1. Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 12:  The impact on markets of economic data  Gross Domestic Product  Balance of Payments  Public Sector Net Cash Requirement (PSNCR)  Level of unemployment 12cis

2. Impact on markets of economic data In addition to inflation measures, like the CPI and RPI, there are other economic statistics which have a direct bearing on the price or value of investment products These statistics are often called economic “indicators”, because they indicate how well the economy is performing. They are watched carefully by the government and by financial analysts  Gross Domestic Product (GDP)  Measurement of economic output  Balance of Payments  The sum of UK’s transactions with the rest of the world  Public Sector Net Cash Requirement (PSNCR)  Difference between government expenditure and income  Level of unemployment  The extent to which those seeking work cannot find work

3. Gross Domestic Product (GDP) GDP is a measure of a country’s output  It is the value of all goods and services produced in the economy over a given period of time (usually one quarter, i.e. three months)  Note: economists tend to use the words “product” and “output”, and “income” and “expenditure” interchangeably for the same thing GDP is the sum of…  Consumer spending  Investment  Government spending  Exports Minus…  Imports Formula is Y = C + I + G + (X-M)  Y  C  I  G  (X-M)

4. Gross Domestic Product What that all means:  Consumer spending (C)  Spending by households on goods and services  Investment (I)  Spending by firms on new capital goods, including buildings, factories and equipment  Government spending (G)  Spending by the government on goods and services  Imports minus Exports = Net exports (X-M)  The value in pounds of our purchases of foreign-made goods and services, less the value of goods and services that foreigners are buying from us These four categories of expenditure give us GDP, because when taken all together, they buy up every bit of output produced in the UK over a given period CISI eLearning Hotspot

5. GDP: all you really need to know… If GDP is steadily increasing:  Economy is usually in a healthy state  But watch out if most of that growth is coming from government spending fuelled by borrowing o That government spending may not be sustainable If GDP has declined for two successive quarters:  Two quarters of negative growth is defined as a “recession”  In an economic recession, consumers spend less, jobs are lost and output falls  The government usually tries to make up for this by spending more o But if the government has built up too much debt and cannot borrow any more, it can’t step in to make up for the shortfall

6. Balance of payments Balance of Payments  The sum of UK’s transactions with the rest of the world GDP is the sum of…  Consumer spending  Investment  Government spending  Exports Minus…  Imports  NX Much of the Balance of Payments data is captured within the GDP data anyway, but analysts like to split it out and look at it in detail. In Financial Services, analysis are interested in the Balance of Payments because of its link between interest rates and the exchange rate  The exchange rate is the rate at which the pound is exchanged for other currencies, such as the US dollar or the euro

7. Balance of payments: all you really need to know… The balance of payments is an indicator of:  A country’s international competitiveness  If a country is importing more than it is exporting, perhaps its goods and services are more expensive than its overseas competitors’, or of poorer quality  The extent to which a country is living within its means  Over the past 15 years, US consumers borrowed heavily to buy foreign-made products, building up a huge balance of payments deficit for the United States How to improve a country’s international competitiveness  Allow the currency to devalue  If the pound weakens, it becomes cheaper for foreigners to buy UK products How to devalue your currency  Lower your interest rates  Foreigners won’t buy pounds if they can only earn 0.5% interest on the deposits Pound vs the euro during the Credit Crunch year

8. Balance of payments The UK exporters have benefited from the weakening of the pound sterling against the currencies of their major competitors. This has resulted in a sharp improvement in current account of the balance of payments, which measures goods and services.

9. Public Sector Net Cash Requirement (PSNCR)  The PSNCR is the difference between government expenditure and income  The PSNCR used to be known as the public sector borrowing requirement, or PSBR  The PSNCR measures the amount the government has to borrow to meet all its expenditure commitments The term “fiscal deficit” is also used for the PSNCR  “Fiscal” means anything relating to taxation  Therefore a fiscal deficit means a shortfall of tax revenue needed to fund expenditure; usually expressed as a % of GDP

10. HM Treasury 2010-11 estimates 2010-11 government spending£704.0bn 2010-11 government revenue£541.1bn ------------- PSNCR£162.9bn

11. Public Sector Net Cash Requirement (PSNCR) In a buoyant economy, tax revenues are strong  Corporate profits are healthy  corporation tax receipts are good  Employment is high  income tax receipts are good  Consumer spending is strong  revenue from consumption taxes, such as VAT, is good When a country is in recession, the opposite happens  Corporate profits are weak or have turned into losses  corporation tax receipts sharply down  Employment is falling  income tax receipts are sharply down  unemployment benefit payments are up sharply  Consumer spending is subdued  revenue from consumption taxes, such as VAT, falls sharply

12. The National Debt A succession of fiscal deficits since 2003 has pushed up accumulated debt to its highest level since the 1960s (when the UK was still paying off the cost of World War II) Public sector accumulated net debt (the national debt)  UK Public sector accumulated net debt (national debt) is expected to peak at 73% of GDP by 2012-13.

13. Level of unemployment A key economic indicator is the rise or fall in the number of people seeking work but are unable to do so There will always be some unemployment in an economy:  Structural - where industries are in structural decline through lack of competitiveness.  Mining is a good example of this, huge job losses occurred in the late 80’s.  Frictional – caused by time lag between one job and the next.  Seasonal – found in sectors such as agriculture and tourism.  Cyclical – due to downturn in the business cycle

14. Key Trends in UK unemployment  A long period of falling and then low unemployment from 1992 (Recession peak) until 2008  Steep increase in unemployment following Credit Crunch and global recession but not as bad as many feared  The British Chamber of Commerce forecasts that total unemployment will continue to rise to a peak of 2.65 million (8.4% of the workforce) in Q1 2011. http://news.bbc.co.uk/1/hi/busines s/8354971.stm http://news.bbc.co.uk/1/hi/uk_polit ics/8354383.stm