Sunday, July 24, 2016
Bank will fight the economic downturn, not the upturn in inflation
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

PMI2.jpg

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

2015 was an unusual year, though not as extraordinary as 2016 is turning out to be. Last year was strange because for the first time in more than half a century there was no inflation at all. Inflation, which in one way or another has dogged most of our lives, disappeared.

Indeed, there were three months last year when Britain experienced technical deflation; consumer prices lower than a year earlier. Before anybody writes in, not all inflation disappeared; there was still plenty of it in the housing market. But the overall price level stabilised.

That brought direct benefits to households. Even modestly rising average earnings of 2% to 3% looked good when set against zero inflation, delivering solid gains in real incomes and boosting consumer confidence.

Inflation remains very low now. The latest figures, for June, showed a rate of just 0.5%, up from 0.3% in May. We have, however, said farewell to the days of zero inflation, and of flirting with deflation. From here, the direction is up.

Some of this was going to happen anyway, as a result of the recovery in oil and commodity prices, and their earlier falls dropping out of the year-on-year comparisons. It has been given an additional boost, of course, by the pound’s post-referendum fall.

(More...)
Sunday, July 17, 2016
Osborne: much better than his critics said, but plenty of unfinished business
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

osbornesack.jpg

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

So no more George Osborne. Hello Philip Hammond. But 0.5% Bank rate, the record low rate that lasted for the whole of Osborne’s chancellorship, lives to fight another day. I’ll come on in a moment to the question of whether the Bank’s decision not to cut on Thursday was the right thing to do.

On Osborne, the game was up for him in the early hours of Friday June 24, though he made a spirited effort to demonstrate he was irreplaceable in the days that followed. Sadly, none of us are.

I’d like to say I’ll miss my fireside chats with the former chancellor at No.11. I’d like to say it but I can’t. They never happened, and they won’t now.

I do, however, feel quite a lot of sympathy for him. The referendum was David Cameron’s idea, not his. No chancellor, and certainly not Osborne, would have taken the risk. As it is, Cameron left office with the cheers of the House of Commons ringing in his ears, while Osborne left by the back door of 10 Downing Street.

Now it is over, how should we view the Osborne supremacy? Was he a good chancellor? There have been few recent chancellors who have divided opinion more. My view is that he was not as bad as his critics alleged, nor quite as good as he and his supporters thought.

(More...)
Sunday, July 10, 2016
Why we should all mind Britain's very large gap
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

mindthegap2.png

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

This continues to be a record-breaking time, though the records being broken are not necessarily those you would want. So, the pound’s peso-style two-day fall in the wake of the referendum was the biggest in the post-Bretton Woods era, in other words for four and a half decades.

Consumer confidence has also taken a tumble, according to a snap assessment published by GfK on Friday. Having been very high – last year was the best year for confidence in the more than 40 years GfK has been surveying it – the post-referendum dive was the sharpest for over 20 years. People may be more worried about their jobs. Another firm, CEB, which monitors online job postings, says they almost halved in the week after June 23.

These things will, as I noted last week, take time to fully reveal themselves. The problems in commercial property which have led to the suspension of withdrawals in several property funds may be the isolated difficulties of an overextended sector or the canary in the coalmine. It is reassuring, I hope, that banks have been stress-tested against a 30% fall in commercial property values.

This week I want to concentrate on what is potentially both a short-term and long-term problem for Britain. I had planned to look at the current account deficit regardless of the referendum outcome. It is timely to do so now.

(More...)
Sunday, July 03, 2016
Carney in a battle to head off a post-Brexit recession
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

carney-jun30.jpg

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

What an extraordinary time it has been. During the worst of the global financial crisis I wrote that we had 10 years of big economic and financial stories crammed into about 10 weeks. Something similar has been happening in the past few days.

Even leaving aside what is going on at the top of British politics, which is completely barking, this is an action-packed time. Remember all that agonising about whether Britain’s AAA sovereign debt rating would be downgraded? On Monday, the last remaining AAA rating, from S & P, vanished with a big downgrade and Fitch, another agency, also took us down another notch.

