Sunday, March 24, 2019
Britain shouldn't be too glad to be grey
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.

In recent days we have had another stunning demonstration of the potency of the job-creating machine that is the British economy. While surveys have suggested that employers are beginning to cut back on recruitment, there was no evidence of this in the official figures.

Overall employment rose by 222,000 in the latest three months for which data are available, November-January, and the employment rate for the 16-64 age group rose to 76.1%, a new record. The unemployment rate dropped to 3.9%, its lowest since November-January 1974-5. And, while only a minority of the net new jobs created over the latest three months were traditional full-time employee jobs, 93,000 out of 222,000, weaker than recently, the others being part-time employment and full and part-time self-employment, these were still strong figures.

And so we have the usual trade-offs. We have strong employment but weak business investment; the weakest of any major economy over the past 2-3 years. Are firms recruiting as an alternative to investing? For some that is not a choice, but for others it is, and it is being made.

There is also strong employment versus weak productivity, which has stagnated for a decade and has weakened again recently. These latest employment figures, alongside weak gross domestic product figures, guarantee further productivity weakness.

Then there is the pay puzzle. Average earnings growth is currently 3.4%, which in the case of total pay (including bonuses) is marginally lower than it was. Real wages are rising, but not by much. And, while you would not expect the kind of pay growth we had when unemployment was last as low as it is now, 44 years ago, when wage increases were well above 20%, you might expect it to be stronger than it is.

All these things; falling business investment, stagnant productivity and weak growth in wages are, of course, intimately linked. A return to the pay norms, not of the 1970s but the pre-crisis era, in which you would expect earnings to be rising by 4.5% to 5% rather than by less than 3.5%, requires a sustained revival in productivity.

There may, however, by another factor which helps to explain the current combination of circumstances, certainly weak pay and productivity, and it is the greying of the labour market. The average age of British workers is increasing and that may have important consequences.

More than half of the increase in employment over the past year has been concentrated in the 50-64 age group. And, if we look a little longer term than that, the concentration of employment growth in older age groups is striking.

Thus, in the past 10 years, there have been 3.175m net new jobs created in Britain, a great achievement. Of these, 591,000 have been among people aged 65-plus and 1.868m have been for those in the 50-64 age group. Thus, 77% of the rise in employment over the past 10 years has been among workers aged 50 and over. This is quite a figure.

Sunday, March 17, 2019
Views from the brink: how slow growth and uncertainty leave firms on the edge
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.

What, amid the Brexit chaos – which grows ever more chaotic by the week – have we learned about the economy? Alongside Philp Hammond’s spring statement, the Office for Budget Responsibility (OBR), revised down its growth forecast to 1.2% for this year, the weakest since the crisis, and predicted that the economy will expand by an average of about 1.5% over the following four years.

That assumes a smooth Brexit, a brave but necessary assumption (the OBR is required to forecast on the basis of government policy) and reaffirms that, even if we get over the short-term hurdle, the challenge of lifting Britain’s growth rate to something like past norms will remain considerable.

The OBR is gloomier about business investment than it was, expecting a fall of 1% this year, similar to last year’s drop, and growth averaging only just over 2% a year from 2020 onwards. This is no strong revival of pent-up investment some talk about and will leave productivity growth languishing at just over 1% a year in the medium-term.

The official forecaster is more comforting about future earnings growth, which it sees rising by just over 3% a year, and rising employment, which it thinks will continue, though at a significantly slower pace than over the past few years.

That combination is good for the public finances as, oddly, is weak business investment; when firms are investing, which can be offset against tax, it is bad for corporate tax revenues. Rising inequality is also good for the public finances. The top 0.1% in Britain are doing very well and generating a lot of income tax receipts. That, without dwelling on it today, could be a golden goose that gets cooked if there is a change of government.

So we have the strange situation in which growth disappoints but the chancellor’s room for manoeuvre has increased. It was thought he would have £15.4bn of room for manoeuvre for this year’s spending review, and possibly some tax cuts; now the OBR thinks it is £26.6bn, though half of that could disappear as a result of the new treatment by official statisticians of student loans.

Those are the headlines but what I wanted to do today is try to get under the bonnet of the figures and tap into what the Institute of Chartered Accountants in England and Wales (ICAEW) describes as “the economic instability resulting from the current uncertainty”. The ICAEW on Friday also revised down its growth forecast to just over 1%, an outlook it described as “frail”.

