Sunday, January 10, 2021
With every lockdown we lose some more of our economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Normally at this time of year not much happens and, during the period of limbo when most of the data refers to last year, it is sensible not to draw too many conclusions about what is going on. This year, however, not much is happening for a different reason. Lockdown 3 has followed hard on the heels of Lockdown 2, with only a few short weeks of tiers in between.

Nobody wants this third lockdown but this is not to deny its necessity. Indeed, the main criticism of the government should be that it has been too slow to grasp the nettle, not trigger-happy. Governments in all parts of the UK have made errors. The Welsh government followed its 17-day October-November firebreak with a big relaxation of restrictions and, as a result, at one stage recently had the highest infection rate in the world. The Johnson government’s lurches before and after Christmas did nothing for confidence and may be only belatedly successful in bringing down infection numbers.

Lockdowns remain controversial. There were restrictions in earlier pandemics but on nothing like this scale. But some of the people arguing that Covid-19 is a hoax, or that lockdowns do not work in limiting its spread, are like those arguing that, despite his heavy defeat and appalling behaviour Donald Trump really won the US election. Indeed, there is often a crossover between these groups.

The misuse of statistics by the coronavirus and lockdown sceptics is as irritating to the statisticians as their other antics are to frontline NHS staff. Nick Stripe from the Office for National Statistics (ONS) tweeted some interesting facts about what happened last year, up to December 25.

The year started with “excess” deaths below the average of the previous five years but that quickly changed with Covid-19 in March. In total there were 73,000 excess deaths in England and Wales last year. From late March to Christmas Day, the excess was more than 78,300.

There were more than 600,000 deaths in England and Wales last year, for the first time since 1918, when the Spanish flu pandemic began. Adjusted for population, there were more excess deaths than in any year since 1940, when the country faced a different kind of threat. We know that without restrictions and social distancing, these figures would have been much higher.

The first lockdown had a crunching impact on the economy, not least because a lot of things closed, including factories and construction sites, which did not need to. The second, in November was milder. This one will be closer to November than March-April, the main uncertainty being how long it will last.

That has shifted some analysts, who normally focus on economic and financial data, to try to come up with vaccination and case number scenarios. David Mackie of J P Morgan is using a matrix of vaccination numbers – under which low would be 200,000 a day, high 300,000 – infections and lockdown compliance. He concludes that while at first blush it looks as if a nine-week lockdown, to March 10, looks likely, the situation could be better than that, allowing the toughest restrictions to be lifted in six weeks, on about February 12. The government is suggesting a longer haul but that is better than overpromising on the timing of exit, as is its wont.

What about the economics of this? There was a lot of excitement about double dip recessions in the aftermath of the global financial crisis but, though it was close, we never quite had one. That means the last one was nearly half a century ago, in the 1973-5 period; three consecutive quarters of falling gross domestic product in 1973, followed by another two in 1975.

The recent picture for UK GDP is dispiriting. The economy was doing badly in 2019, with successive quarterly growth rates of 0.1%, 0.5% and zero from the second quarter. It then shrunk by 3% in the first three months of this year (at the time the biggest fall in the post-war period) then that enormous 18.8% slump in the second quarter. As things stand, the 16% jump in GDP in the third quarter looks like the aberration, and raises the question about whether, after such a short reprieve, we should call it a double-dip recession at all.

Sunday, January 03, 2021
Five reasons to be cheerful - and two to worry about
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Rarely, as we start a new year, has the gap between hope and reality been so wide. The reality, as far as the economy and business in concerned, is the prospect of weeks, maybe many months, of lockdown or near-lockdown restrictions. It makes it, by my reckoning, the worst start in the very many years I have been following these things.

You may ask, what about the start of 2009, when the economy was reeling from the collapse of Lehman Brothers the previous autumn and the teetering on the edge of much of the banking system? But gross domestic product (GDP) fell by “only” 1.7% in the first quarter of 2009, one of its two biggest quarterly falls during the financial crisis, and we will be lucky to get away with anything as small as that during the coming quarter.

The gap between hope and reality struck me most when looking at some of the absurdly hyperbolic tabloid “boom” headlines which followed the EU-UK trade deal and the rolling over of most of the EU’s trade deals with other countries, the latest big one being Turkey.

But, without going down that daft road, let me offer some reasons for hope. In fact, let me offer you my version of the 5:2 diet, which some people may be needing just now. In my case, it is five reasons to be optimistic, and two to be still concerned.

