Essential reading for A2, good for AS

In our manufacturing heartland 100,000 companies employ 2.5m people. The government wants to help. Read how they can - really useful context for growth, unemployment, trade.

What is our manufacturing base like?

For both Business Studies and Economics - who owns Britain?

Foreign ownership of UK companies - good or bad? Whichever way you lean, there is no doubting we are a mongrel economy...

Who owns Britain?

For Globalisation topic coming up

but also useful for all macro-interdependence:

Globalisation

Low inflation good for consumers?

Low inflation is good for consumers and positive for economic growth The Times Nov 27

Andrew Sentance

Consumers are a big driver of economic growth, responsible for more than 60 per cent of GDP in the British economy. One of the key reasons for our sluggish economic recovery is that consumers have not been increasing their spending.
 

Since 2009, consumption expenditure has risen by only 1.2 per cent on average in real terms. That’s just one third of the average growth rate of UK consumer spending (3.6 per cent) in the 25 years from 1982 to 2007.

However, the good news is that the pressures on the consumer have been easing this year. Employment has been rising strongly and wage growth has started to recover. Most crucially, inflation has fallen below the 2 per cent target and at present stands at 1.3 per cent.
This is a big reduction from the 3.1 per cent average inflation in the six years of 2008-13 and the 5 per cent inflation spikes we saw in the autumns of 2008 and 2011.

As this cost-of-living squeeze has subsided, the growth of consumer spending has picked up, and with it the fortunes of the British economy.

This year will see the strongest growth of consumer spending in real terms since 2007, helping to take the UK to the top of the G7 growth league. Last week, we saw this confirmed by the strong growth of retail sales in October, which is not merely a flash in the pan.

So far this year, the volume of retail sales is more than 4 per cent up on last year, with prices dropping on the high street and boosting purchasing power.

Since the late 1980s, there have been only four previous years when retail sales volumes have grown

 by more than 4 per cent — 1997, 2001, 2002 and 2004. Low inflation contributed to strong consumer growth in all these years. In all four, CPI inflation was below 2 per cent, as it has been this year.

This should not be a big surprise to economists. In one of my first lessons in economics, I was introduced to the concept of the demand curve. As prices fall, consumers are prepared to buy more goods and services.

This is not rocket science. Consumers like lower prices. And they also like low inflation. Unfortunately, the present generation of economists has forgotten this basic fact of economic life.
Instead of welcoming lower prices and low inflation, they are warning us about the risk of deflation. A serious deflation is something to be avoided. When the value of everything is in decline in an economy, this is a serious problem. If consumers see the value of their assets dropping in value and their wages falling, they are likely to put off spending, which makes the resulting downturn even more severe.

However, that is not the problem that the UK economy faces at present. Wages are picking up, the London stock market is not far off its all-time high and the value of housing — the main asset owned by the British public — has been increasing, not falling. The value of the UK housing stock increased by nearly 5 per cent last, year according to the Office for National Statistics, and is up by nearly 20 per cent on 2008.

Deflation was a serious risk in 2008 and 2009. However, it is the dog that has not barked since the financial crisis, because central banks and governments have pumped money into their economies to avoid it.

Europe has become the latest focus of these deflation worries, and the latest figures show consumer prices falling in five continental countries — Bulgaria, Greece, Hungary, Poland and Spain. Yet in all of these, economic growth in the past year has been above the European average. Again, this is evidence that low inflation or gradually falling prices can help growth through its beneficial impact on consumer purchasing power.

So if low inflation should be good for economic growth and consumers, can it be sustained?
Two main factors have driven down British inflation since 2011-12. First, energy, food and commodity prices have fallen as global price pressures have eased. This reflects the subdued pattern of global growth after the initial rebound from the financial crisis in 2010.

Second, the pound has been gradually strengthening, holding down the prices of imported goods.
We cannot rely on either of these influences in the future, though. Global energy and commodity prices are highly volatile.

And the $35-a-barrel fall in the oil price we have seen in the past five months will not be repeated. If anything, there are now upside risks to energy and commodity prices as world economic growth is projected to pick up next year.

Meanwhile, the strength of the pound has been undermined by doveish statements from the monetary policy committee of the Bank of England in recent months. The longer the MPC delays raising interest rates, the more persistent this weakness of sterling is likely to become.

