Sunday, December 17, 2017
Fall in jobs casts a new cloud over consumer spending
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

One fall in the number of people in work looks like a blip, two in succession and you might start to detect a trend. The fall in employment announced by the Office for National Statistics (ONS), 56,000 in the August-October period compared with the previous three months, is in the context of more than 32m people in work a drop in the ocean.

But it is worth watching, and it may signal the start of a significantly weaker trend after what has been an employment recovery in Britain since the financial crisis of 2007-9 verging on the miraculous. Even after this fall, it should be remembered that the number of people in work is 3m higher than it was in mid-2009, the crisis low point. In the context of that miracle, a fall in employment is unusual.

Part of that miracle is that private sector job creation has comfortably outstripped the loss of public sector jobs. The ratio of private sector jobs created to public sector jobs lost as a result of spending restraint has been roughly seven to one.

That has changed in recent months. ONS figures show that there was a rise of 19,000 in public sector employment between June and September, alongside a fall of 75,000 in private sector jobs. Public sector jobs are on the rise again, if modestly, while the private sector jobs’ machine has sputtered.

Why should that private sector miracle not continue? Growth and employment are intimately related. The puzzle has been that Britain’s growth slowdown was not reflected in the jobs’ figures. Now, with a lag that explains the puzzle, that slowdown effect is starting to come through. Slower growth in the economy means a fall in employment, or at least a levelling off, is to be expected.

Related to this, though it is not always foolproof, when any economic variable is at record levels, it is sensible not to expect it to keep breaking records indefinitely. We can debate the quality of employment in Britain but the numbers have been clear.

Whichever way you look at it, whether broken down by UK-born, UK nationals or the workforce as a whole, Britain’s employment rate has broken new ground. The 16-64 employment rate peaked at a record 75.3% in the spring and early summer, before slipping back to its current 75.1%.

You may ask why it is not possible to get the employment rate above 75% or so. There are 8.9m people of working age, defined as 16-64, who are officially recorded as economically inactive, and that number rose by 115,000 in the latest three months.

There are a number of reasons for inactivity: 2.4m of the economically inactive are students, 2.1m looking after family or home, 2.2m either temporarily or long-term sick and 1.2m retired. Of the 8.9m economically activity, most say they do not want a job, though 2m say they do. Matching that to the jobs available is the challenge, ands always has been. The number of economically inactive people who say they want a job has ranged between 2m and 2.5m for the past 25 years.

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Sunday, December 10, 2017
A hurdle overcome - now to decide where we're going
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In the past few days my thoughts, like those of the prime minister, often turned to Northern Ireland and I offer the following facts without comment. Northern Ireland accounts for 2.1% of Britain’s gross domestic product, significantly smaller than any English region, less than two-thirds that of Wales and just over a quarter of the economic clout of Scotland.

Northern Ireland’s fiscal deficit with the rest of the UK – the gap between taxation and spending – is £5,438 a head, comfortably outstripping anywhere else, and roughly twice that of Scotland. The voters of Northern Ireland came out 56% to 44% for staying in the EU in last year’s referendum.

For several days last week, it looked as though, notwithstanding all this, the issue of the Ireland-Northern Ireland border had scuppered Theresa May’s “deal to move towards a trade deal”, because of objections by the (pro-Brexit) Democratic Unionist Party, on which the prime minister’s parliamentary majority depends.

Friday morning’s breakthrough many not have entirely satisfied the DUP and, as expected, the deal on the Irish border is something of a fudge. But it is only fair to say that the agreement May came to was in most respects a very acceptable one. The so-called divorce bill has been kept to under £40bn and will be spread out over such a long timescale that in most years it would be the public spending equivalent of small change. Any role for the European Court of Justice in the rights of EU citizens in Britain will be time-limited and very much a fallback one, which should concern nobody but the Brexit ultras.

What was also significant about Friday morning’s breakthrough is what it says about the direction of future trade talks. The harder the Brexit, the more difficult, if not impossible, it would have been to avoid a hard border between Ireland and Northern Ireland. It may have been the tail wagging the dog but the border issue has undoubtedly pushed us in the direction of a softer Brexit, which is why some on the Leave side hated the deal.

Much of the kerfuffle over the Irish border could have been avoided if, as I have argued here on a number of occasions, the prime minister had not been so hasty in ruling out continued membership of the single market, the internal market. Britain came to the EU via being a founder member of the European Free Trade association (EFTA). These days three EFTA members, Norway, Iceland and Liechenstein are part of the European Economic Area and thus the internal market.