I shall stick with Brexit for my first. However thin the EU-UK trade deal is, and it is, it is better than the short-term chaos of a no-deal Brexit. There is a view that a deal was done because Boris Johnson convinced the EU that he really was mad enough to contemplate a no-deal Brexit.

But a basic free trade agreement was always on offer, and the EU has many more reasons to be happy with it than Britain. Its comparative advantage is in goods, particularly manufactured products and food, the UK’s in services, particularly business, professional and financial services. The deal preserves that advantage, albeit with a but more friction, while doing nothing for the services that make up the vast bulk of the UK economy.

Alongside that, Liz Truss, the international trade secretary, has got on, quietly for her, in rolling over those EU deals. The Brexit deal will still damage the economy in the medium and long-term but avoiding most of the short-term chaos of a no-deal Brexit and a schism in Britain’s trade relations with other countries has to be better than the alternative.

Second, while Covid-19 still stalks the earth, this will be a good year for the global economy, and when it does well, the UK should not be too far behind. The global economy shrunk by between 4% and 4.5% in 2020 and leading forecasters expect it to grow by 4% or 5% this year, led by China.

We should put that in perspective. 2020 saw the biggest downturn in the global economy in living memory. The 2009 recession saw global GDP drop by 1.7%, on World Bank figures, and that was followed by a brisk 4.3% recovery in 2010, though it did not necessarily feel like it. But a global rebound is better than stagnation, or worse.

Sunday, December 27, 2020
A dire year for the economy - and for forecasters
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

The forecasting league table referred to in this piece is also available alongside my column on

This extraordinary year is ending with as much to be worried about as at any time during it. People like me often bandy around words like uncertainty but in normal times, there is nothing like the doubt that we are experiencing at the moment. We worry about the health implications of the new Covid-19 strain, and we worry about the economic implications.

The Brexit deal finalised on Christmas Eve was better than a catastrophic no-deal and should be welcomed for that. But businesses were exasperated and damaged by its last-minute nature. There will still be disruption. And the adverse effects of this narrow deal will occur over the medium and long-term.

This has been a year of extraordinary numbers, including the worst-in-300-years recession which will see gross domestic product (GDP) fall by around 11%, and some quarterly lurches, the likes of which I hope will prove to be a one-of; down nearly 19% in April-June, and up 16% in a July-September period for which I am already feeling nostalgia.

To set this year’s 11% fall in context, it is roughly equivalent to the sum of annual growth rates for the previous six years. This year’s budget deficit, put at nearly £400bn by the official forecaster, is equivalent to more than the previous six years combined.

Rishi Sunak has set himself two dates for 2021. The first is March 3, when he hopes to deliver his second budget, a year after his first. The second is the end of April when, on current plans, the furlough scheme is due to start being wound down. That suggests a budget while the labour market still requires significant government support. At one time or another the government has directly supported more than 12.5m jobs, including the self-employed.

Before coming on to my forecasting league table – brace yourself – a couple of honourable mentions from me for what they have done this year. David Owen and his colleagues at the investment bank Jefferies International, were quicker than anybody at using informal indicators to track the economy during the course of the Covid-19 crisis. His assessment of what was likely to happen to gross domestic product (GDP) during the first crucial lockdown phase and the third quarter recovery was remarkably accurate.

I’d also mention Howard Archer of the EY Item Club, not so much for his forecast, but for his tireless monitoring of the data. Not a day goes by without him picking up on and analysing new statistical information on the economy and it is extremely useful.

I should also single out the Office for National Statistics (ONS), which provides much of that data. It has adapted what it does, providing timelier indicators on both the economy and the course of the pandemic, in very difficult circumstances. It has dome a great job, and I can even forgive it releasing important statistics at 7 am.

Sunday, December 20, 2020
Inflation is back - but so far only for house prices
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

For those fearing that inflation will be one of the economic consequences of the pandemic, and the extraordinary measures introduced to combat it, the latest figures showed that it is not happening yet. Far from it. Consumer price inflation fell to just 0.3% last month, admittedly during the second national lockdown, when non-essential shops were closed.

Is this the lull before the storm? Will the economy’s post-Covid bounce, coupled with the inflationary effects of this year’s huge public borrowing and quantitative easing (QE) bring higher inflation? This would not be the first government to inflate away debt.