Other issues — such as the widening current account deficit and political uncertainty surrounding the 2015 general election — could also contribute to a weaker pound in the next six to twelve months.
So UK consumer spending and economic growth could subside if inflation picks up again. But the main message we should take away from our recent experience is that low inflation is good for consumers and a positive for economic growth. If price increases can be kept below the 2 per cent inflation target, that should be good news for the British economy.
Andrew Sentance is senior economic adviser at PwC and a former member of the monetary policy committee

Good news and bad news - weekend reading material:

Good old ECB & inflation/deflation: Full-on QE edges nearer:

http://www.telegraph.co.uk/finance/economics/11244947/Mario-Draghi-ECB-must-now-raise-inflation-as-fast-as-possible.html?

Japan & its QE programme: "Japan’s monetary base will be close to the same size as that of America, even though the US economy is three times bigger and home to two and a half times more people."
http://www.telegraph.co.uk/finance/economics/11247881/Japanese-QE-tsunami-risks-global-meltdown.html

Jeremy Warner adopts a positive stance towards China (for a change):
http://www.telegraph.co.uk/news/worldnews/asia/china/11244131/Globalisation-2.0-could-answer-our-prayers.html

Useful material about investment, global growth and reach of MNCs - and Jamie, the Real Deal on JLR/China:
http://asia.nikkei.com/magazine/20141106-Asia-s-most-desired-brands/Business/Tata-Motors-gamble-on-Jaguar-Land-Rover-paying-off


For a bit of fun, and for some ideas about future industries (note the use of 3D printers):
http://www.telegraph.co.uk/news/worldnews/asia/japan/11244758/City-of-the-future-sinks-into-the-ocean.html

AEP in the Telegraph comes up with the goods on China:

For a picture of the changes taking place in China - that could have a profound effect on the global economy - read this article. Try and get the undercurrents it has - oil prices rising as a result of loosening of monetary policy, but one analyst is quite sceptical about the markets' response; read right to the end to make sure you get it in perspective - none of the alarmist nonsense I throw at you in class sometimes (to keep you on your toes) without the sensible down-to-earth analysis at the very end:

http://www.telegraph.co.uk/finance/economics/11246733/China-blinks-as-economic-downturn-deepens.html

Good Monetary Policy Context Article:

http://www.telegraph.co.uk/finance/economics/11239084/For-believes-in-monetary-voodoo-try-this-for-a-spin.html

"For believers in monetary voodoo, try this for a spin

We play with the money system at our peril. On Thursday, British MPs are to debate money creation, including so-called "helicopter money". This is supposedly the first time parliament has debated such matters since 1844. Back then, it didn't work out so well. "

Daily Telegraph - "We Need Wage Inflation". Never thought I'd hear that:

http://www.telegraph.co.uk/finance/comment/11220695/Only-a-good-old-fashioned-bout-of-wage-inflation-can-save-the-public-finances.html​



"...low inflation and low nominal wage growth are making fiscal consolidation extremely difficult. If tax revenues can’t be made to rise, that leaves even more of the hard lifting to be done by spending cuts. And on this front, we must assume that the low hanging fruit has already been plucked. The Office for Budget Responsibility implies in its forecasts roughly a million public sector job cuts by the end of the consolidation in 2018. So far we have had little more than 300,000. "

QE & Stock Markets - extending our work on Money Supply

A terrific chart in the middle of the article tells you all you need to know about stock markets at the moment:

http://seekingalpha.com/article/2678745-contemplating-stocks-without-qe?ifp=0

Compare and contrast these 2 views on employment prospects:

The first is the current (optimistic) view as expounded by the Bank of England; the second is 1 week older, and is vastly more pessimistic (thank you to Emily for sending the news clip). Both have something to add to your essays:

http://news.sky.com/story/1371766/cost-of-living-pay-rises-outpace-inflation

then:

Flipchartfairytales.wordpress.com

The recent employment numbers showed that the UK has finally closed its jobs gap

– there are now as many people in work, as a percentage of 16 to 64-year-olds, as

there were before the recession. But the headline fi gure obscures the bad news,

says the Flip Chart Fairy Tales blogger.

There are regional variations: the recovery is weak in the West Midlands, Wales and Northern Ireland, and even the southeast outside London still hasn’t recovered its pre-recession rate. Two thirds of the jobs increase has come from self-employment and there are still fewer full-time workers than there were in mid-2008. And pay remains in the doldrums.