It is a rapidly diminishing hope, but there is still a very slim chance that, as we do move beyond the preliminaries and into the real talks, EEA membership will come back on to the table. As it is, it may be possible to argue that regulatory alignment between Britain and the EU, the current buzz phrase, is a sort of de facto EEA membership.

It may or may not, and the fact that nothing can be definitively ruled in or out goes to the heart of the government’s problem, and the frustration of those on the EU side. Where there should be a blueprint for Britain’s future trading arrangements with the EU there is a vacuum that vague words in prime ministerial speeches do not fill.

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Sunday, December 03, 2017
What the bitcoin bubble tells us about the economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

When the price of bitcoin makes it on to the BBC news bulletins, along with reassurances from a deputy governor of the Bank of England that when the bubble bursts it will not threaten the world economy, you know it is a breakthrough moment.

That moment was the rise last week in the price of Bitcoin above $10,000 (£7,400) for the first time, which was followed by a rise to $11,000, before a retreat back to around $10,000. The digital currency, or “peer to peer electronic cash system”, created almost a decade ago by the mysterious Satoshi Nakamoto, once worth a few cents, has never before scaled such heights.

Bitcoin and other so-called cryptocurrencies such as ether on the Ethereum platform, are in vogue. At $10,000, the digital currency is ten times its value at the start of the year and, whatever its devotees might tell you, that is unmistakably a bubble. It is a bigger and faster price surge than the Nasdaq before the dot.com bubble burst, the Nikkei before the collapse of Japan’s bubble economy or the gold price in the 2000s. It has something in common `with tulip mania in Holland between 1634 and 1637, but that too was a bubble waiting to burst.

Jamie Dimon, the J P Morgan chief executive, once described bitcoin as “worse than tulip bulbs”, while the economist Joseph Stiglitz has said it should be banned.

Could this time be different and this artificially-created currency be benefiting from a need for a safe haven from a troubled world? After all, the leader of the free world spends his time issuing deranged tweets, and his arch enemy, if that is not too Austin Powers, appears to have developed the capacity to fire missiles – though not yet with nuclear warheads – from North Korea to the whole of America.

The safe haven story does not really fit, however. Though there are risks, the world economy is enjoying its best sustained period of growth, spread across all regions, since the financial crisis. Other traditional safe havens such as gold, have not soared. The dollar is not strong. Stock markets, normally shunned in troubled times, are strong.

So the bitcoin surge appears to be specific to it and other cryptocurrencies, prompting warnings from the authorities to investors. Vitor Constancio, vice president of the European Central Bank, said it was “a speculative asset by definition” and that: “Investors are taking a risk by buying at such high prices.”

Jean Tirole, the Nobel prize-winning economist, wrote that “bitcoin is a pure bubble, an asset without intrinsic value”. And, while saying nobody could predict with certainty that it would crash, added: “I would not bet my savings on it, nor would I want regulated banks to gamble on its value.”

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Sunday, November 26, 2017
Eeyore? We need reasons to be cheerful, amid the doom and gloom
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.


It is five days since Philip Hammond’s budget and, though you should never disregard the dangers lurking beneath the surface, it remains intact. Sometimes budgets unravel quickly but sometimes it takes a little longer. This one looks as though it has some staying power.

Most of it has been well covered. There was a housing package of mixed merit, to which one can say without hesitation will not deliver 300,000 new homes a year. There was some essential sticking plaster, for the National Health Service – suggesting the government has given up on the hope of big productivity and efficiency gains – and for as yet unspecified Brexit preparations and for universal credit.

Hammond will go down as the chancellor who, against the traditions of the election cycle, loosened policy after a general election, even though there was no real room to do so, a reflection of the government’s very weak position.

Even so, his was a serious-minded budget from a grown-up politician, which should help the government. If it followed by an agreement at the EU summit on December 14-15 that “sufficient progress” has been made to move on to trade, Theresa May’s government will end the year on a stronger position than it dared hope a few weeks ago, when cabinet ministers were falling like ninepins. A government that is stable, if not strong, will help business and consumer confidence.

The chancellor borrowed more yet was able to point to a faster fall in public sector debt – relative to gross domestic product – than in March. That was partly because of the reclassification of housing associations to the private sector, which takes their debt off the government’s balance sheet, and partly the decision to raise £15bn by selling most of the government’s stake in Royal Bank of Scotland. Hammond is often regarded as a sober accountant-type but he and his officials are nothing if not creative.

