Sunday, September 24, 2023
Pay is the key to turning this pause into a peak
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. Not to be reproduced without permission.

There was a time when a Bank of England decision not to raise interest rates was so commonplace that it barely merited a mention. In one long sequence between 2009 and 2016, there was not a change in rates. Thursday’s decision by the Bank to leave rates on hold at 5.25 per cent was not, though, commonplace. After 14 successive rate rises it was big news and the fact that it was on a 5-4 vote added to the intrigue.

Having argued here last Sunday for a pause in rate rises, I was naturally delighted. It was the right thing to do. I also think we have now seen the peak in rates, though with one caveat, so do read on.

The case for a pause I set out last week did not rely on last Wednesday’s unexpectedly good inflation figures. I say unexpectedly good because the Bank of England and the Treasury had expected a small rise in inflation from the previous month’s 6.8 per cent rate. We even had an on the record quote from a Treasury minister to that effect.

You will know, however, that the news was better than that, and that inflation, instead of rising, slipped to 6.7 per cent. Even better was the news on “core” inflation, which is more important for the Bank. This measure, excluding food, energy, alcohol and tobacco – which some say leaves out all the important things – fell even more sharply, from 6.9 to 6.2 per cent. Some of this was an unwinding of upwardly distorted figures in the previous month’s data, but it was good news nonetheless.

Some people will only be reassured when we have positive real official interest rates again – actual rates above inflation – which has not been the case on a sustainable basis for the past decade and a half. But it is on its way and by the end of the year, and even more so into next year, Bank rate should be above inflation, and in time one would hope quite comfortably.

The case for a pause this time, as I say, did not assume the inflation figures would be better than expected but instead rested on clear evidence of stagnant growth, from the gross domestic product (GDP) figures and weak purchasing managers’ surveys, together with strong evidences of a turn in the labour market, with unemployment rising and employment and vacancies falling. The Bank could have ignored all this and raised rates because of its worries about the strength of pay growth. But there were distortions in those figures too.

Now that the sequence has been broken, how will we look back on this period of frenetic monetary tightening by the Bank and other central banks as it reaches its end point? It has taken us into territory that we thought was consigned to economic history, with policymakers battling against the highest inflation in decades. In the Bank’s case that meant 10 and 11 per cent inflation in eight months over the past year or so, against an official target of 2 per cent. Inflation on the old target measure (the retail prices index excluding mortgage interest payments – RPIX) reached a peak of 13.9 per cent in October of last year.

Small wonder, then, that the Bank’s actions since December 2021 have smacked of panic, not least because the UK looked to be in danger of becoming an inflation outlier compared with other countries, a dangerous echo of the way things used to be. The sick man of Europe story, when applied to the UK, was as much about the economy being more inflation prone than others as it was about terrible industrial relations. Both have made a reappearance recently, though not to the same extent as before.

In that panic, the Bank’s monetary policy committee (MPC) tore up some of the rulebook it had used since independence in 1997. That rulebook implied that, with the committee carefully weighing up the evidence regularly, small touches on the tiller would be all that was required.

Sure enough, from May 1997 until August last year, Bank rate never went up by more than a quarter of a percentage point, 25 basis points in market parlance, at a time. August 2022 saw a half-point hike and there were four more to come in the sequence, along with one of three-quarters, 75 basis points, in November last year.

Sunday, September 10, 2023
One year on, Trussonomics is still inflicting damage
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. Not to be reproduced without permission.

We are approaching the anniversary of one of the strangest periods in recent UK economic and political history. I am not talking, for once, about the anniversary of “Black (or White) Wednesday”, September 16, 1992, when sterling crashed out of the European exchange rate mechanism (ERM).

No, this one is more recent, the mini budget of September 23 last year, presented by Kwasi Kwarteng in his brief tenure as chancellor, just five and a half weeks of havoc. The mini budget was the fullest expression of “Trussonomics”, the economic approach of Liz Truss, prime minister for just 49 days.

There have been some recent attempts to rehabilitate her reputation, and that of her approach. There may be more of that when she delivers a lecture at the Institute for Government in London on September 18. There may indeed be a flavour of Kenneth Williams in his classic portrayal of Julius Caesar in Carry on Cleo, when he memorably said: “Infamy, infamy, they all had it in for me.”

She has blamed, and may blame again, “a powerful economic establishment” for bringing her down, suggesting that this establishment had left wing bias which could not handle her conservative approach. Since she was brought down in large part by the reaction of the financial markets, that seems more than a little detached from reality.

