CGS Economics July 2023

Can immigration help push down uk inflation?

By raj

Inflation has been a persistent concern for the UK economy, impacting the cost of living and eroding the purchasing power of individuals. Immigration, a topic of ongoing debate, has the potential to influence inflationary pressures. This article explores the potential relationship between immigration and inflation in the United Kingdom.

Inflation refers to the general increase in prices of goods and services over time. It can arise due to various factors, such as increased production costs, changes in demand and supply dynamics, and monetary policy. When prices rise, the purchasing power of consumers decreases. However, the relationship between immigration and inflation is complex and multifaceted, making it crucial to examine both short-term and longterm effects.

In the short term, an influx of immigrants can lead to increased demand for goods and services. As newcomers settle in the UK, they require housing, food,

transportation, and various other goods and services, stimulating local businesses and generating economic activity. This increased demand, if not met with corresponding supply, can put upward pressure on prices, potentially contributing to inflation. However, it is important to note that short-term inflationary effects of immigration are typically limited. Most studies suggest that these effects are relatively small and temporary, as the economy adjusts to accommodate the increased demand. Moreover, the ability of the economy to respond to increased demand depends on factors such as the flexibility of the labour market, investment in infrastructure, and productivity gains.

In the long term, immigration can have positive impacts on the UK economy that may help mitigate inflationary pressures. Immigrants bring diverse skills, contribute to productivity growth, and fill gaps in the labour market, leading to increased production and

economic expansion. This enhanced productivity can help keep inflation in check by reducing production costs and improving the supply of goods and services.

Additionally, immigrants often tend to be younger and more likely to participate in the labour force, which can offset the impact of an aging population. A larger labour force can enhance economic output and increase the potential for economic growth, helping to prevent excessive inflation.

While short-term effects of immigration on inflation may be modest, the long-term impact can be more significant. By contributing to productivity growth, filling labour market gaps, and expanding the workforce, immigration can help alleviate inflationary pressures in the UK. However, careful management and appropriate policies are essential to maximize the potential benefits while addressing associated challenges.

Eurozone in recession as rising prices hit consumer spending

By Ayokunmi

Eurozone is a gathering of 19 distinct nations. These additionally incorporate part conditions of the European Union that have taken on the euro (€) as their medium of exchange. Right now, the Eurozone is confronting a huge financial blockage because of inflationary tensions of 9.97% in the final quarter of 2022, prompting a downturn, and Gross Domestic Product diminishment in the final quarter of 2022 of 0.1% and first quarter of 2023.

The sharp rise in costs of fundamental labour and products is mostly because of rising energy costs, store network disturbances and rising raw material costs. These factors, joined with the continuous impacts of the worldwide pandemic, have established a troublesome climate for customers and organizations working in the Eurozone.

Consequently, purchaser spending has expanded emphatically, compelling families to give a greater amount of their pay to addressing fundamental necessities. This diminished optional spending on insignificant things like luxury cars or holidays and recreational activities. Numerous organizations, particularly those dependent on purchaser interest, have seen income decline and, now and again, have been compelled to eliminate job positions or shut down entirely.   The effect of these monetary difficulties is being felt across the euro region. Regardless of being Europe’s biggest economy, Germany has experienced the greatest downturn. Simultaneously, Estonia, Ireland, Lithuania and Hungary are additionally in downturn. The decrease in economic output has led to the development of the Eurozone downturn.

Eurozone national banks are wrestling with the tough undertaking of adjusting inflationary tensions and stimulating economic growth. While some dispute for additional forceful financial strategies to support spending and speculation, others are worried about the expected long-term outcomes of such activities.

To moderate the impacts of the downturn, governments and national banks have employed policies, for example, offering monetary help to impacted businesses, executing designated measures to help with work creation. Subsequently, the unemployment rate fell to 6.5% from 6.7%. Nonetheless, due to the complex nature of the economic challenges due to external factors, the effectiveness of these measures remains uncertain.