Before coming on to this question, it is worth noting that the drop in inflation, from 0.7% in October, is producing a significant boost to real pay. When the coronavirus crisis broke, it first looked as if wages were taking a big hit and that people were taking pay cuts to hold on to their jobs. Annual growth in average earnings turned negative in the spring.

That now looks to have been purely a feature of the furlough scheme, when many private sector workers had 80% of their wages paid by the government and their employer did not top up the rest. Overall pay growth has now picked up to 2.7%, with regular pay up 2.8%, both in the August-October period compared with a year earlier.

The public sector is leading the way, with pay growth of 4.1% on a year earlier but the private sector is catching up fast, at 2.3% and rising. In each case, the growth in earnings comfortably outstrips inflation.

Back to inflation. What is going to happen? The most prominent inflation worrier is
Tim Congdon, the veteran monetarist economist, and his Institute for International Monetary Research (IIMR). He says a “reasonable forecast” is that this year’s exceptional growth in the money supply, driven by quantitative easing (QE) will see inflation above 5% in Britain, America and the eurozone at some stage over the next two years.

Annual growth in the UK#s M4 broad money supply measure was 13.1% in October. The annual inflation (deflation) rate in the eurozone last month, by the way, is -0.3%.

Earlier rounds of QE did not lead to higher inflation but this year’s efforts have been bigger and more concentrated. And there is a better prospect of a strong bounce in economic activity than for example after the financial crisis.

The latest consumer confidence reading from GfK, released on Friday, showed that people want reasons to hope, and perhaps that they are ready to spend when they can do so freely again. Though the fuss about the Christmas relaxation of restrictions may have dampened the mood since the survey was conducted, GfK’s consumer confidence barometer showed a seven-point rise, with consumers more upbeat on both the outlook for the economy and their own personal finances.

“It’s safe to say that consumers are looking for good news and they have found it in the form of the UK’s Covid-19 vaccination programme getting underway, which has lifted the mood,” said Joe Staton of GfK.

One ingredient for a potential rise in inflation, the eventual release of pent=up demand, thus looks to be there. The consensus among economists is for growth of more than 5% next year, the strongest since 1988, admittedly after this year’s weakest performance for more than three centuries.

There is quite a wide range of predictions around that consensus, it should be said, with optimists expecting an even stronger bounce and pessimists a recovery from the crisis that will be in low single figure percentage terms. Parts of the country, it is clear, will limp into 2021, amid new tougher restrictions announced in recent days.

The best way to think of the inflation outlook is as a tug of war. On the one hand we have had a huge monetary stimulus whose aim, after all, is to push inflation higher. When it is all hands to the monetary pumps, as it has been this year, it is hard to calibrate whether enough or too much has been done. This is not an exact science.

Without wanting to sound like the famous two-handed economist, on the other hand we will have spare capacity bearing down on inflation. Unemployment will rise further and be a lot higher than before the coronavirus crisis for some time. The “output gap” – economy-wide spare capacity – will be there for a while.

Who will win the tug of war? Inflation forecasts for the coming year do not suggest that most economists are unduly worried about a surge in inflation. The latest compilation of independent forecasts by the Treasury shows that on average the expectation is for inflation of 2% by the end of 2021, in line with the official target. There are a range of views within that, however, with the lowest inflation forecast 0.8% and the highest 3.7%.

Sunday, December 13, 2020
Now investment prospects go from bad to worse
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

When it comes to Brexit, definitions of what is last minute are pretty flexible. As I write this, we are still waiting to see whether it will be a no deal or the thin deal the two sides have been trying to negotiate. The pendulum has been swinging towards the former, though it is always capable of swinging back.

Brexit has now re-emerged as the main risk to recovery. Figures a few days ago showed that gross domestic product rose by a modest 0.4% in October, its smallest increase since the recovery began in May. That left it 1.9% above its third quarter average, which would normally be a good basis for growth in the current quarter.

Since then, however, we have had the November lockdown. It was always the case that its impact would be small compared with the March-April lockdown. Professor Costas Milas of Liverpool University notes, in addition, that data on the UK-wide stringency of restrictions, from the Blavatnik School of Government at Oxford and others suggests that last month was not that much different in terms of restrictions than October.

To that can be added the fact that some economic activity has been stepped up in anticipation of Brexit. UK exporters have been getting their products into the EU and vice versa, hence some of the damaging congestion at ports.

