Economic Indicators Flashcards
Public Sector Net Cash Requirement (PSNCR)
The difference between what the Government receives and what it spends in a given year is referred to as the public sector net cash requirement (PSNCR). This is fiscal policy governed by the UK elected government.
In the long term, a high PSNCR may give rise to concerns about inflation as the Government is spending large sums of money and injecting cash into the economy – as it loosens or tightens fiscal policy.
Right now there is a massive budget deficit
between what is coming in and what is going out.
Causes of Inflation
A rising cost of raw materials for businesses
Increasing cost of labour via wages
Increased consumer demand in the wider economy
A lack of capacity in business / industry
Growth in the money supply
Retail Prices Index (RPI)
The best known measure of inflation in the UK is the Retail Price Index (RPI). It represents the average price of a basket of goods purchased by a typical household (+mortgage interest) and the current RPI series uses a base of January 1987. It is destined to be
replaced in 2030.
It is commonly used by the UK Index Linked Gilt market.
Consumer Prices Index (CPI)
The Consumer Prices Index (CPI) is another key measure of inflation used in the UK. The Monetary Policy Committee (MPC) of the Bank of England is responsible for keeping UK inflation within +/- 1% of the 2% target. The CPI took over from the RPI as the official measure of UK inflation in 2003 and many pension funds and others changed over in April 2011.
CPIH is an extension that is used by the ONS and includes housing costs and council tax, so it considered a more robust index for inflation.
Interest Rates
The Bank of England (BoE) base rate is the monetary tool used by the BoE Monetary Policy Committee (MPC) to set interest rates in the UK.
Level of unemployment
Monthly unemployment figures are considered a key indicator of the health of an economy. If unemployment is too high it may indicate a fall in production and a fall in tax receipts;
conversely, if unemployment is too low it may result in increased labour cost and increased inflation.
Frictional unemployment
Frictional unemployment is caused by changes in the economy that lead to qualified jobseekers temporally unmatched with job openings.
Structural unemployment
Structural unemployment caused by structural changes to the economy such as declines in particular industries and skills no longer being in demand.
Cyclical unemployment
Cyclical unemployment caused by changes in the overall level of economic activity and often associated with the business cycle.
Bond Yields
Rising interest rates and high inflation have an inverse relationship with bond prices: they fall and increase the running yield on bond’s which have fixed coupons, to correlate with increasing interest rates.
They have an inverse relationship to interest rates, meaning that when interest rates rise, bond prices generally fall and when interest rates fall, bond prices generally rise.
Bond yields can be a useful indicator of market expectations of future inflation and interest rates when you look at yield curves in future and compare the trend in movement of the 10 year bond price; many use it as an indicator of future market sentiment.
Equity Prices
The theory is that the price of an index signals future economic expectations and that is why the FTSE is often used as a stamp of current economic activity (and is quoted daily).
Although, 70%+ of earnings of FTSE 100 companies is derived from outside the UK and there is less and less resemblance to the UK economy.
Market sentiment is linked to behavioural finance; behavioural finance, investors often base decisions upon human emotions rather than logic or rational judgement.
UK current account
Measures the trade in good, services, investment incomes and foreign aid and is made up of visible trade (tangible assets such as commodities) and invisible trade (services such as tourism).
If there is a surplus, then the country in question may be seen to be building reserves which it can then spend, this is an indicator of strength within the economy.
If there is a deficit, a fall in the value of its currency may be needed to make imports more expensive and exports cheaper to balance the trade. The deficit may be made up from the capital account when considering the overall balance of payments.
UK capital account
Measures the trades in capital inflows of capital and investment and outflows of the same. Investment can be in anything, including bonds, equities, property and so on.
There is a surplus if the country receives more in capital inflows than it’s overseas investment.
Gross Domestic Product (GDP)
GDP is the value of economic activity generated by factors of production from within the country’s domain.
GDP represents the total MARKET VALUE of all FINAL goods and
services. The growth of an economy’s GDP is used as a measure of its economic growth.
GDP is the output of the UK of those firms (British and Foreign) based in the UK
Role of the BoE
To act as “lender of last resort”, ie. in terms of Royal Bank of Scotland and the Financial Crisis of 2009.
To control the UK’s money supply to act as banker to the government and other banks.
To act as a supervisor of other banks and major financial institutions.