This is not the time to go over again the huge mistakes that were made, including large unfunded tax cuts (and an immediate promise of more to come), a penny off the basic rate, a long-lasting and potentially very costly energy support scheme, and a failure to involve the Office for Budget Responsibility (OBR), the government’s fiscal watchdog. These were big and basic errors, as I am sure the Treasury’s permanent secretary would have pointed out had not Kwarteng sacked him on day one. The Bank of England was kept in the dark.

I note that some of those now trying to rescue Trussonomics’ reputation were privately trying to talk her down from the edge of the abyss before the mini budget, by postponing some of its measures, but she was having none of it. The entire episode gave “going for growth” a bad name (it did not have a very good name before) and we will never know whether the supply-side measures she also had in mind, such as planning reform, would ever have to past the anti-growth coalition on the Tory backbenches.

One reason for writing about this now was a line in James Heale’s account of Truss’s period in office, published in our magazine last Sunday. The rise in the average two-year mortgage earlier this summer to a higher level than in the aftermath of the mini budget would, “Truss believes, ultimately prove the wisdom of her efforts”, he wrote. He was accurately reflecting what the Truss camp believes which, frankly, is nonsense.

When Jeremy Hunt was appointed chancellor by Truss and cancelled most of the mini budget and restricted the energy support scheme, he, along with Rishi Sunak succeeding her as prime minister, calmed the markets. The mini budget saw typical fixed mortgage rates rising by more than two percentage points. Depending on loan to value ratio, fixed mortgage rates went from 4 per cent or below to 6 per cent or above, in some cases substantially above. Hundreds of mortgage products were withdrawn.

Hunt and Sunak’s calming effect resulted in some of those mortgage rate rises being unwound by earlier this year, when it seemed that official interest rates might be nearing their peak. The persistence of inflation and further rate rises have pushed rates up again. Far from vindicating Trussonomics, this has exposed its folly. The inflation problem would have been made worse by a badly timed fiscal boost.

It is important to recognise, moreover, that the damage wrought by Truss’s approach did not end with her departure from office. For housing activity and prices, it marked a turning point. Mortgage approvals averaged 68,000 a month in the eight months leading up to the mini budget. After the dust settled, that average came down to 47,000, a drop of a third. House prices have fallen by more than 5 per cent since the mini budget, according to the Nationwide building society. The Halifax said they fell by 1.9 per cent last month alone.

Sunday, September 03, 2023
Better news for the UK - but the search for stronger growth goes on
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. Not to be reproduced without permission.

Positive growth surprises are so rare these days that we should celebrate the fact that the Office for National Statistics, searching diligently down the back of the statistical sofa, managed to find some extra growth for the UK a couple of years ago, giving us an upbeat end to the summer.

New official GDP (gross domestic product) estimates on Friday have changed the economic picture to one much more like the "V-shaped" recession and recovery I thought we would see when the pandemic struck and restrictions and lockdowns were imposed. History has been rewritten, so instead of collapsing by 11 per cent in 2020, GDP fell by a slightly less scary 10.4 per cent. And the recovery in 2021 has been revised up from 7.6 to 8.7 per cent.

Most significantly, the revised figures showed that GDP at the end of 2021 was 0.6 per cent above pre-pandemic levels, whereas previous estimates had suggested it was 1.2 per cent below. The revised figures have removed some of the UK's inferiority complex. By the end of 2021, only America and Canada of G7 countries had recovered faster. The new figures are easier to square with other data for the labour market and tax revenues. They are consistent with a small rise in productivity over the past 3-4 years, rather than no growth at all.

These were larger revisions than usual, reflecting the fact that estimating GDP during the uncertainties and dislocations of the pandemic was harder than usual. They do not, however, change the growth dilemma by as much as some of the initial response has suggested.

The UK has barely grown recently, GDP rising by only 0.5 per cent since early 2022. Tacking on recent quarterly growth estimates, assuming they are not also substantially revised, to the new figures would leave UK growth over the past 3-4 years near the bottom of the G7 league, though not at the very bottom, and well below the OECD average.

And this is before the impact of higher interest rates - tighter monetary policy - which surveys suggest is having a significant negative impact in the current quarter, and may have a bigger impact later. The UK is not alone in this. So the search for growth continues, and it goes on beyond these shores. The world is also searching for stronger growth.

