Sunday, September 25, 2016
Central banks try to squeeze out the last drop
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.

A few days ago it was announced that Minouche Shafik, who joined the Bank of England as one of its deputy governors two years ago, would shortly be leaving. Her departure, to take up the post of director of the London School of Economics, was perhaps understandable; she described it as an opportunity that was impossible to resist.

It was a reminder, however, of what an extraordinary period we live in as far as monetary policy and the actions of central banks are concerned. When Shafik was appointed in 2014 she was given the role of managing the unwinding of the Bank’s quantitative easing (QE) programme, in others words organising the process by which the £375bn of gilts (UK government bonds) it has purchased were sold back to investors.

At the time, with the effects of the crisis fading and the economy enjoying strong growth, reversing QE was firmly on the agenda, as were higher interest rates. In August 2014, the Bank was working with financial market assumptions that interest rates would be 2% by now.

Things have turned out rather differently. The Bank, rather than running down QE, has just announced £60bn more of it, together with £10bn of corporate bond purchases. Interest rates have been cut to 0.25%, with the Bank’s latest minutes saying most members of the monetary policy committee (MPC) are minded to cut further, to just above zero (which could mean 0.05% or 0.1%), later in the year. It should be said that one MPC member, Kristin Forbes, has said she is not yet convinced of the need for a further cut.

When will the Bank’s QE be reversed? Will it ever be reversed? Given that it has just cut interest rates and may do so again, and given that it has just launched another QE round, any reversal is years away. The Bank, as it told us last November, will not even contemplate a back-door reversal of QE – not reinvesting the proceeds of the maturing gilts it has in its portfolio – until interest rates have reached 2%.

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Sunday, September 18, 2016
Hammond needs to get Britain's productivity mojo back
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 of the challenges Philip Hammond has set himself for his autumn statement on November 23, among many others, is to boost Britain’s productivity. In this, the new chancellor is very much following in the footsteps of his predecessors.

Gordon Brown had his productivity agenda – even at a time when productivity (output per hour worked) was growing at a rate we would give our eye teeth for now – while George Osborne had his productivity plan. Every occupant of 11 Downing Street has sought to raise Britain’s productivity game both in absolute terms and in relation to other countries. Most have struggled to make any discernible difference.

The issue is more pressing for Hammond. The productivity performance he inherits is a particularly feeble one. Though there has been a modest improvement since the depths of the crisis in 2009, output per hour across the whole economy at the end of last year was lower than at the end of 2007. Nor is there any sign of improvement. The latest labour market statistics showed a rise of 2% in the number of hours worked over the past year, roughly in line with the growth in the economy.

Eight years without any growth in productivity is extraordinary. In the previous eight years, when Brown was trying to improve it, it rose by 19%, and in the eight years before that by 20%. Something has snapped and the new chancellor’s task is to try and fix it.

Most countries have experienced weaker growth in productivity since the crisis but Britain’s performance is particularly stark. GDP (gross domestic product) per hour worked is 36% higher in Germany, 31% higher in France and 30% higher in America than in Britain. Even Italy is 11% more productive.

The weakness of productivity is not just a statistical curiosity or a matter of international bragging rights. Most people know the American economist Paul Krugman’s famous remark that “productivity isn’t everything but in the long run it is almost everything”. Productivity – getting more output out of a given input – is the key to prosperity; to living standards.

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Sunday, September 11, 2016
May starts on the long and winding road to Brexit
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.

Summer is turning to autumn, though the weather has yet to adjust in some parts of the country. An Indian summer is perhaps appropriate for post-Brexit Britain, though readers will be aware that the term originated in North America, not the subcontinent.

We are, of course, not yet post-Brexit Britain, though at some point we will be. In a moment I shall talk about the three stages of Brexit.

First, what do we know so far? The shock predicted here duly happened, reflected in a sharp fall in sterling and an immediate drop in confidence and activity. Despite a small recovery, the pound’s average value against all currencies remains 9% below pre-referendum levels and 13% lower than a year ago. Many people who in the past would have regarded a big fall in the pound as a sign of failure have become enthusiastic devaluationists.

The shock has been contained. No prediction of an immediate dive into recession was ever made in this column – I can’t speak for George Osborne – and indeed I was surprised at the extent of the slump in some of the surveys in July, which deteriorated at a faster pace than when the global financial crisis hit.

On July 31 I wrote that confidence could be rebuilt and the shock contained, as long as common sense prevailed and policymakers reacted. So it has proved.

The Bank of England, despite much misplaced criticism, has been instrumental with its “whatever it takes” measures, in turning sentiment around. All the August survey improvements followed its actions.

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Sunday, September 04, 2016
Now is not the time to get rid of cash
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.

The other day I was queuing up at the bank, waiting while the woman in front of me handed over a large bundle of cash to pay her gas, electricity and phone bills. As we waited patiently she explained to the cashier she did not have a bank account, preferring to do everything in cash.

If some economists have their way she will not be able to do this much longer. The Bank of England is about to release the new, long lasting plastic (polymer) £5 note but some economists say physical cash is a relic of a bygone age, which should be consigned to the incinerator of history.