What I wanted to focus on today, however, was the Office for Budget Responsibility (OBR) forecast underpinning the budget. In the old days chancellors would devise their policies and mould the forecast to fit with it. These days it is the other way around. Some would say it means the tail is wagging the dog, but it is the modern way.


In covering the economy over more years than I care to mention, even in the darkest days, I have always tried to look on the bright side. When, in the years after the crisis, many said all hope was lost if there was no change in policy, I held out the hope of recovery, which was eventually fulfilled.

Now, however, it is quite hard to do so. The strong growth the eventually started to emerge four years ago was depressingly short-lived. Just when it looked safe to go back into the water the sharks started circling again. This was meant to be a time of far stronger growth and healthy business investment, and a recovery in living standards.

Apart from the much-flagged productivity downgrade, but related to it, the OBR has come out with a disturbingly downbeat forecast. If it is right then, with the economy slowing to barely more than 1% a year from 2018 to 2020, the economy will barely be registering a pulse.

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Sunday, November 19, 2017
Hammond needs a few rabbits if he is to hang on to his hat
Posted by David Smith at 09:00 AM
Category:

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The traditional task of a chancellor at budget time is to take on the role of conjuror by pulling rabbits out of what appears to be an empty hat. Philip Hammond’s task on Wednesday is slightly different; the hat really is empty yet for his survival and that of the government he has to come up with some significant rabbits.

Budgets, it should be said, rarely change very much and, when they do so, it is often for the worst. The City is expecting a dour budget, given the very limited room for manoeuvre. But unless a few bouncing bunnies appear at Wednesday lunchtime, the chancellor’s first unified autumn budget could also be his last. I hope not.

One of those rabbits, almost certainly, will be on housing, of which more in a moment. Theresa May does not visit new housing developments for nothing, as she did last week, though she avoided the hi-vis jacket she once mocked George Osborne for turning into his uniform of choice.

Some of the budget, almost certainly, will involve creative accounting. The hat is empty , or nearly empty, because, as discussed here two weeks ago, the Office for Budget Responsibility (OBR) will downgrade its productivity assumption, removing most of the wiggle room the chancellor had allowed himself in meeting his fiscal rules.

The announcement on Wednesday that productivity, measured by output per hour, jumped by 0.9% in the third quarter, after falling in the first half of the year, will not stay the OBR’s hand. It will see this rise, brought about mainly by a fall in hours worked, as firmly in the ‘one swallow doesn’t make a summer’ category. The chancellor will want to address productivity weakness in his budget.

It isn't all bad news. The OBR, in forewarning of its productivity downgrade, pointed out that this will be partly offset by higher employment. This year's borrowing undershoot will carry over, in part, to future years.

The decision by the Office for National Statistics to reclassify housing associations back to the private sector is technical,and has no impact on the underlying state of the public finances. But it will reduce headline borrowing by perhaps £5bn a year relative to what it would otherwise be, and lower debt, and chancellors do not look this kind of gift horse in the mouth.

The pressure for higher spending, on the National Health Service, education, fixing universal credit and any number of other things, is intense,

The Treasury has been looking at ideas that will enable the chancellor to meet his fiscal target of a budget deficit of less than 2% of gross domestic product and falling debt (relative to GDP) by the end of the parliament, while giving him the leeway to spend more in the meantime.

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Sunday, November 12, 2017
Time for a pay rise? Let's see some productivity first.
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Something, it seems, is stirring on pay. After years in the doldrums, and with pay growth apparently stuck at 2% when inflation is 3%, two surveys in the past few days have suggested that, finally, things are beginning to pick up. Bearing in mind that there have been plenty of false dawns before, is this at last the moment?

One of the surveys, from the Bank of England’s regional agents, clearly influenced the monetary policy committee (MPC) when it raised interest rates earlier this month. It suggested that, in comparison with pay increases this year of 2% to 3%, the outlook for next year was somewhat higher, 2.5% to 3.5%.

The other, from the Recruitment and Employment Confederation (REC), a monthly survey of recruitment agencies, suggested that shortages of available candidates are starting to have an impact on pay. Starting salaries for permanent staff rose at their second strongest rate since November 2015.

“Anecdotal evidence suggested that candidate shortages and strong competition for staff had driven up starting salaries in the latest survey period,” the REC said. “Data indicated that rates of pay inflation were sharp across all monitored regions, with the steepest increase seen in the South of England.”

Unite, the union, is urging 9,000 Ford production workers at Ford – always a trendsetter – to accept a pay offer worth 4.5% in the first year and a minimum of 6.5% over two years.

