A False Hope?

Huzzah!!!

For people who have read the latest on our economy's progress would have by now realised that our disappointing 0.7% contraction in the economy was actually miscalculated, it's now at a slightly better 0.5% this is due to economists estimating the construction sector wrongly, it was higher than previously calculated leading to a smaller contraction than previously estimated.

This does not mean that the economy is getting any better though, the bank holiday we just had didn't help much either with GDP taking away roughly 0.5%. Some blame the recession on the severe spending cuts that the government has implemented but regardless of the slow growth in the economy it is not all bad.

Compared to two years ago the deficit has been reduced, inflation is down and there are more private sector jobs, but this has led to some questioning as to how unemployment is falling when the economy is shrinking, one reason is that there has been a move to part-time work which has affected the productive capacity of the economy.

A First in the Economy

Even bringing the interest rate down to an all time low doesn't mean the banks will listen and start lending again or as much as the Bank of Scotland thought banks would. So they've resorted to quantitative easing.

Quantitative easing is when the central banks buys assests (mostly corporate and government bonds), but they use money that they've just created or in other words "printed off", but since we are living in the 21st century this is all done electronically. By doing this commercial banks and financial businesses will have newly created money in their accounts which means there is more money in circulation, increasing the money supply.

There are two effects which will hopefully occur through this method: By conducting reverse auctions for government bonds (sellers competing to sell so as to reduce price), it starts increasing the amount of money within bank's bank accounts this may then increase lending activity of banks, this will then help improve activity of the economy. The other effect is when bonds are bought this reduces the availability of them within the economy, this increases demand for the bonds and should it make it easier and cheaper for businesses to borrow.

Since short-term interest rates are as low as possible only long-term interest needs to be driven down, long-term interests are used by companies for long-term investments and individuals for things such as mortgages.

Now analysts are debating whether quantitive easing has been a success or not since it's hard to calculate how much worse off the economy would have been without putting the quantitive easing into practise.

So far reports from the Bank of England have suggested that it has helped boost GDP by between 1.5% and 2% which means that the scheme may be economically effective and rewarding for the long run despite doubts.

Diamond Jubilee having fun playing with GDP

Hi everyone, I'm an AS student at Havering Sixth Form College studying economics, maths, biology and physics. This is my first blog post on my economy news blog which I intend to update every 2 days or so. This is more so I can discuss (with myself) general news about the UK economy (mostly) and other countries that have made the news recently.



Since this is my first blog post I want to talk about the most significant thing that happened this week.
THE DIAMOND JUBILEE!!!

I thoroughly enjoyed myself during the festivities even with the financial crisis looming over us, however even though this celebration of the queen's reign has renewed everyone's patriotism, it definitely has not helped out the UK's economy, which is in dire need of a rejuvenation. The 2 day holiday that we received has had a severe fiscal impact on the economy since everyone was celebrating the diamond jubilee or else spending time with the family.

What impact this will have on the UK's economy is very hard to pinpoint. The Economics and Business Research done a report in April on how much potential money is lost during a bank holiday, they estimated it was roughly £2.3 billion however being able to quantify how much money is lost is sketchy at best.

The Department for Culture, Media and Sport done a report also on the effects and they came up with a figure of a loss of £1.2 billion, but this is also not to be taken at face value since there is a very large spectrum of a GAIN of £1.1 billion to GDP or a loss of £3.6 billion, this is due to the fact that there will be a sharp increase in demand for many sectors and products E.g Leisure, retail, bunting, food.

However there is a fine line between money that is lost and money that is only going to be spent later, for instance, someone may have wanted a plumber to fix their water pipe but since it was a bank holiday they may have had to postpone it. But that scenario doesn't always apply, so it is incredibly hard to be able to create any approximate figure for money spent and lost.

There is also the fact that there are other events at play here, such as half-term and the forthcoming Olympics, so this creates a further layer of complexity since there isn't any definite way to pinpoint the loss/gain in money solely at the Diamond Jubilee.

But just remember that £2.3 billion may sound like a lot, but this is an amount that is made daily so it will have a small effect on the economy either way.