Ernst & Young has predicted a lost decade, with real-terms wages failing to get back to pre-recession levels before 2017. But even this looks optimistic. Take the median wage and measure it against versions of the Retail Price Index that include housing costs and wages don’t recover at all but continue to fall from their post-2008 high. “Lost decade? We used to dream of a lost decade!”

Finally, there’s the rise of the machines. Optimists say jobs lost to technological innovation will be replaced by work in the tech industry, but it is now possible to build global behemoths like Google with a workforce not much larger than that of a county council. You don’t need much imagination to see the implications. So far, economic growth hasn’t done much for wages, steady full-time employment or tax revenues. And there’s not a lot to suggest this will change anytime soon.

is the bond market calm over inflation justified?

This article covers ground we have not got to yet, but a lot of it is around material we are covering - namely inflation. Come to me if some of it is not self-explanatory:

When everybody depends on a bull market, they all run with the herd

Louise Cooper

Are mainland Europe and Britain, therefore, set to experience Japanese-style deflation? To find the answer, many look to the bond markets 

Yuriko Nakao/Reuters

 

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  Are mainland Europe and Britain, therefore, set to experience Japanese-style deflation? To find the answer, many look to the bond markets  Yuriko Nakao/Reuters

Last updated at 12:01AM, November 11 2014

Last Friday I had lobster risotto for lunch. James Carrick, an economist from Legal & General Investment Management, who was dining with me, chose beef. He did so because he had eaten beef recently in the Goldman Sachs dining rooms and had enjoyed it immensely. The memory of that experience influenced his menu decision. The same thought process may partly explain bond market mentality on inflation.

The Bank of England issues its latest quarterly Inflation Report tomorrow. Since its last update in August, there has been yet more evidence of prices stagnating. Consumer prices rose by 1.2 per cent last month on last year’s level, down from 1.5 per cent the previous month. This is the lowest CPI figure for almost five years and inflation has been lower in only two years out of the past thirty. The latest eurozone inflation figure for October showed prices rising a mere 0.4 per cent on their 2013 levels. Prices are falling in Greece, Poland, Portugal, Spain and Sweden. Eurozone inflation has been lower only in the depths of the financial crisis and only then for a few months.
Are mainland Europe and Britain, therefore, set to experience Japanese-style deflation? To find the answer, many look to the bond markets. Bonds are regarded as being the great predictors of inflation because high inflation cuts the value or burden of debt substantially. Bond prices are highly sensitive to inflation expectations.
In 1998 the government had to pay an interest rate of almost 6 per cent a year to borrow money for ten years. Today, the government pays just over 2 per cent a year. In 1999, according to BSkyB’s annual report, the satellite television company paid between 6.8 per cent and 8.4 per cent a year to borrow for ten years. Recently, it borrowed billions by issuing bonds, paying a mere 3.75 per cent for ten-year debt. Companies and governments are paying extraordinarily low interest rates in the bond markets to borrow.
Yet since 1989 CPI inflation has averaged just below 3 per cent a year. If inflation returns to this level, then anyone lending to the government receiving interest of only 2.2 per cent a year will get less back than was originally borrowed in real terms. The investors who lent BSkyB cash at 3.75 per cent are getting only a tiny amount more than historical inflation of 3 per cent. That is very little compensation for the risk of lending to the company. Thus many conclude that the only way that these extraordinarily low interest rates can be justified is by assuming that inflation will be low for many years.
Yet there are reasons why bond markets may be poor predictors of future inflation. The first is what Mr Carrick and I have dubbed the “beef goggles” effect. Or, as applied global macro research puts it, we humans are “tainted by the past” — in James’s case, a delicious beef past.
Bond markets have “memories”, which explains why interest rates on bonds were so high in the early 1980s. Bond investors were scarred by the high inflation of the 1970s. The implication of this research is that at the moment bond-buyers believe that inflation will remain low because it has been low in the recent past. The behavioural finance term is an “availability heuristic”, which overestimates the likelihood of events with greater “availability” in memory.
However, there are other reasons why bonds may be poor predictors of future inflation. These markets have been heavily manipulated by $3.5 trillion of bond-buying from the Federal Reserve and £375 billion from the Bank of England. The European Central Bank may not have indulged in full quantitative easing, but Mario Draghi, its boss, has talked bond prices up and rates down since his “whatever it takes speech” just over two years ago.
By default, bond fund managers have to believe in low inflation to own bonds at these interest rates and keep themselves in work. If bonds are not paying enough even to keep up with future inflation, why own them and employ a bond fund manager?
Moreover, after a 20 to 30-year bond bull market, there are also not many money managers, bond traders or brokers working in the markets that have experienced a crushing bear bond market resulting from high inflation. It suggests that the market, effectively just a group of individuals, is underestimating the threat.
And the biggest sign that bonds are at the peak and overvalued? That bond fund managers, the likes of Bill Gross and Mohamed El-Erian, are the superstars of the money management industry.
Beer goggles improve the attractiveness of a possible mate while under the influence of alcohol. Beef goggles improve the appeal of bonds while under the influence of the euphoria of a multi-decade bull market. It is possibly unwise to wear either too regularly.

