CGS ECONOMICS MAGAZINE 08/07/21 THE CURRENT ACCOUNT ISSUE 2
TOO BIG TO FAIL – 2008 FINANCIAL CRISIS: The cause of the 2008 financial crisis has been an ongoing dispute, passing blame between bankers, economists, politicians and regulators. Most people, however, would agree the problem developed over a long period of time. The leading factor to the downfall in the economy is heavily due to financiers giving out too many loans, specifically mortgages, to those considered “subprime” - borrowers with poor credit history who struggled to pay them off. Moreover, Alan Greenspan, the former chair of the US Federal Reserve, has been heavily criticised for keeping interest rates at a record low of 1%, incentivising banks and hedge funds to hunt for riskier assets that offered higher returns. Investors wanted low-risk investments with a high reward and subsequently turned to the housing market’s mortgagebacked securities as the interest rate was considerably higher than Treasury Bonds. Large financial institutions bought thousands of individual mortgages, bundled them together and sold shares of that pool to investors.
FEATURING: •
Too Big to Fail by Simona (Year 12)
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The Housing Market by Hannah (Year 12)
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Tourism Turmoil by Ewan (Year 12)
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It’s Coming Home by Bruno (Year 10)
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COVID-19 impact on the economy by Kitty (Year 12)
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Cryptocurrency by Zuhah (Year 12)
Meanwhile, Banks trusted the assessments of agencies such as ‘Moody’s’ and ‘Standard & Poor’s’ who were expected to analyse financial risks and provide accurate credit ratings. They have been heavily criticised for being too generous, giving 70% triple-A ratings, creating the false impression that borrowers had a strong capacity to meet their financial commitments. Their greed for profit meant demand for these investments was so high that lenders tried to create more mortgage-backed securities, so firms lowered their standards and made deals with people with even lower credit ratings. Tap here to add a caption
House prices were rising rapidly due to low interest rates and the reduction in regulation, so investors believed that if borrowers defaulted on their payments and couldn’t pay the original amount with interest back, then they could still make profit by selling the property. In reality, the housing bubble inevitably burst, putting houses back on the market where the excess supply caused house prices to plummet. Subsequently, major banks such as Lehman Brothers, that were considered “too big to fail,” filed for bankruptcy in September 2008 with $619 billion in debt. The collapse and panic spread, with a detrimental ripple effect as confidence fell and investors withdrew a record $196 billion from their accounts, having a domino effect on economies globally, with the stock market crashing
After the collapse of Northern Rock, retail banking consumers needed to be protected from the riskier activities from investment banking activities. Therefore, the government intervened with regulations implemented by 2013 to legally separate the two through a “ring fence.” This would aim to protect the general public as the government would have no ‘obligation’ to bail out banks, encouraging banks to be more aware of their risk exposure regardless of the cost.
Despite interest rates being cut from 5% at 0.5% in the UK, economic growth fell by 4.1% in 2009 as the recession dragged on, whilst unemployment rose to 8%, with threats of deflation looming. The recovery was heavily investment-led, worsening the fiscal deficit, as government spending exceeded revenue from taxes. Expensive education and training schemes were implemented to ensure future employment specifically for the younger generation. The deficit can also be explained by the Government bailing out The Royal Bank of Scotland (RBS) for £45.5 billion of taxpayer’s money, spending £500 billion in total to rescue UK banks, highlighting the flaws in the financial market that the Government needed to correct to avoid another global meltdown.
The impacts of the financial crisis severely knocked consumer and business confidence, causing global declines in economic growth as evident in the graph above. The incident in 2008 has affected investment levels to this day. A lot can be learned from the various responses to the crisis, and which were more effective – with countries such as Greece that have struggled ever since the initial collapse. The financial crisis, although causing widespread damage, was essential to revolutionise the banking system, to create a stable economic environment for the future.
THE HOUSING MARKET: The pandemic has had many negative consequences such as increased death rates, introduction of masks into society and limiting human contact between family and friends. There have also been large effects on individual markets as the pandemic spiked demand for toilet paper and pasta due to panic buying. In this article, I will be discussing the effects on the housing market within the UK.