In many respects this is not a huge surprise. Unemployment, at 4.3% of the workforce, is at its lowest rate since 1975. If the traditional Phillips curve, the inverse relationship between wages and unemployment, means anything, it should mean bigger pay rises when unemployment is this low.

Recruitment difficulties, as highlighted by the Bank’s agents and the REC survey, are increasing. Some employers are already suffering the loss of EU migrant workers, or are having to compensate for the drop in their earnings expressed in euros, Polish zlotys or other foreign currencies as a result of sterling’s post-referendum weakness.

Inflation, 3% on the basis of the consumer prices index, 3.9% according to the retail prices index, is running ahead of pay, so real wages are falling. In the past, the current combination of inflation and unemployment would be associated with average earnings growth of 5%, not 2%.

If this is the moment, it would be a cause for some celebration in official circles.
The Bank would be even more convinced that it is doing the right thing in gradually raising interest rates. Faster growth in wages would be good for the public finances and ease some of the political pressure on the government. Beleaguered retailers would have a little less to worry about.

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Sunday, November 05, 2017
A bad news budget will follow this bad news rate hike
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

So it happened. The Bank of England was not crying wolf this time and this time the boyfriend was not unreliable. There has been a wailing and gnashing of teeth from some in response to the first rise in interest rates for more than 10 years but that seems overdone.

A quarter-point rate hike is both small and fully reversible. The Bank’s credibility would have been damaged had it not acted. It cut rates last year when the purchasing managers' surveys for construction, services and manufacturing were plunging. It has raised them at a time when those surveys are stronger than expected, though confidence is weak. It was the right thing to do.

Beyond that, I do not want to dwell on it too much. The arguments were set out here last week. One thing that is worth of comment, however, is that this was a “bad news” rate hike. In the long fallow period since the last time interest rates went up there was an understanding that, when the moment came, it should be greeted as good news.

This is not because savers outnumber borrowers, which they do, but because it would be a signal that the economy was strong enough to come off emergency support. The start of normalisation would be something to celebrate.

This was not that rate hike. It came because inflation is above the official 2% target and set to stay there for some time. It came, more importantly, because the supply-side of Britain’s economy has been so badly damaged – now capable of growing by only 1.5% a year without generating inflation – that it had to happen even though growth is weak.

Through the fallow years, similarly, there was an implicit understanding that it deficit reduction – austerity – meant that fiscal policy was contractionary, it was appropriate for monetary policy, as set by the Bank, to be aggressively expansionary.

Members of the monetary policy committee (MPC) would argue that it still is; they like to use the analogy of easing off on the accelerator rather than slamming on the brakes. But the idea that monetary policy would only be tightened after the task of deficit reduction was complete, and austerity over and down with, has also taken a knock.

We will have to wait a few months for the next increase in interest rates but the next big economic policy announcements, in Philip Hammond’s budget on November 22nd, are only 17 days away.

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Sunday, October 29, 2017
The case for a rate rise may be weak - but the Bank should do it
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Small numbers can make a big difference. Had the third quarter gross domestic product figures come in at 0.3% a few days ago, this column would have been a lot more challenging to write. Yes, a rate rise this week from the Bank of England would still have been more likely than not, but it would have been a very close call.

As it was, of course, the GDP figure came in at 0.4%, weak by normal standards but stronger than the Bank and the markets expected. Now it will be a considerable surprise if we do not see a quarter-point rate hike on Thursday.

It is not, of course, a nailed-on certainty. When the Bank said in September that a majority of members of the monetary policy committee (MPC) favoured what is described as a removal of some monetary stimulus in coming months, it did not name a date.

Two MPC members, Sir Jon Cunliffe and Sir Dave Ramsden, have indicated that they will not be supporting a hike. The small difference in the GDP number may not have convinced them that growth is anything but weaker than it should be.
They may also be worried about what is coming down the track. Ramsden was the Treasury’s top economist while Cunliffe led the work 14 years ago on Gordon Brown’s famous “five tests” exercise, which kept Britain out of the euro.

Even so, the expectation is that they will be in a minority on Thursday, with the City looking for a 7-2 vote for a hike. That, perhaps, is the Bank’s first difficulty.
In the long wait for an interest rate hike, which now stretches for more than 10 years, I had always thought that when the moment came it would be a big and important enough moment for it to be a unanimous vote.

Others disagreed but my argument was that if you could not convince everybody around the table of the need for a tightening, how could you expect to convince the public and business?

This brings me onto the Bank’s second problem. Again, when thinking ahead to this point, I expected we would reach a time when the case for a rise in interest rates would be both unanswerable and easy to explain in layman’s terms.

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