Two’s company, but three’s a crowd
There has been some criticism of Mario Draghi, president of the European Central bank, on his management style. Perhaps controlling a 24-member council, governing 18 member states in the aftermath of a global financial crisis, requires a rather authoritarian approach to get anything done.
Yet a quote buried in a Reuters report grabbed my attention. An unnamed source says that Mr Draghi pays little attention to national central bank governors’ comments in the regular rate-setting meeting: “He sits there with these three mobile phones in front of him and sometimes he’s sending text messages or going out to make or take phone calls.”
Most people I know have two mobile phones — one for work and one for personal use. I cannot think why Mr Draghi requires three mobiles. Is he a spy? Has he got a sideline as a headhunter and needs an extra throwaway pre-pay mobile to persuade staff to break their employment contracts? Any suggestions?
Louise Cooper is a financial analyst and Goldman Sachs alumna. Follow her on @Louiseaileen70

List of websites that provide up-to-date data for critical releases:

I will add to this page as I come across things; feel free to email - or stick in the comments section - anything you come across too.

UK data releases:

http://www.ons.gov.uk/ons/index.html

Bank of England Inflation fan charts (NB can find many other forecasts around this site):

http://www.bankofengland.co.uk/publications/Pages/inflationreport/irfanch.aspx

Global reports and forecasts:

IMF database - very manipulable   or

http://www.imf.org/external/datamapper/index.php

EU stats:

http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/

BBC:

http://www.bbc.co.uk/news/business-24532808


HSBC site (see previous blog) - you will need to go rooting around:

http://www.ukeconomyexplained.hsbc.co.uk/documents/download?id=60

Official US data

http://www.bea.gov/

Unofficial US data:

http://www.shadowstats.com/

Technological innovation, disruptive industries, structural change, unemployment and improving living standards

Gosh, how can so many conflicting concepts fit into one title? If you go to the MoneyWeek issue of 31st October 2014 you will find all this (and more!) in an article by Jim Mellon, a well known money manager. For those of you concerned by the prospect of diminishing job prospects as artificial intelligence develops and takes over more and more processes, it should offer some reassurance; for those complacent about how the world is changing, think again. ALL of you should read it for essay material relating to structural unemployment, capital replacing labour, the impacts of this, and which countries/demographic groups are most likely to be affected.

And you may want some info on apprenticeships while you are at it:

http://www.telegraph.co.uk/education/further-education/11216791/Apprenticeships-can-drive-UK-growth-says-report.html

Finally, why not think about your holiday jobs, and how you could use the experience not just to get spending money, but also to further your career prospects in the future:

http://www.telegraph.co.uk/lifestyle/11214116/Why-teenagers-should-be-put-to-work-at-McDonalds.html

IMF report October 2014: We need more financial risk-taking, but less excess

Good report covering the state of global banking, where the risks lie, and how "normal" banks are not the go-to source of credit anymore:


http://www.imf.org/external/pubs/ft/survey/so/2014/POL100814B.htm

Watche the short video interview:

http://www.imf.org/external/pubs/ft/gfsr/2014/02/index.htm

Policymakers Should Encourage Economic Risk Taking, Keep Financial Excess Under Control

IMF Survey

October 8, 2014

• Stability risks are shifting to shadow banks
• Revamp bank business models to support growth
• Address rising liquidity risks in credit markets

Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but growing excesses in financial risk-taking, which pose challenges to financial stability, according to the International Monetary Fund’s latest Global Financial Stability Report.