As interest rates are at an all-time low in the UK currently at 0.1%, consumers are eager to buy due to mortgage repayments being incredibly low. Additionally, the stamp duty holiday, has lowered costs and encouraged investment. It is said that house prices rose a record 7.4% from the previous year compared to the average 2% annual rise from the previous year. This is because more buyers have entered the market shifting demand out and extending supply. This outward shift in demand has caused a price increase from p-p1 and has also encouraged more sellers to put their house on the market as it has become increasingly profitable to do so. However, as supply is fairly price inelastic because of the time taken to actually build the house, supply can’t keep up with demand and house prices will increase at a higher proportion than quantity.
Some economists believe demand for houses could fall in the future if unemployment rates continue to spike, with a large proportion of the population having a reduced amount (80%) of their income due to furlough. Whilst in the UK, the furlough scheme has managed to decrease the unemployment levels, the uncertainty surrounding job security may increase as furlough ends, with firms unable to financially employ as many people. Moreover, when the stamp duty holiday ends, and it becomes more expensive again, house prices may actually fall as a result of the lack of demand in the economy.
However, it could also be argued that some consumers could have more discretionary income to spend - with no money being spent on commuting and holidays. Additionally, COVID-19 has meant 40% of the workforce is working from home, increasing the need to have bigger living space, increasing demand in the housing market. Similarly, due to lockdowns, the necessity of having a garden has dramatically increased, with many people moving outside the city of London towards the surrounding countryside. The change in demand may vary regionally, with demand locally being fairly inelastic due to the tube access to London and excellent schools.
The government have intervened in this market to decrease house prices by reducing stamp duty allowing no tax to be paid up to £500,000 compared to the £125,000 cap before. This was meant to be ending on the 31st March 2021 but was extended to the 1st July 2021 due to its effectiveness. It reduces the costs to encourage investment, to stimulate the recovery by increasing short run economic growth. They have also extended the ‘Help to Buy’ ISA scheme. This scheme will run until March 2023 and it includes the government lending homebuyers up to 20% of the cost of a newly built home, up to 40% in London. These schemes are designed to reduce the wealth divide throughout the UK by allowing those from low-income families the opportunity to be first time homeowners. A new 95% mortgage guarantee scheme that was launched in April 2021 guarantees mortgages for those that have a 5% deposit. The scheme was initially announced in the March 2021 budget and is designed to encourage banks to offer 95% mortgages as they did pre pandemic. The government has agreed to partially compensate the lender if the consumer defaults on their payment plan which further encourages banks to sign up for this scheme as it reduces the associated risk.
Despite the majority of the world’s house prices rising, some countries such as Spain are experiencing an alarming drop in the value of their houses. Many houses are bought by foreigners who accounted for 12.5% of all house sales in 2019, due to significant travel restrictions consumers are unable to view and purchase properties as easily as before. This has caused an inward shift in demand and decreased average house prices by around 69% below pre-pandemic levels. Due to potentially long-term travel restrictions associated with the pandemic, it is a concern that the Spanish housing market does not bounce back after this shock to the market which could potentially decrease the country’s real GDP as there is lower Aggregate Demand in the economy. In conclusion, these is no accurate economic model that can predict what will happen to the housing market as it recovers from the shock of the pandemic as all of the effects so far have differed depending on how much the market relies on sales to residents overseas. It is expected that for countries such as the UK and America, house prices will keep increasing rapidly making it a good investment for those that can afford it. However, there is some concern about the rate at which house prices are increasing making some people question if the housing bubble is set to burst in the near future.
TOURISM TURMOIL: Last March when the world went into a near total shutdown, all sectors of the global economy were hurt, none more so than the travel and tourism industry. With travel bans implemented globally the industry had little idea what was ahead. An industry that was responsible for a $8810.96 bn contribution to GDP worldwide, in 2018, was now at the mercy of international governments in terms of the relief available and restrictions. Before the pandemic, travel and tourism was a highly profitable industry that protected millions of jobs and propped up entire economies. For example, 32.5% of the Maldives' GDP was generated from travel and tourism. This highlights how devastating a severe drop in international travel would be, especially for a small nation like the Maldives. Whilst the industry supported entire nations it was a highly profitable business. With firms like Expedia generating $107.9 bn in 2019 sales revenue, this illustrates the economic importance of the sector. This importance is also demonstrated through the level of employment as a result of high levels of travel and tourism spending. Chinese tourism spending directly supported 29 million jobs and UK tourism spending directly supporting 1.734 million. This industry is of paramount importance to a wide range of economies and is an industry supported by the world's most wealthy nations.
