Tuesday, March 9, 2010

News is always happening!

We've discussed in lectures how economic news affects the confidence of firms and consumers and hence can have an impact on the economy as people spend/invest more or less as a result, shifting demand functions.

Today saw some more news released about the UK economy in addition to the earlier news about retail sales (see last post below): The trade gap has widened.  As the report suggests, this was unexpected, and it may be the fragile confidence some firms have has been further eroded by this, reducing their individual demand for investment and reducing investment overall.

The trade balance (we'll come to this next week) is the difference between imports and exports, and the trade gap usually refers in the UK (since we're always importing more than we export) to the excess of imports over exports.  Hence it got worse, to £8bn from £7bn.

Why was this unexpected?  Well, the pound has fallen dramatically against the currencies of the countries we trade most with - as the article says, the trade-weighted exchange rate index has fallen over 20%.

This should mean our exports are cheaper, and imports more expensive, hence we should expect a movement away from imports to domestic goods, and a move from overseas consumers and firms towards UK goods.

But it's likely these things do take their time to work through - supply chains are set by firms and may time time to change.

Also, it was noted recently that Eurozone growth has tailed off, with Germany growing 0% last quarter.  That means that the people buying most of our goods aren't doing so well, and perhaps are buying even less goods from us than they might.

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