Suchergebnisse

Governments are important players in many parts of the economy, and at present perhaps the most visible is the balance they set between taxing and spending. Tax and spending polices are in part designed to redistribute resources between individuals, but they can also be used to redistribute resources over time. Governments can also use tax and spending policies to sustain or restrain economic activity, and in most countries a case can be made for using active fiscal policy in periods of clear economic distress, or in periods when it would be useful to restrain imbalances that can lead to financial crises. As a result it is difficult to gauge the appropriate stance of policy. Short-run problems have to be balanced against longer-term needs, and mistakes are common. In the UK, for instance, in the six years up until 2008 the balance of policy was perhaps too loose, whilst over the next five years it is probably too tight, even though deficits are projected to be higher than they were before 2009.

The downturn in global economic activity that started in 2008 was turned into a major recession after the failure of Lehman Brothers in September 2008. It appears that world output fell by more than 1 per cent in 2009, and OECD output probably fell by around 3½ per cent. The effects on output were more marked in the Euro Area and the UK than they were in the US or Canada, which partly reflects the policy responses chosen by Treasuries and Central Banks. The financial crisis that drove the recession affected banks in the US, the UK, the Euro Area and the rest of Europe rather more than it did those in Canada, Australia and Japan. However, recessions have been common, with only Australia and Poland appearing to avoid them. The financial crisis led rapidly to a freezing of trade credit, which caused world trade to decline very sharply at the beginning of 2009. The financial crisis also led to an increase in risk premia in investment decision-making and hence to a decline in the equilibrium capital output ratio, which caused a sharp reduction in the demand for capital goods. Combined with credit rationing effects for firms needing access to borrowing, this induced a collapse in investment. Trade channels made the crisis global, as did movements in exchange rates. Interest rates were cut sharply in the US, Europe and Japan, and approached levels seen in Japan for the previous decade. As a result the yen appreciated strongly, and the combination of the effects of this appreciation on competitiveness and the decline in investment goods trade meant that Japan suffered worse than most other countries, at least in the short term.

It is useful to look at the distinction between transitory and permanent effects of a crisis. Financial crises normally bring on a recession, and the output costs can be large, as Hoggarth and Saporta (2001) discuss. In the majority of cases since 1970 in the OECD countries output returns to its trend level and there is no permanent effect. However, there may have been a permanent scar on the level of output in Japan after its crisis in the early 1990s, making the crisis and subsequent recession much more costly. This may reflect the nature and length of the crisis, as the banking sector was left to flounder for some years before its rescue toward the end of the crisis period. This appears to have left a permanent scar because risk premia were subsequently higher, and real asset prices have not fully recovered.

The increase in UK public sector net borrowing in the past year, plotted in figure 1, has been in part a result of the decline in economic activity, and also a consequence of the change in housing and financial market transactions. The former is predictable with every 1 per cent decline in output below trend producing a decline in net revenues of of between one third and three fifths of a per cent of GDP depending upon the reason for the decline in output. The loss from the decline in asset-related revenues is harder to judge, but the April 2009 budget suggested that revenue losses might be more than 1 per cent of GDP.

In interesting times several things may happen simultaneously, and they may have connected roots. The financial turmoil that developed initially in the US banking sector had its roots in financial innovation that had made available cheap finance and increased demand for housing. This wave of low cost finance had spread to Europe, and house prices rose in a correlated way. The increase in demand in the world economy that resulted from strong growth in lending and high asset values helped raise output growth outside the OECD, and this in turn put upward pressure on oil prices. Markets sometimes work slowly, and the effects of the increase in demand on prices appear to be coming through just as the asset bubble is collapsing. The sequence of events was not inevitable, as low personal sector saving in the US and the UK as well as elsewhere could have been offset by tighter fiscal policy, and better prudential regulation of lenders would also definitely have helped. The desire to move financial regulation from the central bank, as in the UK, may have been for good, competition based, reasons, but it has meant that financial sector oversight has not taken account of the macroeconomic implications of a wave of lending that rested on risky financial innovation and therefore it has not properly addressed the issue of systemic risk (see Barrell and Davis, 2005). The resulting financial turmoil has meant that banks have made losses, and have been unable to trust each other's solvency when making deals. As a result three month interbank rates have risen well above central bank intervention rates, as can be seen in figure 1.

Economic growth in Europe has been disappointing in the past few years, especially when compared to the US, and in addition growth in the UK has looked more robust than that in the large continental economies. There could be many factors that contribute to these differences, and they are addressed in the articles by Crafts; Barrell, Guillemineau and Holland; Mc Morrow and Röger; and Bebee and Hunt in this Review. This introduction discusses some of the factors affecting growth, and draws some conclusions from these studies that help us understand why growth may differ between countries for sustained periods of time, and also why underlying, or trend growth rates may vary over time.

The lack of savings by the UK personal (and private) sector has been a matter of concern to us for some time, in part because it has been clear that inadequate provision has been made for future pension liabilities. The recently published Turner report has highlighted this problem and suggested that on current commitments some 5.2 per cent more of GDP needs to be directed to pensioners in 2050 than is currently the case. Assets have to be built up to provide this extra income, and increased saving is necessary in order to do this. In this note we consider the macroeconomic impacts of building up assets to ensure that the increasing allocation of income to pensioners that an aging population may require is managed efficiently.

In recent weeks, equity markets have been very weak and the euro exchange rate has risen by more than 10 per cent against the dollar. The UK's effective exchange rate has also depreciated, removing some, but not all, of the overvaluation we identified in the April Review. We report on recent movements in table 1, and their implications are discussed in the UK and World forecast chapters in this Review. To an extent the movements in the US stock markets and the exchange rate are linked, but there does seem to be some 'excess strength' in the euro, which will in turn contribute to the weakness of Euro Area equity prices.

The UK has to make a decision on membership of EMU in the next two years. The monetary and fiscal regimes in the Euro Area and in the UK do not differ greatly. However, we argue that membership of EMU will increase the stability of the economy and the credibility of the policy framework, and hence will enhance the prospects for growth and higher incomes and employment. There appear to be no major problems associated with joining EMU at around 1.50 euros to the pound, although there are risks to the UK if the euro appreciates against the dollar after we have entered. However, the costs associated with this risk have to be offset against the probability of the significant output gains that could come from EMU membership in the medium term.