Bubble Business and Economics News Roundup

ECB President Mario Draghi
ECB President Mario Draghi

Ahead of next week’s budget, Chancellor George Osborne announced further cuts to public spending in an interview on the Andrew Marr show. Osborne said the UK needs to live within its means, as he claims the world is “more uncertain” than at any time since the financial crisis struck. The additional savings would be equivalent to 50p out of every £100 the government spends, which could amount to as much as £4bn in spending reductions. However, the Chancellor was reluctant to set out where these cuts would come. The announced cuts come only four months after the Autumn Statement, in which Osborne was much more positive about the state of the economy.

Bank of England Governor Mark Carney said that leaving the EU is the “biggest domestic risk to financial stability”. Carney claims Brexit would cost jobs, have a negative impact on the housing market, and hit the City of London. Furthermore, he claimed that some financial institutions have already made contingency plans to move in the event of Brexit and the ensuing uncertainty. In his appearance before the House of Commons Treasury Select Committee Carney also insisted that fears of Brexit have led to downward pressure on the pound.

The European Central Bank (ECB), somewhat surprisingly, cut the benchmark interest rate from 0.05% to zero, in an attempt to reinvigorate the sluggish European economy. The ECB also decreased the interest rate on the deposit facility to –0.40%, which means that it will cost commercial banks more to hold money than to lend it to customers. Additionally, the stimulus effort will be supported by an increase in the amount of assets the ECB buys monthly. From April onwards, the ECB’s quantitative easing programme will be increased to a whopping €80bn a month. Markets initially responded favourably to the announced measures, but enthusiasm quickly faded. The ECB has repeatedly tried to stave off low growth and deflation over the past few months, but to no apparent effect so far.

In a Brookings Institution paper released last week, economists David Byrne, John Fernald and Marshall Reinsdorf argue that the total-factor productivity (TFP) slowdown during the last decade is not due to the mismeasurement of the gains from innovation in IT-related goods and services, as has been claimed repeatedly by entrepreneurs in Silicon Valley. It is true, the authors concede, that the effect of IT-related innovation on GDP has been underestimated. However, if one fully accounts for the impact of technology on output, the productivity slowdown looks even worse. Other economists, such as Robert Gordon, have argued that although technological innovation is still prevalent, the rate of innovation has slowed down. Moreover, technological growth is unlikely to return to 20th century levels due to a combination of factors, such as worsening wealth inequality and an ageing world population.

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