts from the mini-budget will now not happen. The main one to remain is the cancellation of a rise in National Insurance. A bigger surprise is a reduction of the help given to households for energy bills. This was originally due to last for two years, but has now been reduced to just six months.

Very High Inflation Figures: inflation in September was 10.1% , up from 9.9% in the previous month.

Liz Truss Resigns: as well as economic pressures, political unrest starts to build up. After only 44 days, Truss resigns, becoming the shortest serving Prime Minister in UK history.

Stability returns but... : the combination of Jeremy Hunt and the new PM Rishi Sunak are enough to calm the markets. Currently the Pound is trading at $1.16, and the 10 year bond rate is around 3.5%.

The next big event will be on November 17th, when a full financial statement will be made. In direct reversal of the AD boosting, growth focused intent of the mini-budget, everyone expects a budget of austerity. Apparently, a shortfall of £40bn in government finances needs to be corrected, and it is expected that half of this will be from tax rises, and half from government spending cuts.

No 233: Watch this space...

JUST been announced - some time this afternoon the new Chancellor, Jeremy Hunt will be making more changes to the mini budget of a few weeks ago. 

This is a bringing forward of a bringing forward of the government's "medium term" fiscal plans. Originally they were going to be revealed on Nov 23rd, then Oct 31st, and now, at least partially, today. The main reason for this is probably to try to calm down markets, especially for UK bonds and for Sterling exchange rates.

What do you think will be announced? Most commentators believe that the 1p cut in basic income tax will be postponed by a year. Other tax cuts could also be reversed, such as that on VAT for overseas visitors. Might there be something brand new? Some have mentioned a "windfall" tax, most likely on energy producers but maybe even banks. What is certain is that very little will be left of the measures from a few weeks ago that so strongly shocked the economy.

No 232: Busiest Day Ever?!

 SO MUCH news, so many events today in the UK Economy. Here is a rundown of them with links to BBC news stories.

Some good news today - UK unemployment fell slightly to 3.5%. However, the main reason for this seems to be due to a continuing trend of people leaving the workforce and joining the economically inactive due to long term illness such as Long Covid. Meanwhile, vacancies are still high (bad for firms looking for workers) and wage rises are well below inflation on average (bad for workers!).
https://www.bbc.co.uk/news/business-63204333 

The Bank of England took further action in UK bond markets today. They do not tend to give warnings irresponsibly, so their statement today that there is "a material risk to financial stability" is a worying piece of possible understatement. However, this seems to have been contradicted later by the BofE then saying that they will not extend their action beyond the previously set deadline of Friday. This worried people too!
https://www.bbc.co.uk/news/business-63211743

At the same time, Kwasi Kwarteng (the Chancellor) was receiving a serious grilling in the Houses of Parliament from other politicians. He defended his plans, saying he was "all about growth" and that the IMF agreed that his actions would lead to more of it. This does not seem to tell the whole story of what the IMF said today. A more accurate version is that the IMF did say that the Truss government plans would bring some short-term growth to the UK, but that the measures also endangered even more inflation by cancelling out the effects of interest rate rises by the Bank of England.
https://www.bbc.co.uk/news/business-63206733

Who knows what tomorrow will bring?

No 231: More market turbulence

 THE Bank of England are upping their buying of UK government bonds today out of continued fear that changes in the market may have huge negative consequences especially for pensions.

Here is a summary from the BBC:

Follow the story live here: https://www.bbc.co.uk/news/live/uk-63212398 

No 230: Best Summary of UK Government Finances and Economic Situation

THIS article (https://tinyurl.com/3mhprbkh) is essential reading. It predicts what the Office For Budget Responsibility (OBR) may be going to say about the government's tax cuts and the impact they will have on the government's finances. But it also places this in the wider context of other current economic events.

This is the most comprehensive summary I have seen of this - make sure you read it!

No 229: OBR forecasts likely to show £60bn-£70bn hole after Kwarteng’s mini-budget

 USEFUL for all of us, but particularly for Upper Sixth students just starting to look at Public Finances in their Macro classes, is this article from the Guardian: https://tinyurl.com/mr3dnmt8 

It is important to understand what is meant by a "hole" in the finances. This does not mean there is an extra £60-70bn of borrowing planned; it actually means that the government provided figures might not actually add up, with £60-70bn for which no information has been given yet.

Here is a key quotation from the article that summarises the government's options:

The government's response would be that none of these measures might be necessary, if their actions lead to the 2.5% economic growth they are aiming for. Achieving this growth target therefore has huge significance for not only improving the government's finances, but also in determining the political future of the Truss administration.

No 228 - Where Newspapers Are On The Political / Economic Spectrum

 SINCE the whole point of this blog is get you reading more newspaper articles about Economics, I thought perhaps it might be useful to write a post about where different UK newspapers would be placed on the policitical / economic spectrum. It's always useful to know the ideological background and possible biases when you read an article.

Here's an illustration I made to try and show this:

As you can see, of both the "serious" broadsheet and the tabloid papers, most are right of centre and more supportive of the free market than government intervention.

The Economist is interesting - it pronounces itself both "liberal"in Politics (which makes it left of centre) and "liberal" in Economics (which makes it more free market than interventionist). This unique perspective is just one the reasons why it so worth reading. Don't forget to sign up for your free subscription if you are a CLC student!

Of all the broadsheets, the Guardian is also the only one whose online articles can be accessed for free, which might explain why I tend to favour them......!

No 227: Bonds - the basics

 FOR those of you just starting Economics, or those who just need a recap, here are some basics about government bonds.

Often, especially during crises, government spending is greater than the tax revenue it is receiving. In such a case, it needs to borrow money. It cannot just go to a bank to get a loan like ordinary people do. Instead, it announces to the bond market that it needs to borrow, and issues bonds at an interest rate high enough to attract investors.

A bond is a piece of paper that works like a receipt (or used to be, they are electronic now).

Any bond contains the following information: 

• How much money the bond is worth (i.e. how much is being lent to the government).
• When this money will be paid back to the lender by the government.
• In the time before this, how much interest the lender will receive per year from the government.

This diagram shows how this works with a 10 year UK bond, if its yield were 5% :

 

As you can read in previous posts, the current problem with bonds in the UK is that markets are worried by the recent government plans for tax cuts and for keeping energy bills low. Investors are concerned how/if these policies will be paid for,  so they have more doubts about buying UK government bonds (i.e. doubts about lending their money to the UK government). Therefore, they are asking for a higher interest rate in order to buy them - the 10 year bond rate was around 1% in January, and rose to 5% before the recent Bank of England action (see previous post).