Economic News 2-9 September 2012

A weekly round up of some of the economics news stories in the Sunday papers and from the last week

On Track?

The Telegraph reports that 15 contracts for train operating companies to run rail franchises in the UK are due to be decided between now and 2018. The process of awarding rail franchises in our privatised rail system is under intense scrutiny with Virgin Rail starting a legal action and trying to use as much political influence as it can to overturn the award of the West Coast line to FirstGroup. Virgin Rail criticise the Department of Transport for flawed decision making when assessing the realism of bids submitted to win a new franchise. FirstGroup outbid Virgin by more than £1 billion for the West Coast route - can they possibly hope to deliver on their promises and forecasts? More transport economics blog entries here

Pressing the accelerator when the handbrake is on

A2 students will be familiar with the policy of quantitative easing (QE) - used by the Bank of England as a way of increasing the amount of money in the banking system in a bid to stimulate lending to businesses and households and support a recovery in demand when the economy is weak. At the time of writing the total value of the QE programme authorised by the Bank of England is £375bn. Remember too that policy interest rates have remained at 0.5% since March 2009! The debate about the effectiveness of QE will rumble on for some time to come and this week the Bank's chief economist Spencer Dale made a speech which suggested that QE might be doing more harm than good. You can read the speech here

The essence of his view is that simply pressing on the monetary accelerator when other factors are causing demand, production and jobs to be weak can prove counter-productive in the medium term, especially if it increases the threat of a rise in inflation. Dale believes that the crutch of QE might be preventing the economy re-balancing and re-structuring at a more rapid pace - does it allow more inefficient businesses to remain in place for longer? Has the time arrived for monetary policy to take more of a back seat when it comes to demand stimulus? Have we reached the limits of effectiveness for conventional and unconventional monetary policy measures? Might a rise in policy interest rates actually boost demand? More blog entries on quantitative easing here.

Building more homes - which matters more - easier planning or easier mortgage availability?

The construction sector is an industry where activity is both seasonal and cyclical. Seasonal because quite a bit of new building work grinds to a halt if there is a severe winter. And cyclical because the ebbs and flows of the construction industry are closely connected to the broader economic health of the nation. Little wonder that the government is made keen to get more new homes built, even though it is making deep cuts to capital spending as part of it's deficit reduction plans. It wants the private sector to take up the reins but with each passing month, the statistics on new housebuilding continue to disappoint.

David Smith is the economics editor of the Sunday Times and we recommend that enthusiastic economic students have a look at some of his articles each week as a way of keeping in touch with some important macroeconomic issues. Today he comments that the ease with which potential home-buyers can get a mortgage is crucial to hopes of a recovery in the building industry. Relaxing planning regulations including allowing people more freedom to build extensions and conversions is fine and looks plausible. But in fact there is already sufficient planning permission given to build over 400,000 new homes, the reality is that they are not getting started and many developments are left unfinished. In the money markets, home-buyers face a triple whammy of rising mortgage arrangement fees, rising interest rates and very high deposits required to clinch a mortgage deal. Together with continued weak expectations for house prices and it is clear to see that hopes of a construction-led recovery are fragile. Housing market blog entries can be found here.

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