Public Sector Net Cash Requirement (PSNCR)

Question 1

What is the Public Sector Net Cash Requirement (PSNCR)

Answer 1

This allows us to understand whether a particular economy is running at a surplus (more money coming in than going out) or a deficit (more going out than coming in) and therefore if there is a need to borrow money (this is where the UK currently sits).
This is difference is called the Public Sector Net Cash Requirement i.e. how much money is needed to operate

Question 2

How does the economic cycle affect PSNCR?

Answer 2

1. Recession = PSNCR will grow as tax receipts (income) fall and government spending to address unemployment (expenditure) rises, creating a deficit.
2. Expansion = PSNCR will fall as the deficit reduces as tax receipts (income) rise and government spending (expenditure) will fall.

Question 3

How does the economic cycle impact on fixed interest?

Answer 3

When the economy is strong, demand is high for goods and services. The higher demand, the higher inflation is likely to become. To counter this interest rates will rise. When interest rates in the market rise, the return on fixed interest will become relatively less attractive meaning that prices fall. Equally, in times of slowdown, interest rates are cut to promote growth. This makes the return on fixed interest relatively more attractive and demand increases. With increased demand, the price of the bond will increase. There is an INVERSE RELATIONSHIP between the price of bonds and interest rates. This is important to understand for the exam as it is a key fundamental point in investment.

Question 4

How does the economic cycle impact on
equities?

Answer 4

Equities will tend to rise and fall in price with the economic cycle. In the early stage of growth in the economy the price begins to pick up. As confidence increases demand rises and peak at the top the cycle. As
interest rates are increased to counter the boom, this can put pressure on businesses and despite strong growth share prices can begin to suffer. As the economy contracts, share prices fall as a result of rising interest rates and lower earnings/profits.