Financial experts and strategy creators are intently observing the situation and additional strategies to address the recession and lessen the burden on shoppers. Efforts are being made to balance out energy costs, further develop supply chain resilience and execute measures to help shopper certainty and spending.  The road to recovery for the Eurozone could be a troublesome one, requiring a mix of short-term and long-term reforms in the economy to improve resistance against similar actions. A planned methodology among Eurozone countries will be important to manage the ongoing monetary emergency and advance economic improvement. Inflation has fallen more than anticipated because of strategies, economists say, with expansion tumbling to 5.5% in June, the lowest rate since the start of 2022. Albeit still far from the European Central Bank’s 2% objective.

As the downturn develops, Eurozone policymakers, organizations and residents are hoping for a swift resolution for the rising costs and economic difficulties that have damaged the economy.

Supermarkets are being investigated over rocket and feather pricing

By Ernie

The Competitions and Markets Authority (CMA) is leading these investigations and is due to release a Road Fuel Market Study on 7th July which will include analysis of fuel price changes and whether companies are passing on lower prices to consumers.

Rocket and feather pricing is a situation that involves prices rising rapidly (like a rocket taking off) and then taking a long time to go back down (like a falling feather). An example of this is last year with fuel prices. Consumers were faced with fast-rising fuel prices caused by supply-side shocks including the Russian invasion of Ukraine. Once wholesale fuel prices began to decrease, the prices at the pump remained high. Rocket and feather pricing may be driven by extreme volatility of prices and supply with diesel being more significantly

affected by the price changes. The CMA even found evidence suggesting that prices are likely to be higher at petrol stations where there are few or no competitors nearby showing that companies may be taking advantage of consumers’ need for fuel and not passing on lower prices to them.   What’s happening with supermarkets?

The CMA said it would look at whether a failure in competition meant customers were overpaying for food and fuel which have recently experienced a fall in wholesale prices, but consumers are still severely affected, with food and non-alcoholic beverages inflation in the year to May 2023 being at 18.4%.

Asda said it will work in full cooperation with the CMA and is focused on providing the best value at the pumps. This comes after Asda

announced it will buy 350 petrol stations. The supermarket industry is dominated by only a few large players (an oligopoly) meaning a lack of competition amongst these giants may be the real driver for rocket and feather pricing.

Despite potential downsides for consumers, the Chief executive of the British Retail Consortium has said there’s a 3-to-9-month time lag for consumers to see falling prices in-store. In addition, supermarkets such as Tesco, Sainsbury’s, and Asda, have been helping consumers in other ways such as through price lock schemes involving thousands of products. Sainsbury’s has said it would invest £15 million to cut the price of its own brand items such as rice and pasta. This shows that there is also good news despite concerns of ‘rocket and feather pricing’.

Germany slips into recession

By Sarah

Germany, the 4th largest economy in the word, has entered a recession after experiencing 2 consecutive quarters of negative economic growth. In the 1st quarter of 2023, GDP contracted by 0.3%, following a fall of 0.5% at the end of last year. This is despite estimates it would avoid a recession with 0% growth in 2023.

What has caused the fall in GDP?

The primary cause of the recession is a fall in aggregate demand, mainly consumption. This is in large due to heavy inflation in Germany above the average of 7% inflation in the Eurozone. Rising prices reduces the amount of goods and services households can afford with their income, so is said to reduce ‘real’ incomes. As they can afford less, household spending has fallen by 1.2%. Many households must focus on affording basic necessities such as food, energy and rent, so do not have as much disposable income for extra consumption.

Additionally, energy prices have risen by 240% in Germany, which increases the cost of heating and electricity for households and further reduces their spending. This is due to the loss of supply of Russian oil after the invasion of Ukraine in March 2022. A lack of supply in the market means countries must offer higher prices to buy oil from other sources.

Furthermore, the war in Ukraine has caused significant uncertainty, which can be measured by the ifo business climax index for Germany. The index is takes 9000 monthly responses from business about their current situation and expectations for the next 6 months to give an early indication of economic developments.  The graph above shows the rise in uncertainty felt by businesses during 2023. When businesses are uncertain about the future, they will cut back spending and investment, because they are unsure if they will see good profits. This means they will not increase output, and may even cut back to reduce costs, causing GDP to fall.

