Identify where the country is in the business cycle
LEEDS, England: Down the road from the train station here is a gaping hole. At the height of the property boom, a developer started to build what was to become one of the tallest and most stylish apartment blocks, designed by Philippe Starck.
But construction stopped abruptly last month when financing dried up because of the credit crunch. Now the abandoned site stands as a stark symbol of the collapse of Britain’s building boom and how the credit market turmoil in the United States has seeped across the Atlantic. It also suggests what lies ahead for a few other European economies where property booms gave now debt-ridden consumers a false sense of wealth and security.
In recent weeks, Britons have come to an uncomfortable realization: After 17 years of uninterrupted growth, their economy is moving closer to recession and may well already be in one. Home prices are dropping, sapping consumer confidence, and even though repossessions, bankruptcies and unemployment are still at relative lows, they have started to creep up during the last three months.
Just Thursday, figures released by HBOS, the largest mortgage lender in Britain, showed the housing market slump was gathering pace. The average price of a property fell 8.8 percent in the 12 months through July, the biggest drop since the company started to track prices in 1983.
But the Bank of England is caught in a bind. It is unable to lower interest rates to keep the economy growing because, at the same time, inflation looms. It left lending rates unchanged at its meeting on Thursday.
Britain’s economy is in worse shape than most in Europe, with the exception of Spain and Ireland, because of its heavy reliance on two industries that currently struggle the most: housing and financial services.
Now, many of Leed’s office buildings stand empty and their once trendy glass facades are cluttered with “For Sale” signs.
New developments, like the Lumiere project next to the train station, are being canceled as banks withdraw their financing. Another development, the “Kissing Towers,” which would have provided 300 new apartments, was shelved last month.
North of the city center the picture is even bleaker. Overflowing garbage containers stand in front of boarded-up houses, and the city’s charities are bracing for a busy autumn and winter.
Repossessions are creeping up, and even property prices in London have started to fall, with values of homes in the most expensive neighborhoods, including Knightsbridge, down by 1.6 percent in July.
The housing problems have started to threaten Vivienne Cockcroft’s small business.
Cockcroft sells secondhand clothing and furniture out of a warehouse she rents here, but rising rent and utility costs are forcing her to either move or close down. “Our cash reserves are being eaten away and even moving would mean job cuts,” she said, referring to her eight employees.
Economists say the global credit market turmoil has yet to work its way fully through to the wider economy. Only recently has unemployment, now at 5.2 percent, started to creep up, and Britons are still managing to keep up with payments on their record total personal debt of $2.8 trillion. Indeed, personal bankruptcies were down in the second quarter, though at a slower pace than the trend had been.
“Businesses still need money,” said Adam Tyler, chief executive of National Association of Commercial Finance Brokers. “There’s just nothing out there.”
- Identify where the country is in the business cycle? Explain why this is a problem.
- Prescribe both an appropriate monetary and fiscal policy to “fix” the economy? Support why each policy will “fix” the problem.
- Explain how an average person would be affected by one of your government policies.
- Identify the opportunity cost of one of your policies.