Two weeks ago I launched a bit of informal “crowdsourcing” to try to take the pulse of what was happening to small and medium-sized firms in Britain amid the uncertainty, following one reader’s claim that a “meltdown” was under way. The results, as I stressed then and stress again now, were never going to be scientific but do provide an insight.

In particular, they have enabled me to identify four categories of business in Britain. First on the list are those for whom the phone stopped ringing even before the current heightened uncertainty, and which are hanging on and hoping that something will turn up.

Typical descriptions of current business activity from those in this category were “sales slump”, “dramatic decline”, a warning that a mild decline now would turn into bankruptcy in the event of a no-deal Brexit, and “a disaster with a 60% drop in revenues”.

One business said turnover “fell off a cliff” last autumn, had stabilised this year, but was still well below normal. Another said that the current “plunge” in orders was worse than anything during the financial crisis a decade ago, which others also drew comparisons with for the “suddenness” of the downturn. Yet another said that this year had been “a complete blank” for new orders. One feared that the current sales downturn would be followed by “years and years of misery”. Quite a few thought we were on the brink of recession. Worrying.

Sunday, March 10, 2019
Quantitative easing worked, just don't make a habit of 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.

How time flies. It is hard to believe that it is 10 years since the Bank of England brought an entirely new type of monetary policy, for Britain at least, blinking into the sunlight. Quantitative easing (QE), a complicated name for something that many people do indeed find complicated, was launched then and is still with us.

The misunderstandings then were considerable. When the policy was launched in March 2009 Mervyn King, now Lord King, did a television interview with the then BBC economics editor Stephanie Flanders, to try to explain it.

His mission to explain was not helped by some hysterical comment. Though the worst offenders have often got the economy wrong, some predicted that the Bank’s initial tranche would lead to doom, disaster and hyperinflation, which was wrong on all three counts.

This is, however, a good time to look at QE, and not just because of the anniversary. The experiment, and experiment it was, may be coming to an end.

Theresa May, herself a former Bank official, said in her now notorious first party conference speech as prime minister in October 2016, the “citizen of nowhere” one, that QE had had “some bad side effects”. It had enriched people with assets and made those without them suffer, she said. Those in debt had benefited while those with savings had suffered. A flabbergasted Mark Carney was ready to hop on to the next plane to Canada.

The prime minister, not for the first time, got it wrong. QE was launched, with an initial £200bn in 2009, followed by a further £175bn in 2011-12 and a final (so far) £60bn in August 2016. It was done because, at the time, Bank rate had been cut to what was then the rock bottom of 0.5%, and that was deemed to be not enough to steer the economy away from deflation, falling prices, and towards a sustained recovery.

It worked, then as more recently, by ensuring that the drop in short-term interest rates – Bank rate – to a record low, was accompanied by a fall in long-term rates. Large-scale purchases of government bonds raised their prices and lowered their yields; the yield on government bonds, gilts, feeding through to lower long term interest rates throughout the economy.

There was no deflation, which was the great worry in 2009, and the recovery, while by no means strong in its early years, took hold and lasted. It did not lead to hyperinflation or, indeed, to very much inflation at all. There was no double-dip recession. As a policy which contributed to getting the economy off the sick bed, QE has to be seen as a success.

Nor is the criticism of QE, that it benefited the wealthy “haves” at the expense of the have-nots, valid. Bank researchers looked in detail at this last year, using official data for the distribution of wealth. It found that percentage gains from the policy were “broadly similar” across households and that, while those at retirement age saw the biggest increases in wealth, younger people benefited from stronger incomes. Andy Haldane, the Bank’s chief economist, said that the policy “did not have significant adverse distributional consequences”. The adverse distributional consequences were, as the research shows, more imagined than real.

Sunday, March 03, 2019
This sterling rally was built on shaky foundations
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 of you who like a fact to kick off the day, how did sterling, as in pound sterling, get its name? The answer, which is shrouded in the mysteries of Middle English, is that it could have come from starling, as in bird, which featured on early coinage, or “sterre”, Middle English for star, which was on some Norman coins in circulation in Britain.

I mention this because sterling has been in the news. Though it slipped a little towards the weekend, It has had a good week. Currency dealers have been watching the parliamentary shenanigans very closely, and decided that they merit marking the pound higher. As in the period since the June 2016 referendum, sterling has been acting as Brexit barometer.

