No 252: Day of Strikes but more Inflation?

HALF a million workers are on strike today in the UK. It involves state school teachers, university lecturers, civil servants, train drivers and bus drivers. Although NHS workers like nurses and ambulance drivers have been striking recently, they are not today. (See this BBC article for further details about today's strikes.)

It is striking (haha) that most of these workers are public sector employees who are therefore directly negotiating with the government. These workers argue that their wages have not been keeping up with inflation ever since 2010, when the government of that time initiated "austerity policies" - spending cuts (including freezes on pay rises to state employees) to pay back the government borrowing to relieve the 2008 financial crisis. Recent high inflation has of course made the real wage situation even worse for these workers.

The government says it cannot award large pay rises because it does not have the money, and because such wage rises will only add to inflation, thereby only serving to make the economy worse.

Certainly government finances are not in a strong position - as stated in an earlier post, public sector borrowing in December was the highest for that month since it began being recorded. But if these pay rises were awarded, would they be inflationary?

Any extra income for households is likely to lead to additional consumption. As we know from our lessons, the resulting shift on AD would create a higher price level but we also know it also leads to more real GDP - which is something else the UK does need quite desperately.

But the government is not talking about this "demand pull" inflation. Instead it arguing that pay rises will lead to a "wage-price" spiral. This is when firms have to raise their prices due to having to pay higher wages. However the higher prices then mean workers want higher wages again, and if they are given them, firms will once more have to raise prices, and so on and so forth. It all results in higher and higher rates of inflation.

We could picture this on a diagram as a series of inward shifts of SRAS. As well as the higher and higher price level, paying more wages would either force some firms out of business or force others to cut their workforce - leading also to lower GDP. This then is definitely a situation to be avoided!

 But I would argue it is not the current situation. Remember that many of the workers striking today are public sector workers. If government has to pay higher wages to, for example, teachers, it does not follow that it will then put up the "price" of education - since state school education is free (at least at the point of use). It would be same for other government workers, including those in the NHS.

There is no doubt it would be hard to find the money to fund these public sector wage rises. But it would seem the inflationary impacts may not be as high as the government claims. Having read this,  next time you are having a conversation with a government minister you can say, "I think you are exaggerating the impacts of the wage-price spiral, which does not really apply to public sector pay rises...." :)

No 251: But here is some good news!

AFTER that last post, which did not have much positive news for the UK, here is some much needed optimism.

The CBI (Confederation of British Industry - an organisation that represents business leaders) has just released a report about the economic benefits of "green" industries. Currently in the UK they contribute £71 billion a year to UK GDP, employ 840,000 people, and wages in these jobs pay £10,000 a year more than the overall average wage.

(See here for the full story: CBI green industry report.)

Now I am an environmentalist (so therefore biased)- but the CBI are not. So it is very revealing that they are saying that despite whatever climate change benefits these industries might have, they have a large positive effect on the economy.

For me and many others, this seems like a rare and valuable opportunity for the UK. If we develop our green industries, not only we will improve climate change, but profitable businesses and high quality jobs will also be created.

The UK has been a global leader in these industries, especially those related to renewable energy. There are signs, however, that this competitive advantage is under threat, particularly from the USA whose green businesses are benefitting from huge subsidies via Biden's Inflation Reduction Act (see post 249). Many economists believe the UK can continue to compete well, but that a well thought-out industrial plan from the government will be essential.

No 250: Two Important UK Macro Announcements

JUST announced this morning, two very important stories.

Food inflation in January was 16.7% (see here for full story). in other words, food prices in UK this month are 16.7% higher than they were in January 2022. For an average family, this equates to almost £800 a year higher food bills. Although rises in other prices are slowing down, news like this is sure to mean that the Bank of England MPC will again raise its base rate of interest on Thursday.

Meanwhile the International Monetary Fund (IMF - a global institution set up to provide funds for economic emergencies) has just published their 2023 forecasts for economies around the world (see this BBC article). It names the UK as the only major advanced economy that will have a recession in 2023, forecasting growth to be -0.6% for the year. Even the Russian economy is predicted to grow in 2023.....

The Chancellor, Jeremy Hunt, has said this shows the UK is subject to the same pressures that all other countries are under, but if so, why is the UK forecast to do worse than them? What individual factors is the UK experiencing that other similar countries are not?

Try to think of some. Later on in the week I will blog about what I think these factors are, and we can see if we agree. 

No 249: Green subsidies and electric car batteries

THE European Union could be on its way to self reliance in the production of electric car batteries, but only if it matches the green subsidies of the USA, according to the article below.

Having a thriving battery industry in one's country is seen as a very important medium term goal, both since there will be more and more demand and to ensure that a particular country does not have to rely on others for this. The pitfalls of relying on other countries to supply energy has of course been emphasised by the problems EU nations have had in the past year due to needing Russian gas and oil.

President Biden's recent Inflation Reduction Act has put the USA ahead in the race to develop large scale and cheap battery production. Much of the act's £300 billion of subsidies have been allotted to green technology industries. Other countries may complain that this is an unfair form of protectionism, but the reality is that if they do not match the US subsidies, they will lose the competition in these emerging industries. We already seen a large amount of green FDI funding switch to the USA from other parts of the world.

Meanwhile in Britain, the Britishvolt electric battery mega factory project has collapsed, at least in part due to government refusal to provide emergency funding.

Read about this and more at:

https://www.theguardian.com/business/2023/jan/24/eu-could-end-reliance-on-china-electric-car-batteries-by-2030-investment-joe-biden-369bn-green-subsidies?CMP=Share_AndroidApp_Other

No 248: Record December UK Government Borrowing

IT has just been announced that UK Government borrowing in December was £24.7 billion - the highest ever for December in the 30 years since modern records began.

One reason for this is the financial support beging given to households and businesses for the energy bills. Another is from the jump in government interest rates caused by the disastrous economic policies of the Truss administration (so much damage in less than 2 months in power!).

The implications for future increases in government spending are serious. At a time when there are pressing needs for more funding for the NHS and higher wages for government workers, how much is going to be possible given these already extremely high amounts of borrowing?

An important topic too for your Economic studies, so take the time to read this:

https://www.theguardian.com/business/2023/jan/24/energy-support-uk-government-spending-interest-payments?CMP=Share_AndroidApp_Other

No 247 Japan's demographic disaster

NEARLY 30% of Japan's population are aged over 65. The birth rate is so low that by 2065, on current trends, the population will have fallen from 125 million to 88 million.

Not surprisingly, the Japanese government are trying various measures to change this. But critics of the government's policies say they do not address the core problems of

"the cost of compulsory and higher education, the rising cost of living and, poorly paid and unstable jobs for non-regular workers, and punishingly long working hours that make a healthy family life practically impossible."

There are also cultural issues. Consecutive Japanese governments have refused to allow more immigrant workers into the country. It also seems that having a traditional family is not attractive to many Japanese women. As a university student, Nao Imai, said:

"When you have a child in Japan, the husband keeps working but the mother is expected to quit her job and look after the children. I just feel that it’s hard to raise children, financially, mentally and physically."

There could be huge economic problems created by the demographic problems.of having a smaller and older population. As you read the article below, consider the following questions:

(1) what will happen to the number of workers and therefore Japan's productive capacity?

(2) what will happen to tax revenue?

(3) what will happen to government spending?

https://www.theguardian.com/world/2023/jan/24/japan-birthrate-population-pm-solution-already-rejected-by-young?CMP=Share_AndroidApp_Other 

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.