A2 Macro: Domestic and External Headwinds

As part of an introduction to a deeper analysis of economic cycles one of my A2 groups considered some of the domestic and external economic headwinds that will shape the next stage of the business cycle - not least the likely pattern of any recovery in activity. The aim of the exercise was to emphasise the importance of the inter-connected nature of modern economies. And also to reinforce the idea that policy decisions taken inside the UK economy can be blown off course by external shocks.

Here are some of the ideas

Domestic influences

Consumer expectations - about future changes in taxes, unemployment, house prices, real incomes Business expectations - the state of confidence / pessimism about sales, costs, credit availability, cash-flow and profits Scope for further monetary policy decisions - e.g. extension of quantitative easing, edge policy rates to zero Fiscal policy changes - need to scale back borrowing, control G, likely sharp rise in the tax burden Access to credit and the cost of borrowing - are the banks and other lenders sufficiently recapitalised to start lending?

External influences

Shape and strength of recovery in economies of our major trading partners Ability of the global economy to coordinate a sustained recovery Growing pressures for protectionism / economic nationalism Volatile exchange rates Volatile international commodity prices Large swings in direction of foreign direct investment / international capital flows

It is really important for A2 macroeconomists to keep abreast of the news and develop a deeper awareness of what is happening and the mutliple inter-relationships between economic, financial and political forces. Are we in a substantially brighter position than six months ago? What causes turning points in cycles? The anniversary of the collapse of Lehman Bros is an opportune moment to take stock of where we are.

Some suggestions for reading

Telegraph: Too early to celebrate the end of the recession

Guardian: Recession is officially over, according to leading thinktank

The Times: House prices rise 0.8% to fuel rebound hopes