While it would be an exaggeration to say that currency markets now think that it is all over, and that a no-deal Brexit has been definitely avoided and an extension of the Article 50 process beyond March 29 is a near certainty, the fact that things have been moving in that direction propelled sterling to the giddy heights of $1.33 and €1.17.

Simon Derrick, the veteran currency strategist at BNY Mellon in London, said the pound’s rise was overwhelmingly explained by the prospect of a delay of some weeks to Brexit, and that markets had not yet thought through the implications of other developments, such as the Labour party’s apparent shift to supporting a second referendum. He also noted that at $1.33, sterling was not much above its post-referendum average of $1.3050.

This, by the way, compares with a $1.58 average for sterling against the dollar for the three years before 2016. Currency markets effectively downgraded the economy, and the pound, after the Brexit vote.

In the low $1.30s, then, the pound is still in what dealers would see as a neutral range. But it is above its post-referendum closing lows of just over $1.20 and €1.08. What might push it higher still?

Adam Cole, currency strategist at RBC (Royal Bank of Canada) Capital Markets, has in response to client requests updated his subjective Brexit probabilities. They are now 5% for a no-deal Brexit, down from 15%; 35% on exiting on March 29 with a deal, 40% on exiting later, also with a deal, and 20% on Brexit not happening at all, possibly as a result of a second referendum. A second vote, he suggests, would be 60% likely to overturn the result of the 2016 referendum.

Of these various outcomes, he argues, there would be scope for a small 2%-3% rise in the pound on exit with a deal now, or after a short delay. The most sterling-friendly outcome, as its performance since the referendum implies, would be for Brexit not to happen.

Sunday, February 24, 2019
Housing is creaking - and not just because of 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.

Every month these days a little battle is played out. Downbeat data is released on the housing market, to be immediately followed by comments from estate agents and others in the property industry. Their general take can be summed up in the opening lines from that song in the musical Annie: “The sun’ll come out tomorrow, bet your bottom dollar that tomorrow, there’ll be sun!”

I do not begrudge them for trying to look on the bright side. If you are in a business which relies on housing turnover going up, and benefits from rising house prices, this is a testing time. The housing market has, in some key respects, never got over the global financial crisis of a decade ago – transactions remain well below pre-crisis levels – and it is suffering a renewed downturn now.

Annual house price inflation has, according to the Nationwide building society, petered out almost completely. Prices last month were just 0.1% up on a year earlier, having come down from more normal 5%-6% growth three years ago.

The Halifax reported a rather alarming 2.9% slump in prices last month, bringing strong echoes of the crisis years, though it reported almost as big a rise in December. It too thinks annual house-price inflation has all but petered out. Asking prices, to take another measure, have had their weakest year for a decade.

I know, at this point, what some people will be thinking, that house prices are too high and any softening, to the point where they are now rising by a few percentage points less than wages, has to be a good thing.

But there is good and bad house weakness. Good house price weakness is when extra homes tilt the balance and make houses more affordable. Bad house price weakness is a reflection purely and simply of weak demand.

It is the bad version that we are seeing at the moment. According to Rics, the Royal Institution of Chartered Surveyors, new buyer enquiries for home purchases have weakened for the sixth month in a row and are now at their weakest since the crisis. It is become commonplace to see this as a problem mainly affecting London and the south-east but it is now widespread; the weakest readings in the latest survey were the east and west midlands.

If prices were determined by demand alone, they would be even weaker than now. But, in the market for existing homes, as opposed to new build properties, supply is also very weak. The Rics survey reports that, apart from a brief downward spike immediately after the referendum in 2016, instructions to sell are also at their lowest since the crisis.

The supply pipeline is also weak according to surveyors, with surveys and appraisals lower than they were a year ago. Potential sellers do not want to sell into a soggy market. If they can do so they would prefer to stay put. High transaction costs, notably stamp duty, are a powerful disincentive to move.

It is tempting to blame most of this on Brexit. Consumer confidence is down and so is the willingness of households to commit to major purchases. That is reflected in a weak market for new cars and, in the absence of Help to Buy incentives, people’s appetite to take the plunge in the market for existing homes.

Sunday, February 17, 2019
How to end austerity without breaking the bank
Posted by David Smith at 09:51 AM
Category: David Smith's other articles

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

Theresa May, by all accounts, is promising to splash the cash to deserving causes like some modern-day Lady Bountiful. Labour MPs in leave-supporting constituencies who support her withdrawal agreement are being promised more money, as are businesses kicking up about the consequences of a no-deal Brexit.