Netting all this out, the economy may suffer only a small setback this quarter, if it
does so at all. Brexit, though, represents a significant risk in the early months of next year, when it is likely to be combined with further post-Christmas Covid restrictions. The sunlit uplands provided by coronavirus vaccines will still be there, but probably not until the spring.

Even when we get into the sunshine, though, it is unlikely to shine on business investment. A strong investment revival still seems like a distant prospect. The EU referendum in June 2016 killed off a decent recovery in business investment, leaving it 20% below what it would otherwise have been on the eve of the pandemic, according to the Bank of England, since which time the situation has gone from bad to worse.

The Office for Budget Responsibility (OBR), the official forecaster, predicts that after a pandemic-related 18.1% fall in business investment this year, next year’s “recovery” will be a mere 1.2%. That compares with figures of 15.1% and 7.5% for consumer spending. Consumers will get their mojo back a long time before businesses do, it thinks. Only in 2022 will there be a reasonable pick-up in business investment, the OBR suggests. It will, however, take until 2023 before business investment gets back to depressed 2019 levels, and that is on the assumption of a smooth Brexit.

This is even with the incentive, which should be very important for small and medium-sized firms, of a £1m annual investment allowance, a temporary measure which has been extended by the Treasury until the beginning of 2022.

The OECD, which recently released an updated global economic outlook, is even more downbeat about UK business investment, warning that “feeble investment” will weigh on the recovery and that “business investment will remain weak due to spare capacity and continued uncertainty”. Business investment next year will be running at 80% of pre-Covid levels, it says, and warns of “high risks of rising trade barriers, reduced labour mobility and lower foreign direct investment”, particularly in the context of leaving the EU without a deal.

Sunday, December 06, 2020
If the Scots want independence, they'll have to pay a lot for it
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

These are heady days for supporters of Scottish independence. Fifteen polls in a row have shown net support for independence among those likely to vote, the latest from Ipsos-Mori for STV showing 56% support for Scotland breaking free from the rest of the UK.

Support for Scottish independence has risen as a result of the Covid-19 crisis. It could have gone either way. Scotland’s death rate per million people from the coronavirus in recent weeks has been higher than in England, although the cumulative total is slightly less, as it is lower than in Wales, though higher than Northern Ireland’s.

Scotland has benefited massively from the UK’s ability to borrow vast sums to fund its crisis response, with the help of the Bank of England, and has gained massively from UK schemes. As its own independent economic and fiscal forecaster said in September: “The largest increase in spending in Scotland has been through UK-wide schemes.” Separately, the Scottish budget has been boosted by 14% since the projections set out in February, “largely driven by extra funding from the UK government”.

Despite all this support for independence has grown, because of the perception that Nicola Sturgeon, the Scottish first minister, has had a good crisis, while Boris Johnson has had a bad one. Even the Scottish Tory leader concedes that she has the better communication skills. Johnson’s jovial old Etonian schtick does not work north of the border. He was toxic even before he described devolution as “a disaster”.

It is Sturgeon, however, who has again exposed the Achilles heel of independence; the economics of it. Her announcement of a £500 bonus for “Scotland’s life-savers and care-givers” – all NHS and care home workers - together with her plea to the UK government to waive tax on it, has again highlighted the weakness of Scotland’s public finances. The Scottish government describes the bonus as an “investment of around £180m”.

Every country is borrowing hugely this year because of the pandemic. The official forecast for the UK budget deficit this year, 2020-21, is £394bn, 19% of gross domestic product. But Scotland went in this crisis with a budget deficit of 8.6% of GDP, compared with 2.5% for the UK as a whole, according to its own GERS (government expenditure and revenue Scotland) exercise, published in the summer.

Scotland’s budget deficit this year is likely to be a sky-high 26% to 28% of GDP, according to calculations by David Phillips of the Institute for Fiscal Studies, and it will stay above 10% of GDP for years even when this crisis is over. If anything, this year’s deficit could be even higher, because of recent additions to spending. As the IFS pointed out: “Under full fiscal autonomy or independence, the deficit would be the Scottish government’s responsibility, and the need for tax rises or spending cuts would be starker.”