The ifo fell for the first time in 6 months (seen below) in May to 91.7 from 93.4 in April, when indexed against the average sentiments in 2013. This is due to pessimistic expectations of managers who are less satisfied with the level of incoming orders and demand in Germany. Manufacturing, trade and construction all saw steep declines, however the service sector remained unchanged.

What does the future look like for Germany’s economy?

Inflation is cooling, as it fell to 6.1% in May from 7.2% in April. This may increase consumer and business confidence, as long as it remains on a downward trend. Businesses however do not like change, so their confidence relies of inflation being steady and predictable.

There have been large investments into semiconductors and battery factories in Germany, which could lead to growth in the clean energy sector, however, is likely to take a long time to significantly impact the economy.

The Bundesbank (German central bank) is predicting an increase in growth in the second quarter of 2023, which would end the recession. This is a result of improvements to supply chain issues and firms now able to fill backlog orders from the pandemic. Predictions of growth and improvement are likely to improve confidence, which will enable growth to occur and likely lift Germany out of recession once again.

Overall, GDP is expected to shrink by 0.3% by the end of 2023, suggesting

it won’t enter a deep recession. It is worth noting that 2/3 of the fall in GDP is put down to more workdays lost for public holidays in 2023 than previous years, showing confidence is likely on the way up in Germany.

Energy giant 'SSE' to pay £9.8M for pricing breach

By Jamie

Energy giant SSE (formerly known as Scottish and Southern Energy) has been hit with a record-breaking fine due to serious regulatory violations. The company, one of the United Kingdom’s largest energy suppliers, has faced intense scrutiny in recent years over its practices and adherence to industry regulations. SSE has long been a prominent player in the UK’s energy market, providing electricity and gas to millions of customers across the country. However, concerns have been raised regarding the company’s conduct and compliance with regulatory standards. As of the 6th of June, SSE has settled at a £9.8 million (reduced from £11.58 million as the company settled the investigation early) penalty after breaching its generation licence, the industry regulator (Ofgem) has announced.

So, what regulatory standards were broken? To answer this firstly we need to understand SSE’s business. SSE provide

electricity to homes mainly in Scotland and in some areas Transmission constraints can occur in situations such as when there is not enough electricity network capacity to transport power out of an area in which local generation outstrips demand. The electricity system operator takes action to manage flows across the network to increase and decrease the amount of electricity produced by different generators. But, given that it only has limited alternatives available to it in these situations, there are risks that generators can exploit their position by increasing prices to reduce output and Ofgem puts rules in place to prevent this. Ofgem’s probe, which was launched in October 2021, found that SSE made the bid prices it charged the electricity system operator to lower output from the Foyers pumped storage power station at Loch Ness “significantly more expensive”, including in periods of transmission constraint.

Following an extensive investigation by the Ofgem, SSE has been fined a staggering amount for its transgressions. The fine, set at an unprecedented level, reflects the severity of the violations and serves as a strong message to other industry participants to not exploit abuse their power in the energy sector and exploit its consumers. The repercussions of SSE’s fine extend beyond the company itself. The energy sector as a whole will undoubtedly be affected, as the case sets a precedent for stricter enforcement of regulatory standards. Other energy providers will be under increased pressure to ensure compliance with regulations, avoiding similar penalties and maintaining the integrity of the industry. This landmark case may usher in a new era of heightened scrutiny and accountability for energy companies across the United Kingdom.

Why was Britain's Favourite airline fined £1.1 million recently?

By Tom

Shockingly recently British airways, the Uk’s largest airline was fined £1.1 million with the penalty being imposed by the Information Commissioner’s Office (ICO) due to a data breach incident that occurred in 2022, relating to both Covid and customers personal data breaches

Why were they fined?

The fine imposed on British Airways stems from a data breach incident that took place in 2022. Hackers managed to access the personal and financial information of approximately 429,000 customers. The breach included sensitive data such as names, addresses, payment card details, and travel booking information. This unauthorized access to customers’ data raised concerns about data security and privacy. The ICO’s investigation revealed several failures in British Airways’ data security measures, which contributed to the data breach. One critical factor was the company’s failure to implement sufficient security measures to protect customer data adequately. It was discovered that British Airways lacked proper safeguards, such as multi-factor authentication, which could have thwarted the hackers’ attempts to gain unauthorized access. The General Data Protection Regulation (GDPR) came into effect in May 2018, setting strict guidelines

for data protection and privacy. British Airways’ data breach was deemed a violation of the GDPR, as the company had not taken appropriate measures to ensure the security of customer information. The GDPR empowers regulatory authorities to impose significant fines on organizations found guilty of such violations, with penalties of up to 4% of the company’s annual global turnover.

