Sunday, October 14, 2018
A new dawn for pay - or another false one?
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.

It has been a very long time in coming. So long indeed, that looking forward to a meaningful revival in pay and productivity has become the economic equivalent of Waiting for Godot. I won’t spoil the plot of the play but when I saw it, it went on a bit.

But has the moment finally arrived? The latest figures on productivity – the amount we produce for every hour we work – showed an uptick. As the Office for National Statistics reported, there was a 1.4% rise in the year to the second quarter, and this was the seventh successive quarter in which productivity had grown on this basis.

A sustained revival in productivity, as noted here, is the perhaps the most important positive development that could happen to the economy. I don’t have to quote Paul Krugman’s deadpan observation that “productivity isn’t everything but in the long run it is nearly everything”, but I will.

Productivity is the ultimate driver of economic growth and any improvement helps competitiveness, the public finances and is intimately connected to pay. And on this, it was a neat coincidence that Andy Haldane, the Bank of England’s chief economist, appointed a few days ago to also chair the government’s new industrial strategy council – with part of its aim to raise productivity – is also more upbeat on pay.

In a speech to the Acas Future of Work conference, he discussed the “puzzling pattern of rich jobs but poor pay growth”, the biggest reason for which has been weak productivity. As he put it: “Productivity growth pays for pay rises, at individual firms and for the economy as a whole. Over the past ten years, productivity has barely grown in the UK.” A lost decade for productivity largely (but not entirely) explains the lost decade for real wages.

But now, he suggested, a new dawn is breaking for pay. Average earnings growth has picked up to 2.9% and the Bank’s own evidence on private sector wage settlements suggest they are running at 2.8% so far this year, and above 3% in IT and construction. The 1% public sector pay cap, he noted, “has now been lifted and decisively so.” And, perhaps most tellingly: “Measures of labour market tightness have increased to their highest levels since before the crisis and, in some cases, ever.”

When a member of the Bank’s monetary policy committee speaks of stronger pay growth, there is always a swings and roundabouts aspect of it for households, certainly those with mortgages. The stronger that pay is, the more emboldened the Bank will feel in raising interest rates.

But the central question is a different one. Is this really a new dawn for productivity and pay? Just when we were ready to go home, has Godot lumbered into view?

Let me take productivity first. The ONS, when reporting the upturn, also noted that at 1.4%,”this remains noticeably below the long-term trend observed before 2008 when productivity growth averaged nearly 2% per year”. There are also a couple of clear caveats about the figures.

Sunday, October 07, 2018
A Brexit deal by Christmas? Even that's too late as uncertainty bites
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.

And so it goes on. Businesses hoping for clarity on Brexit from the party conference season were hoping in vain. With less than six months to go, there are at least six different possibilities.

They include a failure to negotiate a withdrawal agreement with the European Union; a failure to get a deal through parliament; a second referendum – now more or less backed by Labour; a general election; and an extension of the Article 50 Brexit process. Labour has helpfully said it will oppose any deal negotiated by Theresa May, while the Tory “chuck Chequers” crew seems happy to join Jeremy Corbyn in the division lobby when the time comes.

The possibilities also include, of course, an outbreak of sweetness, light and common sense on both sides and an agreement to leave the status quo in place during what is likely to be a long transition during which Theresa May’s “deep and special partnership” with the EU is negotiated.

There are signs of optimism this weekend from EU officials, including the Commission president Jean-Claude Juncker, that an agreement on withdrawal is close, and this has boosted the pound. However, it is not yet clear what the solution will be to the Irish border issue, though it could involve Britain effectively staying in the customs union for a very long time, and Brussels is a very long way from accepting Mrs May's Chequers' proposals as the basis for future negotiations.

Were there to be an agreement in the next few weeks there would be a huge sigh of relief from business. I am sceptical of whether it will bring a significant “deal dividend” for the economy, as promised by Philip Hammond at the Tory conference, but it has to be infinitely better than a disruptive and highly damaging no-deal Brexit. As a way of killing of Britain’s car industry, and others, no-deal would be hard to beat.

The chancellor, who was deprived by the prime minister of the chance to announce the ninth successive fuel duty freeze in his speech – a tax that is withering on the vine so badly that it cannot be too long for this world – has to manage the “sunlit uplands” that will follow a deal; the promised end of austerity next year. This for a chancellor who reportedly told cabinet colleagues that there was no money left after the National Health Service’s 70th birthday settlement.