Sterling has tumbled but not yet collapsed, though has hit a 31-year low, while the stock market has almost been a caricature of itself; despair followed by euphoria. I would like to take some reassurance from the euphoria bit though, thinking back to the crisis, I recall that the FTSE-100 was still surprisingly buoyant in the late spring of 2008 and gave little sign of the horrors to come.

Meanwhile, as if on cue, official figures reminded us of one of Britain’s important sources of vulnerability. The current account deficit in the first quarter – the red ink on the balance of payments - was a worryingly large 6.9% of gross domestic product, only marginally down on the record 7.2% of the final quarter of 2015.

So what is going to happen? We are still in a state of limbo in terms of the economic impact, short and long-term, of the referendum decision. There is some preliminary evidence that consumer confidence has taken a hit and a lot of talk of cancelled investment projects but very little hard evidence.

(More...)
Sunday, June 26, 2016
I'm not going to sulk - we have to make the best of a bad job
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

euflagtorn2.jpg

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

For many people reading this, Friday morning will have dawned as a moment of triumph, of liberation. That was not how I saw it, as you might have gathered from my series of pre-referendum pieces. But, admittedly after a dishonest campaign, the voters decided otherwise. Democracy does not always throw up the outcomes we would like, or think sensible. We face a poorer and more uncertain future.

Despite his “no regrets” statement in Downing Street on Friday, I doubt if David Cameron now thinks that of the referendum that is bringing an end to his prime ministerial career. You only ask a big question of voters if you are sure of the answer. Downing Street thought it was sure of the answer as late as Thursday evening but it was wrong. As it is, a Tory prime minister Sir Edward Heath is most remembered for taking Britain into Europe 43 years ago, and Cameron will go down in history as the prime minister responsible for taking us out.

The Cameron-George Osborne double act, meanwhile, does not have much further to run. As with the referendum outcome, people will have mixed feelings about this. The chancellor has had more than his fair share of setbacks, particularly since last year’s election. As he joked himself, his version of the 5:2 diet is one in which in two out every five budgets he has to eat his words.

Osborne wanted to be remembered as the chancellor who took over at a time of crisis and, while courting unpopularity, fixed the public finances, alongside some long-term reforms, including pensions. Now, the abiding memory will be of the warnings on the economy that he commissioned or co-ordinated not being enough to persuade voters. Indeed, if the evidence of the polls is anything to go by, those warnings backfired with many voters. It is not hard to think who might succeed Cameron as prime minister. A successor to Osborne is rather harder to think of.

Osborne’s efforts were not enough, and neither were those of the overwhelming majority of economists, including highly respected bodies such as the Institute for Fiscal Studies (IFS). Businesses, big and small, were much less influential than expected, even locally. Nissan’s presence was not enough to prevent a big vote for Brexit in Sunderland, nor Honda in Swindon, nor Airbus in Flintshire.

(More...)
Wednesday, June 22, 2016
10 reasons to vote to stay in the EU
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

ballot-box.bmp

The moment has arrived. The biggest decision voters will take for decades is hours away. Most are unprepared for it, and with good reason. The referendum campaign has also revealed a new and unattractive type of politics in Britain. Just over a year ago we had what was in most respects a conventional general election. Manifestos were published, costings were made, and policies were tested. There was humour, and in the main it was good-humoured. This campaign has been very different, partly because battles within parties are always more fraught than those between them – there has been very little brotherly or sisterly love on show – partly because of the way the immigration card has been played, and partly because of a blatant disregard for facts, overwhelmingly by Vote Leave. Anything goes, and with it the truth.

For those of us who think there is not a credible or remotely sensible case for voting leave, what can we say to influence those who have yet to make up their mind? Here are 10 reasons to stay in the EU, which Britain has made a success of.