What does this mean for British airways?

The data breach incident had a profound impact on the affected British Airways customers. The compromised personal and financial information left them vulnerable to potential identity theft, fraud, and other malicious activities. Moreover, customers lost trust in the airline’s ability to protect their data, which could lead to long-term reputational damage for British Airways.

The ICO’s fine of 1.1 million pounds serves as a severe financial blow to British Airways. The penalty not only reflects the seriousness of the data breach but also serves as a deterrent for other organizations to prioritize data security. The incident highlights the importance of robust security protocols and proactive measures to safeguard customer information. In addition to

the financial consequences, British Airways also faced legal action from affected customers, further impacting its reputation and bottom line. The data breach incident faced by British Airways underscores the need for organizations to prioritize data security and privacy. It serves as a reminder that even industry leaders can be vulnerable to cyber-attacks and underscores the importance of investing in robust security measures. British Airways must enhance its cybersecurity infrastructure, implement stricter data protection protocols, and regain the trust of its customers by demonstrating a commitment to safeguarding their personal information.The recent 1.1 million pound fine imposed on British Airways sheds light on the criticality of data security and privacy in the modern digital era. The incident exposed vulnerabilities in the company’s security infrastructure and raised concerns about the protection of customer information. By addressing these shortcomings, British Airways can rebuild trust, prevent future breaches, and ensure a safer environment for its customers. The data breach serves as a reminder to organizations worldwide that investing in robust data protection measures is not only ethically crucial but also necessary to comply with regulatory frameworks like the GDPR.

HSBC withdraws mortgage deals for new borrowers

By olly

Due to expected rising interest rates, there has been a rapid increase in demand for mortgage deals. This has resulted in HSBC temporarily withdrawing mortgage deals to ensure that they can stay within their “operational capacity” and meet their “customer service commitments”.

Recently, there has been predictions that The Bank of England will raise rates higher than previously forecasted, to 5.5%. This resulted in a rapid spike in demand for mortgages for new borrowers who want to get their mortgage now, before the predicted rate increase. HSBC, who

account for almost ¼ of the home loans market, therefore made the decision to temporarily withdraw the mortgage deals offered to new borrowers. The closure was short lived, with deals becoming available again after just being withdrawn for just four days.

The delay on offering mortgage deals means that fewer new borrowers will be willing to purchase a house and get on the property ladder. The higher rate of interest rate (5.5%) should deter some prospective borrowers from taking out loans as they feel unsure as to whether they’d be able

to pay back their loan at the higher rate. This benefits HSBC as they then take on fewer borrowers who have potential to default on their mortgage payments, meaning that the bank is more likely to make money on a larger proportion of their mortgages. Additionally, their flows of payments are more consistent, thus improving their confidence when lending money to other consumers. Consequently, stability is created within HSBC, protecting the bank from possible dangers which have been created by the abnormal inflation-heavy market conditions.

Alumni Interview –Class of 1998

William Holman

Civil Servant

1. What is your current role?

I lead a team of economists at the Office of Rail and Road (ORR)we are the economic regulator of the rail industry. You might have heard of Ofgem, Ofcom and Ofwat - we’re similar to them but for rail. At the moment my team is carrying out a big project to set the prices that Network Rail (which owns the train tracks and stations) can charge to train operators like Chiltern to run their trains on the network. Because Network Rail is a monopolist, these prices have to be set by an independent regulator (ORR).

2. If you were Prime Minister, what would you do?

As I’m a civil servant (which means I work for the government), I have to be careful about what I say!

My number one priority would be that the housing supply should be massively increased - the number of homes should

always grow in line with the population. This would help flats and houses to be more affordable for young people when they start working. This would upset a lot of people because it means building homes over green fields, but the alternative is that future generations live in housing poverty.