This is the season for big international economic gatherings. A couple of weeks ago leaders of the Brics’ countries – Brazil, Russia, India, China and South Africa – met, though Vladimir Putin could not attend in person because of the International Criminal Court warrant for his arrest for war crimes dialling in remotely.

Soon there will be a summit of G20 countries – the big advanced and emerging economies – in India. Rishi Sunak, who has drawn criticism for skipping the United Nations’ General Assembly, will attending this gathering in New Delhi in a few days (September 9-10), and may have a bilateral meeting with China’s president Xi Jinping. The G20, divided as it is on Russia-Ukraine, may not be a meeting of minds.

Hard on the heels of these gatherings will be the annual meetings of the International Monetary Fund and World Bank, this year to be held in Marrakech, Morocco from October 9-15. I would like at this point to have included a clever link to the song by Crosby, Stills and Nash but its lyrics are a bit weird.

All this summitry is probably mainly of interest to those attending, but behind it there is a fundamental question. When will the world economy gets its mojo back and, more fundamentally, where will the growth come from?

Take the Brics gathering. When the acronym was invented for Goldman Sachs by Jim O’Neill more than 20 years ago, before he was ennobled, it did not then include South Africa, the host of last month’s summit, which took advantage of the stray ‘s’ to add itself. Now, Six more countries have been invited to join, including Saudi Arabia, Iran, Ethipia and Argentina.

As for the original Brics, soon it became clear that, of these giants of the emerging world, only China and India really cut the mustard. With its economy once more threatened by the bursting of a property bubble, even China is under a cloud. Its high watermark, of growth averaging nearly 10 per cent a year, is long gone. Now it struggles to hit 5 per cent. Its moment of greatest glory, when it grew strongly during the 2008-9 global financial crisis even as the West suffered what was then its deepest recession since the Second World War, is now history.

We should not write off China, and the criticism of James Cleverly, the foreign secretary, for visiting Beijing, and of Sunak for his proposed meeting with Xi, is misplaced. The reality of international trade is that we have to interact with countries that we do not much like and have plenty to criticise about. In the case of China, the world’s second biggest economy, and the UK’s fifth biggest export market, and second biggest source of imports, with bilateral trade of £100 billion a year, this is very much the case.

In many ways, China is following the script set out by O’Neill two decades ago, which had it slowing to 5 per cent and then 3 per cent as it converged on Western economies. And we should remember that China growing by 5 per cent now adds more to the global economy than it did when growing by 10 per cent 20 years ago.

The Centre for Economics and Business Research (CEBR), a consultancy, describes China as suffering from “growing pains” but not a collapse. Each year it updates its annual world economic league table and recently it has pushed out its estimate of when China will overhaul America’s GDP in dollar terms. In 2015 it thought it would happen in 2025. Its latest estimate, published a few months ago, was that it will not now happen until 2036.

Sunday, August 27, 2023
2% is hard - should we move the inflation goalposts?
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. Not to be reproduced without permission.

An epic battle is underway and has been for more than 18 months. Some say it is being fought with the wrong weapons, others that the outcome is not for us to determine but depends on international factors, but it continues. The battle is to get inflation back down to its official target of 2 per cent.

Though inflation has come down from its peak of 11.1 per cent last October to 6.8 per cent last month, there is a bigger journey to get from here to 2 per cent than that achieved so far. There is nervousness in government about where we go from here, particularly over the next couple of figures, which will determine how much state pensions and other benefits rise in April next year. That will be based on the September inflation rate. Household energy bills are heading in the right direction but petrol prices have been rising again.

The collateral damage from fighting inflation with higher interest rates, meanwhile, which can now be seen in the housing and labour markets and will spread elsewhere, is building.

The latest “flash” purchasing managers’ survey, published a few days ago, dropped well below the key 50 level and was headlined “UK private sector output falls at fastest rate since January 2021”. January 2021, to remind you, was at the start of the third Covid lockdown and monthly gross domestic product fell by nearly 3 per cent that month. Other countries are seeing a similar impact of higher interest rates.

Against that, consumer confidence continues to zigzag, this month reversing its July fall according to the GfK measure released on Friday, with people slightly less gloomy about their own personal financial situation over the next 12 months. Confidence, though, remains historically low, and the hit from higher interest rates has yet to be fully felt.

Is the battle worth the fight? Why do we have an inflation target, and why does it have to be 2 per cent? Would it make much difference if it were higher, say 3 or 4 per cent, is it meant less interest rate pain?