All that will come later. For now, the uncertainty persists. What impact is it having? That the economy has slowed is not in doubt. Latest official figures show that gross domestic product (GDP) growth has slowed to 1.2%, just over a third of its rate in late 2014 and early 2015, when the economy was getting into its post-crisis stride. Growth in the first half of the year was its slowest for six years, when the eurozone crisis was bearing down on Britain’s economy.

The interesting thing about the growth slowdown is that it is more or less in line with the view of the majority of economists, and me, about the likely short-term consequences of Brexit, which is that Britain’s GDP would be around 3%, or roughly £60bn, lower by 2020 as a result.

Sunday, September 30, 2018
No need to get queasy about the unwinding of QE
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 America’s Federal Reserve raised interest rates on Wednesday, nobody was much surprised. The increase, the eighth since the US central bank began to move away from its crisis level of near zero interest rates, takes the official rate to a new target range of 2% to 2.25%.

That is still very low by past standards and, with luck there may not be many more rate rises to come. There will be another this year, in December, and maybe two or three next, but the Fed no longer regards monetary policy as “accommodative”, central banker language for stimulating the economy.

Alongside the Fed’s announcement was conformation that it will continue unwinding its quantitative easing (QE), by $50bn (£38bn) a month from October. It brought barely a murmur.

QE remains one of the most controversial policies embarked on by central banks to pull their economies back from the brink and avoid a re-run of the Great Depression of the 1930s. The Fed is close to the 10th anniversary of its launch of QE, while for the Bank of England it began a decade ago next March, alongside a reduction in official interest rates to what was then an all-time low.

Since then, the Fed, European Central Bank, Bank of England, Bank of Japan and others have done around $14 trillion (£10.7 trillion) of QE, of which £435bn has come in Britain from the Bank. $14 trillion is a big number; if you want to put it in perspective it is nearly a fifth of the combined gross domestic product of every country in the world.

From its launch, QE has been widely misunderstood. Many thought it was all about bailing out the banks, which it was not. Other predicted a great inflation, even a hyper-inflation, as central banks turned on the monetary taps, and were embarrassingly wrong.

Once people saw how easy it was for central banks to electronically create money and purchase assets – the Bank’s QE vehicle is known as the asset purchase facility – eyes began to light up. Why not electronically create money to build roads, bridges, houses, hospitals or schools, or give every household a big cash bonus?

Those arguments, misguided as they were, have not gone away. Some are still determined to see QE as a magic money tree. There are other arguments about QE, which is the policy has benefited the holders of assets, and thus increased inequality. But an asset purchase programme was always going to benefit the holders of assets, mainly pension funds and insurance companies, and any marginal increase in wealth inequality looks like a small price to pay for avoiding more serious economic damage and deflation.

What we are now seeing in America, and will see at some stage in Britain, is one of the essential components of QE, its reversibility. The assets, mainly government bonds, that were purchased, can be sold back. That is what kept the policy honest, and anchored, as distinct from a Weimar Republic, or Zimbabwe-style exercise in money-printing.

Sunday, September 23, 2018
Combine Labour and Brexit for the stuff of nightmares
Posted by David Smith at 09:00 AM


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

The Labour party that gathers for its annual conference in Liverpool this weekend has a spring in its step. Across the aisle in the House of Commons Labour MPs see a Tory party tearing itself apart over Brexit. Oppositions are there to pick up the pieces when that happens and Labour is ready to do so.

It is not clear where Theresa May goes next, after the drubbing her Chequers proposals received at the EU summit in Salzburg, but when she says that it is a choice between her deal (bravely assuming it is not already a dead parrot) and no deal, Labour would beg to differ.

They would see a general election as the obvious course if the prime minister goes down to defeat either in Europe or in parliament, which is one reason, apart from Jeremy Corbyn’s longstanding Euroscepticism, Labour has not moved behind a second referendum.

Though under a different leader Labour could expect to be well ahead in the polls, probably with the kind of huge lead Tony Blair enjoyed over John Major in the run-up to the 1997 election, Corbyn will see the neck-and-neck position it enjoys, after a summer dominated by rows over antisemitism, as a good base camp from which to launch an assault on the summit.

Many things have been going Labour’s way. There is nothing better for the main opposition party than a government in a state of extreme disarray; the Tory government has lost seven cabinet ministers since November and there is open revolt among some of its backbenchers.