Six years after the start of the financial crisis, the global recovery continues to rely heavily on accommodative monetary policies in advanced economies. This has helped economic risk-taking in the form of higher investment and employment by firms, and higher consumption by households. But the impact has been too limited and uneven. Things look better in the United States and Japan, but less so in Europe and in emerging markets.

At the same time, a prolonged period of low interest rates and other central bank policies has encouraged the buildup of excesses in financial risk-taking. This has resulted in elevated prices across a range of financial assets, credit spreads too narrow to compensate for default risks in some segments, and, until recently, record-low volatility, suggesting that investors are complacent. What is unprecedented is that these developments have occurred across a broad range of asset classes and across many countries at the same time.

“The best way to address the new global imbalance between economic and financial risk-taking is to adopt policies that transmit the benefits of monetary policy to the real economy, and to address financial excesses through well-designed micro- and macroprudential measures,” said José Viñals, Financial Counsellor and head of the IMF’s Monetary and Capital Markets Department.

Banks need a new fitness regime
Banks hold significantly more capital than before the crisis, but many institutions do not have a sustainable business model that can support the recovery.

The report analyzed 300 large banks in advanced economies—which comprise the bulk of their banking system—and found that banks representing almost 40 percent of total assets are not strong enough to supply adequate credit in support of the recovery. In the euro area, this proportion rises to about 70 percent.

These banks will need a more fundamental overhaul of their business models, including a combination of repricing existing business lines, reallocating capital across activities, consolidation, or retrenchment. In Europe, the comprehensive review of bank balance sheets by the European Central Bank provides a strong starting point for these much-needed changes in bank business models.

Risks are moving to the shadows
Financial stability risks are shifting from the banking system to less-regulated shadow banks. For example, credit-focused mutual funds and exchange traded funds have seen massive asset inflows, and have collectively become among the largest owners of U.S. corporate and foreign bonds.
“The problem is that these fund inflows have created an illusion of liquidity in fixed income markets,” said Viñals. “The liquidity promised to investors in good times is likely to exceed the available liquidity provided by markets in times of stress.”
This mismatch is driven by the growing share of relatively illiquid assets held by credit mutual funds. It is a potentially powerful amplifier that could exacerbate pressures on credit funds in times of stress.

Spillovers could be global
Emerging markets have grown in importance as a destination for portfolio investors from advanced economies. These investors now allocate more than $4 trillion, or about 13 percent of their total investments, to emerging market equities and bonds—this share has doubled over the past decade. Because of these closer financial links, shocks emanating from advanced economies will propagate more quickly to emerging markets.

The increasing global synchronization of asset prices and volatilities, combined with rising market and liquidity risks in the shadow banking sector, could amplify the impact of shocks on asset prices. This may result in sharper price falls and more market stress.

Such an adverse scenario would hurt the global economy and, at the limit, could even compromise global financial stability. This chain reaction could be triggered by a wide variety of shocks, including geopolitical flare-ups, or a “bumpy” normalization of U.S. monetary policy.

Financial policies are key
Financial policies can help address the new global imbalance between economic and financial risk-taking.

First, to help economic risk-taking further, banks need to fundamentally adjust their business models to help improve the flow of credit to the economy. Safe sources of credit, outside the banking sector, should also be promoted, though this needs to be accompanied by effective regulation to avoid the build-up of future risks.

Second, policymakers need to design and implement a range of micro- and macroprudential policies to address financial excesses that can threaten stability. For example, greater oversight is needed of asset managers to ensure that redemption terms are better aligned with underlying liquidity conditions. More comprehensive monitoring and reporting of leverage in nonbank sectors and in emerging market companies would also help identify potential vulnerabilities.

Finally, policymakers must have the data necessary to monitor the build-up of financial stability risks. They must prepare to ensure they have the statutory authority and analytical capacity to use their macroprudential tools. Policymakers must also have an explicit mandate to act when needed and, equally important, the courage to act even if measures are highly unpopular.

Chart of the day

I may need to explain this one to you; the leverage ratio measures the size of a bank's (firm's) balance sheet, compared to the capital it holds. I believe banks are expected to have them below 14% now, although I'd have to check that. Look at the blue sucker on the right. Thoughts?

Deflation - good, bad & turning ugly - Daily Telegraph

Essential reading for A2s (and AS later in the year)

http://www.telegraph.co.uk/finance/financialcrisis/11199850/Deflation-good-bad-and-turning-ugly.html