The government has already allocated more than £4bn for Brexit preparations, most but not all for getting ready for no-deal. Though some of that no-deal spending would have happened anyway, and there will be few examples quite as bad as the transport secretary Chris Grayling’s phantom cross-channel ferries, money is being spent.

The civil service, creaking under the strain of leaving the EU, is growing in size. After years of cuts in numbers, and a low of 416,000 in the second half of 2016, the home civil service had added about 20,000 extra people by September last year, and has been busy recruiting more over the winter.

The additional spending comes on top of the prime minister’s insistence on a generous 70th birthday settlement for the National Health Service. Its spending will be £20.5bn higher in England in real terms by 2023-24. Add in Scotland, Wales and Northern Ireland and you get to about £25bn.

The House of Commons Treasury committee, reporting last week on the fiscal impact of that NHS birthday gift, together with other measures last autumn which included an earlier than expected raising of tax allowances, declared that the government’s stated objective of eventually balancing the budget “now has no credibility, so cannot be used by parliament to hold the government to account”.

The objective of balancing the budget, ever, seems to have turned into a dead parrot. It has ceased to be. Somewhere in the depths of the Treasury you imagine Philip Hammond, his reputation as the most fiscally conservative chancellor on the line, head in hands and quietly weeping.

He would see it differently and that, without his resistance, the spending increases and tax cuts would have had to be much larger, and the prospective hole in the public finances much bigger. After him, he might say, comes the deluge.

The pressure, however, persists. This will be a big year for public spending, and not just because of Brexit. The Treasury is due to hold a comprehensive spending review and Liz Truss, the chief secretary, will soon give a speech setting out the priorities for it. The review is not definite; there are Brexit-related circumstances in which it might not happen, but it is planned.

The challenge is quite straightforward. As things stand, the NHS is getting plenty but most other parts of government are still in austerity mode. The NHS accounted for 11% of all spending on public services in the mid-1950s, 23% by 2000, 29% by 2010 and, on present plans, will be 38% of all spending by the 2023-24. That looks dangerously unbalanced.

A very good briefing note from the Institute for Fiscal Studies on the outlook for the spending review, by Carl Emmerson, Thomas Pope and Ben Zaranko, sets out the parameters. A normal spending review covers the next 3-4 years, though the IFS opens up the possibility this time of a one-year review, given that the uncertainty may not have lifted even by the time of this autumn’s budget.

It is not clear how much we will learn about it when the chancellor delivers his spring statement in less than a month’s time, on March 13. I suspect very little. The “spending envelope”, the amount in overall terms that the government intends to spend over the next few years, had at one time been expected in last autumn budget.

But that budget, held unusually early in October to clear the decks in November for parliamentary approval of the prime minister’s EU withdrawal agreement – and we know what happened to that – only really told us what will be happening to NHS spending. Will we see the envelope next month, so that we know what everybody else is getting?

Almost certainly not. The talk is of a “stripped down” spring statement consisting of a new official forecast, which itself will be subject to the uncertainty of how many of the known unknowns about Brexit have been resolved. The Brexit fog, to coin a phrase, will also provide the chancellor with a good excuse not to set out the spending parameters. Though the Commons Treasury committee was also sceptical about a “deal dividend” for the economy and public spending from an orderly Brexit, Hammond will not want to concede that point.

Saturday, February 09, 2019
Not just a slowdown - we're stuck in a low gear
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.

Like all the best famous quotes, it is far from clear that Harold Macmillan, the former Tory prime minister, ever said when asked what he most feared: “Events, dear boy, events.” He certainly did not say another thing usually attributed to him, “you’ve never had it so good”, but a variation on it.

I could write a whole column on this. John Maynard Keynes probably never said: “If the facts change, I change my mind. What do you do, Sir?” Many of us have, however, written that he did. Fortunately these days we have an electronic record of what Donald Trump, or Donald Tusk, said, or at least tweeted.

Anyway, whether he said it or not, events do not just matter for politicians. They are hugely important for central bankers. In America, the Federal Reserve has backed off further interest rate rises, having done nine so far (but only to a level of between 2.25% and 2.5%), because of growth concerns.

The European Central Bank has ended its programme of quantitative easing (QE) but, in the light of a sharp slowdown in the eurozone’s big three economies – Germany, France and Italy – will be wondering privately whether it was right to do so.

