Sunday, January 14, 2018
Britain does infrastructure well - let's build on that
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.

Recently I was at a meeting in which someone was extolling the virtues of French infrastructure, its railways, its (toll) motorways and an energy sector which is the world’s largest net exporter of electricity in the world, including to Britain.

Then somebody else asked whether they had ever travelled by Eurostar from St Pancras, the magnificently restored and modernised London terminus – with its pianos, fashionable shops and statue of John Betjeman (who helped save St Pancras from demolition) - to Gare du Nord, its Paris equivalent. It is a journey from high-quality infrastructure to a dirty, run-down relic of a bygone age. And if you do not believe me look at the Trip Advisor reviews. As for motorways, the M6 toll in the Midlands has never been a commercial success but compares well with anything in France.

This month has seen the opening of the new London Bridge station, yards from this newspaper’s offices. The station, London’s oldest, has been extensively modelled and modernised, looks magnificent, and will look even better when the work is completed, with the reconstruction for the most part done while the trains were still running.

There are plenty of other examples of Britain doing infrastructure very well. Crossrail, which will begin offering fast services across London at the end of this year, looks to be an extraordinary engineering achievement in a city where underground space was severely limited. With a fair wind will be followed by Crossrail 2. And, while there has been an infrastructure bias towards London, needed for a modern capital city which at one time had a badly creaking infrastructure, there are plenty of other good examples around the country.

Look, for example, at Birmingham New Street station, now a pleasure to use and a great asset to Britain’s second city. Both Severn Bridges, linking England and Wales, were great engineering achievements at the time of their construction, and this year will go toll-free. Most people will be able to cite good examples of new infrastructure in their region. Travelling around, I certainly can.

Many of Britain’s universities have used their borrowing powers and the income from foreign students to transform and expand their campuses. The problems in the National Health Service do not, in the main, arise from a lack of physical capacity, expanded and modernised in the 2000s, but the squeeze on day-to-day spending.

Praising Britain’s infrastructure is not a normal position for anybody, including me, to take. It is very easy to see only the negatives and that for too long a period too little was invested. George Osborne’s hope, that investment by pension funds and insurance companies in infrastructure would replace direct investment by government came to much less than hoped. The institutions were concerned about taking on the risk of large public projects and, without them doing so, there was less incentive for government to involve them. Regulations also proved to be a significant constraint on institutional; involvement in financing new infrastructure.

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Sunday, January 07, 2018
The most important trade deal is on our doorstep
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.

I always try to start a new year in a mood of good cheer, and it is only in the past few days that I have come to realise the comic possibilities of Brexit. While some would call it a black comedy, who could fail to have been amused by David Davis’s “dog ate my homework” embarrassment a few weeks ago when the 58 detailed sectoral Brexit studies he had boasted about turned out to be nothing of the sort.

Then there was Theresa May’s dawn dash to Brussels in December to secure an agreement, days after the Democratic Unionist Party had scuppered a deal to move on to the second phase of Brexit negotiations. There will no doubt be more such dashes; not so much shuttle as shuttlecock diplomacy.

Many people have also seen the comedy in the activities of Liam “Air Miles” Fox, the international trade secretary, who is reported to have travelled 219,000 miles in the 18 months since he took on the job. He provoked mirth by holding out the possibility of Britain joining the successor to the Trans-Pacific Partnership (TPP), the trade grouping apparently fatally wounded by Donald Trump’s withdrawal.

With America out, the grouping consists of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Though Britain is not committed to replacing America in a new pacific partnership, Fox has not ruled it out and his ministerial colleagues say geography is no barrier to Britain’s participation.

The cue for the mirth is that this is happening as Britain is leaving a perfectly good trade arrangement with the European Union, an export market more than five times the size of the 11 TPP signatories. It is also that, whatever ministers may say about geography, it matters hugely for trade and, Brexit or not, Britain is not about to be towed into the Pacific.

I am no cheerleader for Fox but the barbs seem a little harsh. Travelling around the world is exactly what a trade secretary should be doing. The international trade department, started from scratch in the wake of the Brexit referendum, and having to cope with a gap of more than 40 years since Whitehall last had expertise in trade negotiations, has gone about its task in a sensible way.

In contrast to Davis’s Brexit department, known as DEXEU, where staff turnover is running at 9% a quarter and where the top civil servant, Oliver Robbins, was moved to the cabinet office in September to co-ordinate negotiations for the prime minister, the trade department is quietly getting on with it.

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Sunday, December 31, 2017
How jobs and interest rates surprised the forecasters
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 table accompanying this piece, which is essential, can be accessed on the Sunday Times website,and in the newspaper.

So what kind of year was it? A good one for the global economy, with increasingly broad-based growth and a sense that the deadly grip of the financial crisis was starting to ease. For Britain, it was a year dominated by Brexit, as was always inevitable. We have not seen the last of these years.