3. What’s your favourite sandwich?

Important question. It has to be a hot sausage sandwich on brown bread, with ketchup, no butter.

4. What subject and where did you do your undergraduate degree? I studied Economics & Politics at the University of Bristol. I absolutely loved Bristol, it is a beautiful city and has a culture that I haven’t seen anywhere else in the country.

I also did a Masters degree in Economics of Regulation and Competition at City University in London - I studied part-time while working.

5. What made you decide to take your chosen career path after CGS?

Some of my earliest memories are of playing Monopoly with my Mum after school. I knew from that early age that I wanted to work in something to do with money (like real-life Monopoly), so I took economics at school and Uni, and then found out more about job opportunities while I was at Uni.

Alumni Interview –Class of 1998

6. What advice would you give someone aspiring to enter the world of economics?

Just do it! If you like economics then you are very fortunate, because there are lots of job opportunities and the profession is pretty well paid. I’d also recommend degree apprenticeships, such as the Government Economics Service degree apprenticeship - this is a five-year programme of paid work and study, after which you have an economics degree, with all your fees paid for, and loads of great work experience.

7. What are the best and worst aspects of your current role?

Best aspect: high profile work that makes a clear impact.

Worst aspect: as a regulator we have to sometimes make decisions which upset people, and that’s never a fun place to be.

8. What are your career goals for the future?

To grow as a leader who develops the economists of the future.

9. What was your best memory of CGS?

I have lots of very good memories of the school. I had an amazing group of friends who I am still in touch with today. Maybe my favourite memory is the ‘Sixth Form Boat Trip’, which was a big party after A’ levels on a boat on the Thames (does this still happen?!). It was an amazing way to end school life with friends and with teachers who got to let their guard down a little!

10. What book are you currently reading or what are you watching on Netflix?

I like ‘gritty’ political books and TV. I have been watching ‘Once upon a time in Northern Ireland’ (on iPlayer), which is a brilliant telling of the Troubles in Northern Ireland which were ever-present in the news while I was growing up. It is not for the faint-hearted.

Mrs Carr's Chocolate Brownies

Trialled & Tested by 12D Economists

Ingredients

190g unsalted butter

100g milk chocolate

90g dark chocolate

100g plain flour

40g cocoa powder

50g milk chocolate chips

50g white chocolate chips

Around 30g white chocolate shavings

3 eggs

275g caster sugar

Instructions

1. Cut the 190g unsalted butter in cubes and tip into a medium bowl with the 190g of milk and dark chocolate.

2. Fill a small saucepan about half full with hot water, then sit the bowl on top so it rests on the rim of the pan. Put over a low heat until the butter and chocolate have melted, stirring occasionally with a spatula to mix them.

3. Once the chocolate and butter has completely melted, remove the bowl from the pan and leave to the side to cool.

4. Turn the oven on to 180 degrees – prepare a shallow 20cm square tin with baking parchment paper

5. Break the eggs into a large and tip the sugar in. With an electric mixer on maximum speed, whisk the eggs and sugar. They will look thick and creamy, like a milk shake. This can take about 5-10 minutes, depending on how powerful your mixer is. The mixture will be ready when it becomes and pale and has doubled in it’s original volume.

6. Pour the cooled chocolate mixture over the eggy mousse, then gently fold together with a spatula. Continue going under and over in a figure of eight, moving the bowl round after each folding so you can get at it from all sides, until the two mixtures are one and the colour is a dark brown.

7. Hold the sieve over the bowl of eggy chocolate mixture and sift the cocoa and flour mixture, shaking the sieve from side to side, to cover the top evenly.

8. Gently fold in the powder mixture using the same figure of eight action as before. The mixture will look dry and dusty at first, but will end up looking gungy and fudgy at the end.

9. Stir in the white and milk chocolate chips

10. Pour the mixture into the prepared tin, scraping every bit out of the bowl with the spatula. Gently ease the mixture into the corners of the tin and paddle the spatula from side to side across the top to level it.

11. Put the brownies in the oven for 30 minutes, you will know when they are done.

12. Leave the brownies it tin until they have completely cooled down and then lift out the tin and cut into squares.