The report of the left-leaning Institute for Public Policy Research’s Commission on Economic Justice, which in many ways could be seen as a blueprint for a future Labour government, was put together not just by Justin Welby, the Archbishop of Canterbury, but among the other commissioners were Dame Helena Morrissey of Legal and General Investment Management, Dominic Barton, McKinsey’s global managing partner and Catherine McGuinness, a senior committee chairman on the City of London Corporation.

The 10th anniversary of the Lehman Brothers collapse has given Labour a chance to revisit the excesses that led to the financial crisis. As John McDonnell, the shadow chancellor, put it in his recent speech to the Trades Union Congress: “Let’s be clear. The financial crash was caused by the deregulation of the banking system, the finance sector and greed. It turned the City into a giant casino. “

The responses to the crisis, such as quantitative easing, he went on to say, meant that the “reckless speculators” who caused it ended up benefiting from it. Meanwhile, ordinary folk were made to suffer from the “grinding austerity” impose by the Tory-led government elected in 2010.

Labour is on a roll in another respect. If last year’s general election was a test of whether voters, fed up with austerity and a 10-year squeeze on real wages, would vote for a left-wing party, Labour passed with flying colours. Its share of the vote, 40%, was up by a third on 2015, when Ed Miliband was leader and the Tories won an overall majority. The number of votes cast for Labour, 12.9m, was only exceeded once by Blair in his three victories, way back in 1997.

Sunday, September 16, 2018
Pay's up - but don't put out the bunting just yet
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.

According to my well-thumbed Collins French-English dictionary, déjà vu literally translates as ‘already seen’. Mostly, however, we think of it as the sensation of having lived through something before, which can be disconcerting.

I say this because, to quote the great American baseball player Yogi Berra, no relation to the bear of similar name, I am getting déjà vu all over again. The source of it is close to home for all of us; pay.

The latest official figures brought news that regular pay in July was 3.1% up on a year earlier, its strongest rate of growth for three years. Private sector pay growth (3.2%) was at a three-year high, while the public sector (3%) has not seen stronger growth in earnings for six years.

For those of who you like these things, if regular pay growth had picked up to 3.2% across the whole economy, it would have been the strongest since December 2008.

The picture for total pay, including bonuses, was slightly less remarkable. It was also up by 3.1% in July but this was only the strongest since last December. Even so, it was better than expected.

So why the sense of déjà vu? It is because this is not the first time in recent years that pay growth has appeared to be breaking higher, only to subsequently disappoint. Just when the Phillips curve appears to be working – the lower the level of unemployment the higher the pressure for pay rises – it has gone on the blink again.

Is it for real this time, or another false dawn? Are we about to see a sustained acceleration in pay growth, to the relief of beleaguered retailers and the government, if not the firms forced to cough up?

Let me first set out the case for the prosecution. One argument for faster pay growth, plainly, takes up straight to the Phillips curve. The unemployment rate did not fall further in the latest three months but at 4% it remained at its lowest since the winter of 1974-5. Back then, by the way, annual pay growth was about 25%. And, while the rate of unemployment may not have changed this summer, its level fell by 55,000 in the May-July period.

Those who think something is definitely stirring, such as George Buckley, an economist with Nomura, the Japanese investment bank, point to other ways of measuring the acceleration in pay growth as slack in the labour market is used up. Annualised private sector pay growth in the past six months is 3.4%, he points out.

There is another factor, highlighted by the Bank of England in the minutes of its latest meeting, the outcome of which – an unsurprising interest-rate hold – was announced on Thursday. One of the factors holding pay down in recent years is that people have been more reluctant to change jobs than in normal times.

Sunday, September 09, 2018
Austerity had to be done - but did it lead to Brexit?
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 looking for the real-world impact of the events of a decade ago, people who had never heard of Lehman Brothers then, and may still not have heard of them now, will be able to tell you two things. One is that stagnant productivity has gone in hand with stagnant real wages; in both cases the worst performance not just for decades but for centuries. The other is austerity.

I shall leave productivity and wages for another day, though there is always something new to say. There is also something new to say on austerity, particularly in the context of the Commission of Economic Justice report published a few days ago, and championed by Justin Welby, the archbishop of Canterbury.