Sunday, November 29, 2020
Sunak's talk of emergency can only knock confidence
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

You may have seen a report a few days ago which highlighted people’s lack of understanding of basic economic concepts. The report, based on a survey by the Economics Statistics Centre of Excellence and the National Institute of Economic and Social Research, showed that fewer than half of people knew what gross domestic product (GDP) was when presented with a range of definitions.

Most, 67%, knew that the government was running a budget deficit – I don’t know what the other one-third has been doing during this year – but only 40% knew that that meant government spending was higher than tax revenues.

Welcome to my world. This is meat and drink for those of us who think basic economic understanding should be part of the school curriculum and made available to every adult. Perhaps it helps explain some of the things that have been happening in the past few years.

Though people who have made it this far into the Business section are much more economically aware than most, some of the emails I get show there is still work to be done. Among the public at large, budget deficits and trade deficits are commonly confused, as is government debt and international debt. And don’t get me started on the difference between real-terms changes – those adjusted for inflation – and changes in cash, or nominal, terms.

This brings me on to Rishi Sunak. Chancellors have a duty to explain, and this chancellor has won plaudits for his clarity and the speed of his response to the crisis. I defy even the most economically aware member of the public, however, to have followed his jargon-filled and statistics-heavy spending review statement when it was delivered in the House of Commons last Wednesday, without benefit of the accompanying documents.

That was not my main concern. In rehearsal, the chancellor’s opening burst – “Our health emergency is not yet over. And our economic emergency has only just begun” - may have sounded suitably Churchillian. But it jarred, and it jarred badly.

I know what was meant, that the economic effects of this crisis will be around for years, and there will be bills to pay in future, though Sunak has been noticeably coy about saying anything about future fiscal policy. But as a description it was a strange one, and if his aim was to undermine confidence, this was how to go about it.

The “economic emergency”, which it has been, began in March and, as far as the economy is concerned – our old friend GDP – reached its low point in April, seven months ago. A 23% recovery from that low point by September and a 15.5% rise in GDP in the third quarter show the extent to which that recession low is in the past, not something to be suffered in the future.

Sunday, November 22, 2020
In a deep fiscal hole - and the government is still digging
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

November can be a cruel month for chancellors. The last thing Rishi Sunak wanted was a second national lockdown and on Wednesday we will all find out what the additional measures he has been forced to put in place, including the extension of the furlough scheme until March, will cost.

On Wednesday the chancellor will announce the results of his one-year public spending review, covering 2021-22, the fiscal year starting next April. Shortly after that the Officer for Budget Responsibility (OBR) will unveil its latest fiscal assessment and economic forecast.

There is plenty to consider on both fronts. On the face of it, the spending review will process has been a gain for the often wasteful defence budget and a loss for overseas aid and for public sector workers, who face a one-year pay freeze. The chancellor could yet surprise us and not cut overseas aid from the 0.7% of gross national income the government delivered even during the austerity years, or not freeze public sector pay, but both have been briefed. So the Ministry of Defence has been celebrating what Sunak himself has described as the biggest defence boost in nearly 30 years. I shall come back to that.

More attention, I suspect, will be devoted to the latest assessment from the OBR. Its last assessment, in its fiscal sustainability report in July, set out three scenarios. Even in the most optimistic it expected gross domestic product (GDP) to drop by more than 10% this year, which would mean the biggest annual fall since 1709, which as you will know, was the year of the Great Frost. This month’s national lockdown will have tilted the balance towards a bigger rather than smaller hit to GDP.

I read a headline the other day saying that the chancellor faces the worst hit to the public finances since the war. That was hardly news. In August, the OBR updated its central scenario to take into account Sunak’s July economic measures, to predict a budget deficit of £372bn this year.

Nothing like that has ever been seen before in peacetime, either in comparison with its cash level – the previous peak was £158bn during the financial crisis – or as a percentage of GDP, which is the high teens.

This week’s OBR exercise will take into account the chancellor’s many variations in his winter economic plan, originally announced in September with a new and less generous job support scheme but later modified to include the extension of the furlough scheme, initially for this month and subsequently until the end of March.

It is not all one-way traffic. While the monthly public borrowing figures have broken records this year, they have come in below what the OBR feared. Figures released on Friday showed that public sector net borrowing was £22bn last month, for a cumulative total of £215bn so far this fiscal year. That is lower than the cumulative figure of £291bn for the first seven months of the fiscal year consistent with the OBR’s projections. This week’s figures will be horrible but they might not be as horrible as they could have been.