These developed nations have had their spending on travel limited significantly and the producers of tourism services have suffered. Between February and April 2020 air passenger arrivals in the UK fell 98.3%; this statistic truly demonstrates the total shutdown of the sector. A key victim of this is Thomas Cook, a firm that had 178 years of business experience behind it. The impact of this event is unparalleled. For example, Thai tourism chiefs have claimed that the impact of the pandemic on the industry will be worse than the 2004 Boxing Day Tsunami. Thailand depends heavily on tourism from Western countries for lots of the locals' income, 90% of Phuket residents rely on tourism for employment. Therefore, this illustrates that the impact of this event transcends continents and will be felt globally.
However, it could be argued that some sectors of the economy, especially in the UK will benefit. The UK domestic holiday sector will undoubtedly benefit from the travel restrictions put in place on usual British holiday hotspots. To quantify this new level of demand, the website Cool Camping has seen a 750% increase in bookings compared to last year and Best Western are reporting a 700% increase in bookings across their chains. It is clear to see that UK consumers are desperate for holidays, regardless of whether they are in the Peak District or the Balearics. However, there is a fear that there may be excess demand for domestic holidays and that producers can’t meet this new demand, especially due to the impact of Brexit on labour supply. Globally, the impact on the tourism industry will be devastating but domestically, in the UK, there will be some big winners among hotel or camping firms. It has given UK residents the opportunity to experience the beauty of our own landscapes, that they might not have without Covid. It’s clear to see the pandemic has exposed the knife-edge some tourism reliant economies are on. Moreover, in a world that is becoming more and more globalised, are we really economically prepared for similar crises?
IT’S COMING HOME!! With the European championships up and running, stirring up excitement and anticipation throughout the continent. The Euros can be the perfect cure to raise global spirits in and amongst the effects of the coronavirus pandemic. The Euros have been held by 11 different cities across Europe rather than the typical format whereby it is hosted by a single nation. These championships are likely to have a positive effect of the economies of the nations involved, especially now fans are allowed to spectate and visit different cities to watch the games. This could positively impact the hospitality and retail sectors of the nations involved, providing them with a post-pandemic boost. However, with the coronavirus still a danger to social life, the economic impact may not be excessive due to the restricted capacities. Inevitably these reduced capacities will limit turnover that stadiums and hospitality venues are able to produce during the tournament.
Euro 2020’s Host Cities: -
Amsterdam, Holland – Johan Cruyff Arena Baku, Azerbaijan – Olympic Stadium Budapest, Hungary – Puskas Arena Bucharest, Romania – Arena Nationala Copenhagen, Denmark – Parken Stadium Glasgow, Scotland – Hampden Park London, England – Wembley Stadium Munich, Germany – Allianz Arena Rome, Italy – Stadio Olimpico Saint Petersburg, Russia – Krestovsky Stadium Sevilla, Spain – Estadio de la Cartuja
The Economic Effect of Euro 2020 on the UK: The gradual easing of restrictions and successful vaccine rollout has caused economic activity to increase in recent months. Economists believe that the economic impact of Euro 2020 could see the UK economy boosted by up to £3 billion, throughout England, Scotland and Wales. This has been stimulated by not only TV subscriptions, shirt/merchandise sales and ticket revenue but mostly food and alcohol sales with an estimated 15 million pints sold across England and Scotland on the day of the match between the two neighbouring rivals. This helps support pubs and smaller businesses that have been closed for over a year and provides them with the finances they need to survive the effects of the pandemic. As the economy begins to recover, the Bank of England predicts continued economic growth and a rise in employment in 2021. With the pound experiencing a rise in May 2021 (up one cent against the Euro) the investment into foreign exchange could rise, with the extremely low interest rates playing a factor whilst individuals and firms begin to gain confidence as we near the final stages of the pandemic.