It is easy to forget just how much the events of the autumn of 2008 transformed, for the worst, the economic and fiscal outlook in Britain. The Treasury’s March 2008 budget, under the title “Stability and opportunity: building a strong, sustainable future”, was six months after the run on Northern Rock and in the same month that Bear Stearns, the US investment bank, had to be bailed out.

The outlook, however, was expected to be barely clouded by these events, with growth predicted of 2% in 2008, 2.5% in 2009 and 2.75% in 2010. The budget deficit would be 2.9% of gross domestic product in 2008-9, 2.5% in 2009-10 and 2% in 2010-11.

If you don’t want to know the score, look away now. This was when the then Labour government insisted it was meeting its fiscal rules and the policy of the Tory opposition, crafted by David Cameron and George Osborne, was to “share the proceeds of growth” been tax cuts and higher public spending.

The earthquake that hit the economy and the public finances rendered such talk obsolete. The growth numbers turned out to be very different. The economy shrank by 0.3% in 2008 and 4.2% in 2009, making it the biggest post-war recession, before a modest return to growth, 1.7%, in 2010. The deficit, government borrowing, went off the scale, with figures of 7.3% in 2008-9, 9.9% in 2009-10 and 8.5% in 2010-11. Over those three years, borrowing was a staggering £319bn higher than the Treasury expected in March 2008.

Unlike now, the differences between the parties on the appropriate response to this were small. Tories were unhappy with the idea of a short-term fiscal stimulus to ease the impact of the recession at a time of already high government borrowing. But the fiscal stimulus, largely in the form of as temporary Vat cut and ideas like a “scrappage” scheme for old cars, was quite small.

Both main parties were agreed that there was no alternative to deficit reduction – austerity - through a combination of tax hikes and public spending cuts. Tory austerity under Osborne was intended to achieve its goals of eliminating most of the budget deficit more quickly, and Labour would have relied on tax hikes (including the 50% top rate it announced before leaving its office). But there was no serious political disagreement that, faced with a budget deficit of 10% of GDP (higher on initial figures), there was no alternative but to act.

There were, of course, plenty of noises off among economists arguing against austerity, and that the appropriate course for a weakened economy was for the government to spend, more, rather than less. I never argued, as some did, that austerity itself could provide a stimulus, by lower long-term interest rates. But I did think there was no alternative.

Sunday, September 02, 2018
The Amazon effect has kept a lid on prices - but not for much longer
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.

We live in a time of generally low inflation, and have done for some time. That may not be true of Venezuela, once lauded by Jeremy Corbyn, where the inflation rate has just topped 80,000% and the International Monetary Fund thinks it could hit the one million per cent mark by the end of the year; the kind of rate where people are obliged to carry even redenominated banknotes around in wheelbarrows.

But it is true in most countries. Looking across the advanced world, America’s inflation rate of nearly 3% is at the top of the range while Japan’s, just under 1%, isn near the bottom. Eurozone inflation is 2%, while Britain has a 2.5% rate. No big economy has a serious inflation problem.

Independent central banks can take much of the credit for that and, in fact, since Bank of England independence in 1997 – Gordon Brown’s greatest legacy – Britain’s inflation rate based on the consumer prices index has average exactly 2%, in other words it has been bang on target over the period as a whole, even if it has deviated from that target most months.

The Bank and its counterparts elsewhere would be the first to admit that other factors have been at work in this shift in the global inflationary environment. Some of these factors – the China effect, the rise of the discounters and the impact of Amazon and e-commerce in general – fall into the same category. They brought about a step-change down in prices, squeezed the margins of traditional manufacturers and retailers but brought significant benefits for consumers.

It was once common to talk about the China effect on inflation. Low-cost imports of goods from China dragged down inflation. The result was often that prices of goods fell year upon year – goods price deflation – even as service-sector inflation remained above the overall 2% target.

The China effect has not gone away but it is not what it was, and over time it became more complicated. China as a source of cheap goods also became a country which, because of its sheer size and rate of growth, put much upward pressure on oil and commodity prices..

The China effect and the impact of discount retailers on inflation were closely related. It is an impact that persists, notably in the grocery sector, though not enough to prevent a pronounced, mainly weather-related rise in food prices in coming months, which the Centre for Economics and Business Research has warned about.

Elsewhere, however, that effect too is diminishing. The pound shop model, if not broken, is under strain. Pound shops selling increasing numbers of products for over £1 are never going to have the same impact on inflation, though their approach did change the pricing behaviour of other retailers.