This is a debate that has been running for a long time but remains hot. Only a few days ago Jason Furman, former head of the White House Council of Economic Advisers, wrote in the Wall Street Journal that the Federal Reserve, America’s central bank, should lift its target from 2 to 3 per cent when it next reviews its strategy.

“Whatever considerations led policy makers to conclude that 2 per cent was the right number in the 1990s would lead them to consider something higher, like 3 per cent, today,” he wrote.

A bit of history might be useful at this point. The UK came to have an inflation target by accident just over 30 years ago, in the autumn of 1992. When the pound was forced out of the European exchange rate mechanism (ERM) on “Black” Wednesday in September 1992, the central plank of the government’s economic policy was removed.

In its place an inflation target was introduced. Legend has it that the process was helped by a couple of economists from New Zealand who were on secondment at the Treasury. Three years earlier, New Zealand had pioneered the introduction of an inflation target and an independent central bank given the job of meeting it.

The target, for inflation to be kept in a 1 to 4 per cent range, paved the way for Bank to be made independent in 1997. Its target was 2,5 per cent, for a measure known as RPIX, the retail prices index excluding mortgage interest payments. This was chosen instead of plain RPI because otherwise, the Bank would have been targeting a measure which mechanically went higher every time interest rates were increased.

Things became simpler with the shift to a CPI (consumer prices index) target in the early 2000s. At the same time as the shift, the target was reduced from 2.5 to 2 per cent, reflecting the fact that over time RPIX inflation tended to be about half a percentage point higher than CPI inflation. 2 per cent also became the consensus figure among central banks, though in the UK the target is set by the government, as it has been since 1992.

Sunday, August 20, 2023
It was daft to leave the EU, but don't romanticise rejoining
Posted by David Smith at 09:00 AM

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

When, a week ago, I wrote about the UK’s growth problem, underlined by the fact that GDP (gross domestic product) per head is lower than at the end of 2021, I said that there was no obvious short-term fix. This met with a big response, on Twitter, X, or whatever it is called this weekend, in emails, comments and elsewhere.

This, overwhelmingly, was that the way to fix the growth problem was to rejoin the European Union or, failing that, the single market and customs union. I try to deal with what is practical and possible over the next few years but let me address this.

The many people saying this were chiming with public opinion. Polls which ask whether the decision to leave the EU was right to wrong, monitored by the polling expert Professor Sir John Curtice on the What UK Thinks website, show that by an average of 60 to 40 per cent, people think leaving was wrong.

Curtice’s latest poll of polls on how people would vote now, based on the last six surveys, and excluding don’t knows, shows 59 per cent support for rejoining the EU, against 41 per cent for staying out. People think leaving has been bad for the economy, exacerbated the cost-of-living crisis and made it harder to sell goods abroad.

The evidence is on their side. The post financial crisis recovery in business investment was snuffed out by the 2016 referendum and has only just risen above its spring 2016 level. Leaving the single market has hurt British exporters, as every survey shows. The latest figures, for the second quarter of this year, show that the volume of exports of goods and services was down by 11 per cent compared with the final quarter of 2019, the eve of formal Brexit.

Both exports and imports have suffered. The Office for Budget Responsibility (OBR), in assumptions last reviewed in April, expects that in the long run both exports and imports will be 15 per cent lower than if the UK had remained in the EU. So far, imports, which in the second quarter were marginally higher than in the final quarter of 2019, are holding up better. The OBR is sticking to its assumption that leaving the EU will reduce the UK’s long run productivity by 4 per cent.

On the cost-of-living crisis, detailed work by the London School of Economics’ Centre for Economic Performance, last updated in May, shows that of the 25-percentage point rise in UK food prices between December 2019 and March this year, eight percentage points – just under a third – was due to Brexit. Trade frictions, mainly non-tariff barriers, made food more expensive.

Bringing all these effects together in a so-called doppelganger model – comparing UK performance with what it would have been had we not left - John Springford, deputy director of the Centre for European Reform (CER), estimates that last year the UK economy was more than 5 per cent smaller than had there not been a vote to leave.

His research has been through a baptism of fire, having been challenged by other economists and has come through it well. For those who think the effect is smaller, or larger, the 95 per cent confidence range for the negative effect is 3 to 6.7 per cent.

The usual response to this is that the UK has done fine relative to other big EU economies since the referendum. But the EU, eurozone and France have significantly outgrown the UK since then, reversing the pre-2016 position. And the growth record relative to German and Italy, particularly on a per capita basis, has deteriorated.