Ultimately, the hosting cities of Euro 2020 will be thrilled to welcome live sport back to their nations. As a clear increase in morale will become present throughout Europe as we can once again hear the buzz and atmosphere of stadium. While the economic impact of the tournament may not be as great as previous years, profits should help countries get back on their feet financially after the dampening effects of the coronavirus pandemic.
IMPACT OF COVID-19 ON THE ECONOMY: Since the arising of COVID-19 in China in December 2019, it has killed over 128,000 people in the UK and left 700,000 unemployed. It has had a detrimental effect on not only our society, but also the economy. Coronavirus has heavily worsened the already struggling high-street shops, with H&M closing 350 stores, GAP closing 81 stores in the UK whilst another competitor, Topshop, was also bought by ASOS. They all have the intentions to shift the market online, contributing to the rising unemployment rates. Gross domestic product grew by 0.4% in February 2021 which was 7.4% lower than February in the previous year. Moreover, the service industry has still not recovered from the pandemic and some industries have been very severely affected. As shown below air transport growth has fallen by 91.6% and rail transport fell by 78.4%. This is due to the various travel restrictions throughout lockdown. However, some industries have benefitted from the current situation; postal and courier activities grew by 23.8% and human health activities increase by 4%.
Coronavirus has proven to be regressive, has heavily benefitted the highest income earners as the lower income families suffer from reduced income and threatening unemployment. Amazon’s consumer spending increased by 60% during the March lockdown and has enabled Amazon to hold over 38% of the e-commerce market. Whilst the combined wealth of the world’s 10 richest men rose by £400 billion, Oxfam has predicted poverty to have risen globally by 500 million from pre-covid times.
The government has had to spend billions of pounds to protect the economy during the pandemic. To fund this extra spending, they have borrowed money because there has been a fall in the amount of tax revenue raised. From April 2020 to 2021 government debt was £299bn, the highest it has been since WWII. Over £100bn was spent on support for jobs, such as the furlough scheme, £1.65bn to support the UK's vaccination rollout, £50m to boost the UK's vaccine testing capability and nearly £400m has been spent to help arts venues in England re-open. The Bank of England has financed these measures with £2285bn of quantitative easing in 2020. The pandemic has meant that there will be more government spending and less tax revenue for years to come, with future tax rates likely to increase to compensate for the accumulating debt.
Rishi Sunak, the Chancellor of the Exchequer, announced some important measures in the 2021 government budget which are aiming to help the economy recover from this period. For example, in April 2023 corporation tax is due to rise from 19% to 23% which would raise tax revenue and help the government pay off debt. Moreover, furlough has been extended until September to improve the welfare of those who are unable to work and help businesses recover. Regardless of the policies set by the government it is clear to see that COVID-19 has affected the economy in numerous ways and will have an impact on many future generations to come.
CRYPTOCURRENCY: As defined by the Oxford Dictionary, cryptocurrency is: “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”. Many people have begun to trade crypto in the last 10 years and the market is increasingly growing, even today. Crypto differs from other types of trading because it is a lot easier and cheaper to partake in and does not require any interference from a third party which is seen as admirable by users. The emergence of new crypto trading and technology has led to both changes and advancements within economies. The first way in which the overall impact of crypto trading has been positive for the international economy is because it has enabled a larger number of international transactions to take place. This is because many people around the world do not have access to bank accounts or credit cards; especially in developing countries. Cryptocurrency is helpful in bridging gaps when it comes to helping people engage with the worldwide economy. It is especially helpful for migrant workers who wish to send money home because it is easy to do and does not involve any third parties - helping the circular flow of income and positively impacting our economy.
BITCOIN: • • • •
Created by Satoshi Nakamoto in January 2009 Price has grown by 66% in February 2021 18.74m bitcoins in circulation worldwide User index in 2021 shows 97% confidence in cryptocurrencies • 14, 915 Bitcoin ATMs worldwide • In 2017, one Bitcoin was worth $19,783.06
Although crypto has its advantages, we must remember that it is dependent upon the wider crypto market. This means that people’s purchases and holdings can easily gain or lose value which creates a sense of risk and uncertainty because although many users find they are able to make a profit, losses are also regularly experienced which makes crypto trading unreliable and dynamic which users may find unattractive. This will cause not as many people to invest, so perhaps, the extent to which we expect to see the positive effects on our economy will not be as large as projected.