1. Crises are best avoided. Nobody can be sure that there will be a sterling crisis, within a wider financial market crisis, if Britain votes to leave. But enough people are saying it to make it highly likely. And it could be very nasty. People may think that these market gyrations are not relevant to them. They are wrong. Memories of the banking crisis of 2008-9 are too recent to mean we can ignore these things, and bank shares - here and in Europe - would come under pressure in the event of a Brexit vote. A sterling plunge, meanwhile, affects everybody, through higher food prices, higher petrol prices, a general increase in the price of imported goods and more expensive foreign holidays. And don’t believe the nonsense about Brexit lowering prices. Negotiating new arrangements for, for example, food imports, will take years, if they can be negotiated at all.

2. Self-inflicted long-term economic damage is never a good idea. The issue is not whether the economy heads straight into recession, though it easily could. It is that over the long-term, on all the plausible analysis, the economy will be smaller, and people on average poorer, with employment and living standards lower, if we vote to leave than if we were to stay in the EU. This would be the first time I can remember that voters would have voted for a poorer future.

(More...)
Sunday, June 19, 2016
A hard pounding - and with so very little to show for it
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

poundeuro.jpg

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

The moment is nearly upon us. Like the Scottish referendum in September 2014 but with even more at stake, a nerve-racking few days lie ahead. Either way, we will wake up to a different world on Friday morning , a very different one in case of a vote to leave.

One point is worth making. It is that economic models tend to underestimate the impact of shocks, as we saw in 2008. Some people say leaving the EU will be a little like leaving the European exchange rate mechanism (ERM) in September 1992. Apart from the fact that both narratives involve a plunging pound, the similarities end there. In 1992 we left a currency arrangement after 23 unhappy months having joined, as was said then, at the wrong rate, the wrong time and for the wrong reasons.

Leaving allowed an overvalued pound to come down to earth, and made room for big cuts in interest rates, which are simply not an option this time. As for sterling’s fall providing us with the elixir of export-led growth, it did not happen after the pound’s 25% fall in 2008-9, and there is no reason – with world trade depressed – it would be any different now.

Voting to leave the EU after 43 years in which our economy has become increasingly intertwined with the rest of Europe, and done well out of it, would be a very different proposition to being kicked out of the ERM. Even leaving the ERM made the Tory economic brand toxic for years. Apart from the economic and financial fallout, the political instability that would result from a Brexit vote would be much bigger. Whether this would be helped or hindered by George Osborne’s threatened £30bn emergency austerity budget – and whether it would happen - is one of the many questions that would arise.

(More...)
Sunday, June 12, 2016
Britain does very well in the EU - we would be daft to leave
Posted by David Smith at 09:00 AM
Category:

euukflags.jpg

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

It is time to put up or shut up. Should we stay in or leave the EU? Those who have been following my pieces in recent months will not be surprised by my verdict. The economic and business case for remaining in the EU is conclusive. We would damage ourselves, potentially badly, by leaving. We should stay in.

I do not want to concentrate on merely avoiding the negative consequences of leaving the EU. Later I shall set out the benefits Britain obtains from EU membership, our “dirty little secret”.

Before that, let me explain my verdict. When I started thinking and writing about the referendum after last year’s general election, it was without strong preconceptions. I always opposed euro membership for Britain and have written for this newspaper about the Swiss, Norwegian and other alternatives to EU membership, often to the intense irritation of politicians.

So what decided me? Three things. Britain’s economy is convalescing from the biggest financial shock in a century. Just a few years ago we came close to the edge of the abyss. We are still living in the shadow of the crisis.

To have one shock was careless; to impose a second, self-inflicted shock before we have got over it would be an act of stupidity. All the credible analysis – even from credible pro-Brexit economists - shows there would indeed be such a shock. Leaving the EU will mean a period of turbulence, and a significant hit to growth and jobs – GDP by 2020 between 2% and 6% lower than would otherwise be the case – and a big rise in public borrowing which can either be ignored (which international investors will not like) or require tax hikes or deeper spending cuts.

There might have been a time when we could happily accept a shock of this kind, with growth strong, the world economy buoyant and interest rates high enough for the Bank of England to be able to cut them aggressively to alleviate the pain. But this is not it.

(More...)