You may recall Andy Haldane, the Bank’s own chief economist, who has been saying one or two controversial things in these pages over the summer, floated this idea in a speech a year ago. Willem Buiter, chief economist at Citi, the global bank, and a Bank alumnus, has also done so.

Now Kenneth (Ken) Rogoff, former chief economist at the International Monetary Fund (IMF), a longstanding abolitionist, has devoted an entire book to scrapping cash. The Curse of Cash, from Princeton University Press, is published this week.

Rogoff is always worth listening to. His work with Carmen Reinhart on previous financial crises – eight centuries of them – was invaluable in informing the path out of the 2007-9 crisis. His related work on government debt and the safe limits on it, while it did not go unchallenged, was influential.

Surely all this is very different from the case for abolishing cash? After all, though we do not use notes and coins as much as we used to, they still account for almost half of all payments in Britain. Cash may not be quite the king it was but it has not yet been dethroned.

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Sunday, August 28, 2016
Hammond faces a steeper climb up debt mountain
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 back to work, in my case after escaping to the Outer Hebrides, where the people were a lot friendlier than the weather and where I discovered that Breakfast means Breakfast.

On the return-to-work theme, much has been made of Theresa May’s challenging in-tray, and the fact that the new prime minister has a lot on her plate. But do not underestimate the tricky terrain faced by Philip Hammond, the new chancellor, and the Office for Budget Responsibility (OBR), which will help frame his decisions this autumn.

Hammond, who has been described as “swashbuckling” by the Financial Times, perhaps for the first time in his life, has been helped by the fact that the immediate post-referendum shock has been contained. The actions and assurances of the Bank of England and the swift transition to a new government helped a lot; do not forget that we could now have still been in the middle of a Tory leadership contest.

So did the plunge in the pound, probably not mainly by boosting exports but by encouraging more foreign visits to bargain-basement Britain, as predicted here. Selling Swiss watches to tourists has been good business, while retailers in general have done better than they feared. For a fuller reading of the economy’s performance this summer, we will this week get the first of the purchasing managers’ surveys for August, following their plunge in July.

The welcome absence of an immediate crisis only partly eases the pressure on the chancellor, however, and barely makes the OBR’s task any easier. It, remember, has the job of assessing the outlook for the public finances, not just in the short-term, but also in the medium and long-term. It will have to make assumptions about Britain’s post-Brexit future, including future trading relationships, at a time when the government is only starting to grapple with these questions.

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Sunday, August 07, 2016
The Bank's big guns won't stop us taking a hit from Brexit
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.

You will forgive me, I hope, for being in a state of excitement since Thursday lunchtime. I cannot remember exactly what I was doing in March 2009, the previous time interest rates were cut. I can confirm I had fewer grey hairs back then. But, having sometimes despaired about whether I would ever see another interest rate change, the Bank of England duly delivered.

True, until June 23rd it seemed much more likely that the next rate rise would be up rather than down, though not yet. And true, we thought we had seen the last of quantitative easing (QE) from the Bank. Its invention of a new term funding scheme (TFS), intended to ensure that the rate cut from 0.5% to 0.25% gets fully passed on by the banks and other lenders, is another initiative that owes its life to the referendum result.

I’ll come on in a moment to the Bank’s measures, and whether they will work. Even without the additional QE and the launch of the TFS, however, it was clear that this rate cut was more controversial than most. Before it was announced, some former members of the Bank’s monetary policy committee (MPC) joined other pundits in arguing against it.

One tabloid newspaper which had supported Brexit aggressively bemoaned the fact that its elderly readers were about to be hit with a double whammy of lower interest rates on their savings and higher inflation. To which the answer is, they got what they voted for. Unless, of course, those older readers backed Brexit because they believed George Osborne’s warning that it would mean higher interest rates.

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Sunday, July 31, 2016
Confidence has crumbled - but it can be rebuilt
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.

We are at an interesting moment, something which will be of intense interest to future economic historians. Business and consumer confidence have taken a battering since the Brexit vote on June 23. Is the slump in confidence an inevitable harbinger of very tough times ahead for the economy, a recession, or can it be turned around?

That confidence has fallen sharply is not in doubt. One of the longest running measures of business confidence, dating back to the 1950s, is the CBI’s industrial trends survey. Its latest reading, published a few days ago, was a bit of a shocker.

Optimism over the business situation fell at its fastest pace since January 2009, which was in the depths of the global financial crisis. The drop in confidence was similar to previous periods in the survey’s history when the economy has been in recession.

It is not just businesses which are feeling downbeat. In the immediate aftermath of the referendum GfK, which has been monitoring consumer confidence in Britain since the 1970s, released a “snap” survey showing a sharp fall.

Some suggested that this was a knee-jerk reaction which overstated the true picture, and that confidence would soon settle down. Well on Friday GfK released final figures for July, which showed that the drop was even more dramatic than it had first thought. Instead of falling by eight points, confidence this month was down by 11 points compared with the pre-referendum period.

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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

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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.

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