1. EC-111 British Economy
Recent UK Macroeconomic
Trends
Dr Catherine Robinson
F26, Richard Price Building
Office Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30
Appointments: c.robinson@swansea.ac.uk

2. So, the UK policy response
•To emphasise international co-operation and co-ordinated
fiscal and monetary policy responses to help move the UK
and world economies out of recession
•a number of levers during the recession:
Bank base rate reduced to 0.5 per cent
Bailing out of some banks and finance to support the balance
sheets of the banks
Value Added Tax temporarily reduced from 17.5% to 15%
Quantitative easing of £200billion – Asset Purchase Facility by
which the Bank of England can buy corporate bonds
Car scrappage scheme
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3. Into 2009…heading into
double dip…
 But the market is still jittery (Flash crash of the NYSE in May
2010)
 International organisations meeting to define standards in
banking (BASEL I – 1980s and non-binding)
 To raise capital ratios, to improve stability in international
banking and to reduce regulatory differences globally
 BASEL III (September 2010)
 Increased the capital ratio requirements
 Insisted on new capital buffers
 Banks argued that there was a risk of a double dip as a result
 Banks consolidated and tried to diversify – also M&A
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4. And the currency markets??
 Contagion means that currencies are suffering
 Euro problems in Ireland, Greece and now Portugal and
Italy…
 Cyprus problems in the news recently
 A country that was developing via two sectors – tourism and
off shore banking
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5. How can we ensure this mistake
doesn’t happen again?
 Regulate the financial sector more effectively
 Commission a report – the Independent Commission on Banking
 Sir John Vickers
 Report published in September 2011
 recommendations on ring-fencing domestic retail banking, 1/6th to
1/3rd of banking assets to be within the ring-fence
 Competition in banking sector needs to be improved
 “Future of Finance”, 2010
 Report by LSE stars – Adair Turner, Andy Haldane and lots of
others
 Highlights that central banks and governments should shoulder
some of the responsibility for the failure – argue as yet, this hasn’t
happened
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6. Financial Services Act
2012
 Came into effect on 1st
April, 2013
 Brings Bank, FSA and treasury
under the same umbrella
 Criticised in the past for little
coordination between the
institutions
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7. Management of the financial
system
 Increasingly understood that the financial system had
changed beyond recognition from the 1980s
 Many banking investments were obscured, bordering
on illegal (Barclays fined £500m by the UK treasury)
 Libor scandal extended beyond Barclays in the end
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8. Why are banks regulated in the
first place?
 Goodhart (2010)
 Market failures:
 Monopoly control
 Asymmetric information
 Externalities (social costs to bankruptcies)
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9. What has happened to our macro
variables?
Source: Gregg and Wadsworth
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10. International variations
• Gregg and Wadsworth (2010) group countries into 5
categories on the basis of changes in the GDP and
unemployment over the recession:
 Those with small falls in employment relative to GDP (UK
and Sweden)
 Those with small falls in employment relative to
GDP, having introduced employment subsides
(Italy, Germany, Netherlands and Japan)
 Those with similar employment and GDP falls (France)
 Those with larger employment falls than GDP (US, Spain
and Ireland)
 Those with little fall in GDP (Australia)
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11. Why did the UK labour market hold
up?
Employers entered the recession in fairly good financial shape
Able to absorb some of the downturn without shedding jobs
 Total hours worked have fallen sharply and the share of part-timers
risen
 Workers accepted nominal wage moderation early on in the
recession
increased chances of finding work if they are made redundant
• The impact on productivity (and international competitiveness) and
public finances has been large; hence the cuts
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12. Cost of crisis
 The level of debt in most Western Economies is a
direct result of bank bailouts
 Severe recession
 Bank of England policy of “quantitative easing”
 Exchange rate system in Europe under threat
 Greece most obviously
 Irish IMF loan and the austerity measures
 Italy, Spain and Portugal also under pressure
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13. Slide 30.13
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Country
National
Debt 2009
National
Debt 2014
Budget
deficit 2009
Budget
surplus
required* in
2014
US 88.8 121.0 -12.3 4.3
Japan 217.4 239.2 -9.0 9.8
Germany 79.8 91.4 -2.3 2.8
France 77.4 95.5 -5.3 3.1
Britain 68.6 99.7 -10.0 3.4
G20 100.6 119.7 -8.6 4.5
*To bring respective national debts back to a maximum of 60% of GDP by 2014
Source: IMF, World Economic Outlook (various)

14. And now the Euro…
 Weaker countries within the Eurozone have suffered –
especially Greece
 No longer considered to be a good debtor
 Agreed to a range of austerity measures for the
foreseeable future in exchange for Euro bailout to prevent
national bankruptcy
 A wider EU problem
 The ECB issued €530bn of cheap loans for Banks to
ease liquidity concerns
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15. Failures of macro models?
 How come no one saw this coming?
 Well, some did (but not as many as now claim they did)
 Housing market had been overvalued for years in the UK
 Savings far too low
 Did our macroeconomic models let us down?
 Over-reliance on inflation targeting?
 Argued that MONEY is a glaring omission from existing
new Keynesian macro models
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16. There will be other
mistakes…
 Macroeconomic models will not cover all eventualities
 Abstractions from the real world
 Simplifications
 BUT still powerful tools
 A new focus on risk?
 The role of credit ratings are also under scrutiny
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17. Road to recovery
 Osborne:
 Treat the recession
 Tighten the fiscal belt – balance the budget
 Reduce government spending – rebalance the UK economy
 Encourage growth through private sector enterprise and growing
exports
 Regulatory reform of the financial sector
 Balancing the need for reform against the footloose nature of financial
intermediaries
 Balls:
 Treat the depression
 Looser fiscal policy to encourage growth
 Short term increase in government spending to get the economy back
on track
 Tougher stance on financial sector reform
Is the second policy approach viable?
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18. References
 Griffiths and Wall (2012) Applied Economics, Chapter 21 for UK financial
institutions, Chapter 30 for the basics
 Crafts and Fearon (2010) ‘Lessons from the 1930s Great Depression’, Oxford
Review of Economic Policy, 26(3), 285-317
 Drinkwater, Blackaby and Murphy (2011) ‘The Welsh Labour Market
Following the Great Recession’, WISERD Policy Brief
 A play by Julian Gough: goat futures explains the housing bubble
 For up to date information, have a look at the Economist blog:
 http://www.economist.com/blogs/blighty
 Deeper understanding in the current debates going on:
 Finance for the Future, LSE Report of 2010, available at
http://www.financeforthefuture.org.uk.
 This is really tough stuff though, so just read the summary!
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19. Review
 We have covered a lot
 70 years in about 10 hours!
 What have we looked at?
 A bit of theory
 Macroeconomic variables
 Tinbergen’s model
 Flexible targets
Keynesinan versus monetarism
Inherent tradeoff between macro variables
 Post war macroeconomic performance in Britain was not
bad, but could perhaps have been better
 What did post war Britain look like? Capital, labour,
intermediates, employment, output, balance of payments
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