A year ago my annual forecasting league table, a staple of the economic calendar, caused controversy because it showed that forecasters had a good year in terms of predicting the economic numbers, even though most of them did not anticipate the biggest development in 2016, the vote to leave the European Union.

This time there was no such problem. Forecasters knew what was coming in 2017 and in that context many of the forecasts were very good. The consensus at the start of year was a little low on both growth and inflation, though not decisively so.

I should say that we do not know precisely what growth in 2017 will have been, and even when we do the figures will be prone to revision. I have estimated 1.7%, following the release of the third quarter national accounts just before Christmas. But 2017’s growth could have been higher or lower than this.

The same applies to the balance of payments, where again we only have three quarters of current account data but my number, a rather eyewatering deficit of £90bn, will be close to the eventual outturn.

Inflation is easier. The figures do not get revised and we know that consumer price inflation was 3% in October and 3.1% in November.

That brings me on to the two biggest surprises, for forecasters looking ahead early this year, as far as the economy was concerned. The first was interest rates, for which I have sympathy with the forecasters.

At the start of the year the Bank of England had passed up on its earlier hints about a second post-referendum cut in interest rates in November 2016, but a further rate reduction still appeared to be on the cards. That and the fact that we were approaching the 10th anniversary of the last hike in rates meant that no change was the safest forecast at the start of the year. The tiny number of forecasters who did predict a rate rise are to be congratulated, though in most cases they expected growth in the economy to be significantly stronger than it was.

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Sunday, December 24, 2017
Only an end to the uncertainty will lift all our spirits
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 was John Maynard Keynes, the greatest economist of the 20th century, who taught us about the importance of confidence, or as he dubbed it “animal spirits”, in the economy. As he put it in his General Theory of Employment, Interest and Money in 1936, “most of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits — a spontaneous urge to action rather than inaction”.

As we approach the end of an interesting year, there is no doubt that animal spirits are lacking in Britain. The world economy is enjoying a revival but this country is in the slough of despond. Friday’s modest gross domestic product revision reflected growth that occurred more than a year ago. The question is whether anything can be done to lift the spirits.

Consumer confidence has been negative (more people expect things to get worse than better) all year, according to the closely watched GfK survey. The December reading, of -13, is lower than the levels the index tumbled to in the immediate aftermath of the EU referendum in June last year.

In 2015, consumer confidence enjoyed its best year in the survey’s history, with zero inflation and strong employment growth leaving households very chipper. Now, Joe Staton of GfK foresees further declines in confidence in 2018 after what he describes as a “slipping and sliding year”.

The animal spirits of consumers are important, and will help determine how the economy does in 2018. Animal spirits are, however, usually associated with business, and here they are notably absent. The latest results of the Bank of England’s decision maker panel, established to probe the implications of Britain’s withdrawal from the EU, were released a few days ago.

The panel, of about 2,500 executives from small, medium and large businesses across all sectors, is run by the Bank with Professor Paul Mizen of Nottingham University and Professor Nicholas Bloom of Stanford University.

Members have been disappointed by sales growth over the past year and expect a slowdown next year. Sales growth in cash terms, 4.9% in the year to the third quarter, is expected to slow to 3.7%. That slowdown is alongside continued high inflation, which they expect to slow only modestly from its current 3.1% to 2.6%. The panel is also gloomier about jobs, with recruitment growth expected to be lower in 2018.

The panel, interestingly, is more downbeat about wage prospects than are the Bank’s regional agents. While the agents see a modest upturn, the panellists think that wage growth will, if anything, dip from this year’s 2.6% to 2.5%. They also offer little succour to those who expect that falling migration from other EU states will boost wages, with an even split between those expecting to see stronger wages and those anticipating them to weaken.


As things stand, some businesses are squeezing wages to compensate for the impact of sterling’s fall on costs such as raw materials, while others are boosting wages to compensate for the rising cost of living.

The big picture, which explains the lack of animal spirits, is that businesses think they face a weaker sales environment because of Brexit. Asked about the impact on sales in 2020, by a margin of 45% to 18% they expect a fall. The most exposed sectors are those that export to the Continent, and include high-value professional services, manufacturing, transport and information and wholesaling and retailing. In each of these, the probability of a drop in sales in 2020 is put at between 25% and 35%.

Every survey tells a similar story. The Lloyds Bank Business Barometer has edged slightly higher but concludes that “firms remain concerned about the outlook”, with larger companies particularly worried about Brexit.

The Recruitment and Employment Confederation found a rare unanimity among 200 employers it surveyed, with not one expecting economic conditions next year to be less challenging than in 2017, and a decline in confidence about investment and hiring decisions.

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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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