As for the Bank of England, never before have I seen events, and in particular the single event of Brexit, dominate one of its quarterly press conferences as much as the one on Thursday, when to the surprise of nobody it left interest rates unchanged and, though the extent of it was slightly more of a surprise, significantly revised down its growth forecasts.

The impact of events on the Bank is not just that Mark Carney, its governor, has to answer more questions on Brexit than he is comfortable with, and who quipped that he no longer wakes up in the mornings but in the middle of the night, but also that it has taken it further away from what it wanted to do.

Plan A for the Bank was to gradually raise interest rates to a “new normal” of about 2%, from 0.75% now, in response to rising wage pressures and other indicators of limited spare capacity in the economy and because, after a long period in which official rates have bene close to zero, it made sense to think about normalising them.

Plan A has not yet been entirely torn up, but it has evolved into what might be best described as Plan A-minus. The Bank still sees scope for “limited and gradual” rate rises in coming years, for similar reasons as before, but they are now expected to be more limited, and more gradual.

There was a time when many in the City expected the next rise in interest rates to be in May. But what Carney described as “the Brexit fog” will not have lifted by then. Nor, looking at the Bank’s new forecasts, will there be much scope for raising rates in August or November. With the governor set to depart at the end of January next year – less than 12 months from now – the likelihood of him going without any further rate rises under his belt is increasng.

By the time of any sunlit uplands in the Bank’s new forecast, an eventual pick-up in growth to a hardly-booming 2% by 2022, it will be Carney’s successor who is in charge.

That the Bank has reduced its forecasts is not a surprise. Business surveys have pointed to a sharp softening of growth. The January purchasing managers’ surveys for manufacturing, construction and services were all weak, suggesting the economy has all but ground to a halt.

Sunday, February 03, 2019
Bogged down in Brexit while the economy festers
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 is sometimes said that the gulf between businesses and ordinary folk has never been greater. People do not necessarily think that what is good for firms is good for them. An annual survey by Edelman, the public relations firm, just updated, found that 52% of people don’t think the way business is done is good for society, though they are even more damning of government.

On one thing, however, businesses and households are united. They are all feeling gloomy, thoroughly cheesed off with politicians and fed up with a Brexit process which goes around in ever decreasing circles.

I sympathise with that. As a news junkie, I will listen to pretty well everything but rarely have I used the off button more than in recent months. And don’t get me started on Question Time.

Anyway, the ICAEW, the Institute of Chartered Accountants in England and Wales, produces a reliable quarterly survey of business confidence, which I follow. It latest, for the first quarter, will be published tomorrow but I have had a sneak preview.

It shows that confidence has fallen to an index level of -16.4, the lowest since the economy was mired in recession 10 years ago during the global financial crisis. As the ICAEW demonstrates, confidence is closely linked to the politics of the Brexit process.

Its survey came too late to encompass the latest parliamentary votes but they will have done nothing to bolster confidence; dead-ends tend not to. The gloomiest sectors in the survey are retail and wholesale, followed by property and construction.

Its results are consistent with growth slowing to a crawl, just a 0.1% rise in gross domestic product this quarter, alongside a sharp slowdown in investment. More on that in a moment.

I said businesses and consumers are at one on this. The latest GfK index of consumer confidence was at -14 in January, the same as in December but five points lower than a year earlier and lower than in the immediate aftermath of the referendum. Households are now experiencing real wage increases again, according to official figures, and unemployment has not been this low since the mid-1970s. With inflation also coming down the “misery index” (the unemployment rate plus the inflation rate) is at low levels. People should be quite optimistic.

They are, however, worried about the future, and particularly about the economic outlook. A net 39% of people think the economic situation will get worse over the next 12 months, the gloomiest people have been on this for seven years, and approaching the level of concern we saw during the financial crisis.

The uncertainty that is driving down confidence will eventually lift. The House of Commons version of the withdrawal agreement that Theresa May will take to Brussels has little chance, but a version should eventually emerge that satisfies both sides and parliament. When that is, and how long an extension of the Article 50 timetable will be required beyond March 29 remain open questions. The risk of a no-deal Brexit is higher than it was before last week’s votes and is of great concern for business, which found the latest political shenanigans as unhelpful as any we have seen.

Getting beyond all this remains the challenge. Businesses complain that, because of Brexit, nothing else is happening, particularly in government. They are being asked to reassure customers while being offered nom reassurances or certainty themselves.