Another effect, the impact of Amazon and e-commerce, is however an apparently enduring one. The rise of online retailing, now such a key element on everyday life, has been swifter than you might think. According to official figures, online retailing accounted for less than 3% of all retail sales as recently as late 2006 and early 2007.

Now it is 17.1% on an unadjusted basis, having hit a high of 19.9% in November last year as a result of “Black Friday”. Assuming another Black Friday this autumn, and this is one US invention I would prefer to have seen staying on the other side of the Atlantic, a new record is likely to be broken. In a seasonally adjusted basis, July’s 18.2% online share was a record.
The benefits in lower prices of internet retailing have not necessarily been evenly spread; the young and computer-savvy being bigger beneficiaries than older consumers and those for whom the online marketplace is a minefield.

But the effect has permeated through to all retailers and is one of the sources of high street distress. Lower internet prices mean even John Lewis cannot claim to be never knowingly undersold in comparison with online-only rivals but it like most successful bricks and mortar retailers has had to embrace online retailing.

How big has the impact on inflation been of e-commerce? Central bankers are mainly clear that there has been an impact. Jerome “Jay” Powell, the chairman of the Federal Reserve, told the Senate Banking Committee earlier this year that the “Amazon effect” had been a factor keeping inflation low since the financial crisis.

Sunday, August 26, 2018
As the budget defciit falls, Hammond's task is clear
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 a chancellor there are few things more comforting than good news on the public finances. And the latest news, released a few days ago, was good. The downward momentum for the budget deficit established by George Osborne from 2010 has been maintained by Philip Hammond.

A budget surplus in July is not unusual but this July’s, of £2bn, was the best for 18 years. Borrowing – the deficit – in 2017-18 was £39.4bn, the lowest for 11 years, and the last pre-crisis year of 2006-7. Borrowing so far this fiscal year is the lowest for 16 years.

The Office for Budget Responsibility (OBR), the fiscal watchdog, is not given to hyperbole but it noted the “substantial year-on-year improvements in the deficit”. In celebration, the chancellor may have been inclined to add to booming alcohol duty revenues - - up 7.4% or nearly £300m this year compared with last – with a tincture or two of his own.

The question is what to with it. While all eyes may be on the European Union, a tax-cutting experiment is under way on the other side of the Atlantic. Donald Trump may have had other things to think about in the past few days but his aggressive cuts in corporate and personal taxes have provided a significant spur for America’s economy.

There is also the argument, first set out in this newspaper immediately after the EU referendum, that some of those aggressive tax cuts, specifically a cut in corporation tax to 10%, from 19% now, would boost investment and help maintain Britain’s attractiveness to inward investors during the current period of Brexit uncertainty. Hammond himself once talked in a German newspaper interview of adopting a different economic model for the UK. That was always said to be one of the EU’s fears.

Tax is one thing, spending another. The National Health Service has had its 70th birthday present, in the form of additional spending building up to more than £20bn a year by the early 2020s. Other departments, creaking under the strain of eight years of austerity, want presents too, and lots of them.

So how will all this go down at the Treasury, as the chancellor starts detailed preparations for his autumn budget? The watchword I think will be that, while the public finances are better, they are not yet out of the woods.

Government debt, at nearly £1.8 trillion (there are 11 noughts in that figure) is still rising and, while it has started to edge down relative to gross domestic product, it is still a high 84.3% of GDP. It has risen by £1.25 trillion in 10 years and, as reported here recently, is on a trajectory that could see it rise alarmingly from the early 2020s, mainly because of demographic factors.

As for the deficit, the OBR has been having a bad time with its borrowing forecasts in the past couple of years, overestimating the impact of slower growth on the public finances. Its November 2016 forecasts were for borrowing of £68.2bn in 2016-17, £59bn in 2017-18 and £46.5bn in 2018-19. This compares with outturns of £45.8bn and £39.4bn respectively for the first two years, and what looks like roughly £30bn this year.

The Treasury will gratefully grab this improvement relative to the forecast, which adds up to roughly £50bn, with both hands. But it is also aware that there has been significant slippage in the public finances compared with what was expected quite recently. So if we take the OBR’s projections a year earlier, in November 2015, a big gap is starting to emerge. 2016-17 was roughly right but the 2017-18 deficit was projected to be under £25bn, this year less than £5bn and next year, 2019-20, a budget surplus of more than £10bn. Some of that slippage reflects policy changes; most is due to slower growth.