It is not just about numbers. Brexit, apart from a continuing divisive impact, has had a disastrous impact on politics, trust in politicians and competence in government. Much political talent was lost because it was on the wrong side of the Brexit divide. Without Brexit, we would never have had a Boris Johnson government, a Liz Truss government or, for that matter, a Theresa May or Rishi Sunak government, though it may be unfair to tar them with the same brush.

In the case of Sunak, however, we still have government by slogan. After the experience of the past few years, businesses regard the Tory party with deep suspicion.

Sunday, August 13, 2023
Our economy's hung over, and there's no obvious pick-me-up
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. Not to be reproduced without permission.

Every month the UK’s official statisticians give us what might be described as frantic Friday. This is the big release of economic data, at 7am no less, encompassing gross domestic product (GDP), industrial production, the services sector and trade. I feel sorry for my daily colleagues, not just because of the early hour of release, but also because it is hard to cram in so much to their stories. Some previously important figures, such as those for trade, tend to get squeezed out. Statistics that would make a good story in their own right on a different day do barely merit a mention.

The latest frantic Friday was two days ago, and included not just the latest monthly figures, for June, but those for the second quarter. The headline was that second quarter GDP grew by 0.2 per cent, a touch better than many expected, and was 0.4 per cent up on a year earlier, smack in line with this year’s very modest expected growth rate.

The detail of the figures showed that the second quarter was helped by a 0.5 per cent rise in monthly GDP in June, which was itself boosted by a 2.4 per cent rise in manufacturing output. That was a surprise, given that surveys for the sector have been universally gloomy. I mentioned trade, so I should record that the trade deficit in goods and services was £19 billion in the second quarter, while that for goods alone was £51.3 billion. Both are large but have been helped a little by the drop in international energy prices.

Despite June’s upside surprise, the UK’s growth picture remains very weak. The Resolution Foundation points out that growth over the past 18 months is the weakest outside recessions for 65 years.

This is reinforced by the statistics for GDP per head, which some would say is a better measure of growth. This rose by just 0.1 per cent in the second quarter, following no growth at all over the two previous quarters and two consecutive quarters of decline last year. In the second quarter it was lower than in the final three months of 2021, and down also by 0.1 per cent on a year earlier.

Nothing in Friday’s figures will lead to revisions in what has been a gloomy month for UK economic forecasts. Earlier this month the Bank of England offered up the prospect of growth of just 0.3 per cent over the next 12 months, and a similar feeble expansion over the following 12, so two years of near stagnation.

“Past increases in Bank Rate, and the higher path of market interest rates …, will weigh to an increasing degree on UK activity and inflation in coming quarters,” it said. “GDP growth is expected to remain below pre-pandemic rates in the medium-term.”

Now the National Institute of Economic and Social Research (Niesr), which has been analysing and forecasting the economy since just before the Second World War, has also provided a very downbeat forecast in its latest quarterly review. The UK, it says, is enduring a period of five years of lost economic growth, and things are not getting any better.

The economy, it says, will grow by just 0.4 per cent this year and 0.3 per cent next, which is so close to no growth at all that there is a 50-50 chance of a decline in economic activity at the end of this year and a 60 per cent risk of recession in late 2024. Friday’s GDP figures showed that the economy has not yet recovered to pre-pandemic levels and the forecast suggests that this will not happen until next year. That may be a touch pessimistic, given that the gap to be made up is now only 0.2 per cent, but that itself shows how the UK has been struggling compared with competitor economies.

The Niesr forecast ticks just about every gloomy box. Growth will be weak, not creeping above 1 per cent until 2026, the unemployment rate will rise to more than 5 per cent, from a recent low of 3.5 per cent, and inflation will not get back to the 2 per cent official target in a forecast period that extends until 2027. This implies that official interest rates, predicted to reach a peak of 5.5 per cent, will be high for longer.

Sunday, August 06, 2023
Jobs have held up well, but the cracks are starting to show
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. Not to be reproduced without permission.

My attention was grabbed a few days ago by a company news report in The Times, headlined “Marshalls to cut 250 jobs and close factory after profit warning.” You may ask why. It was because announcements of job losses, which at one time used to be commonplace, have became as rare, if not as hen’s teeth, then as glorious days this summer.

On closer examination, Marshalls, which makes building materials, had in its trading update on July 31, and reported “challenging market conditions” in the first half of the year, driven by “persistent weakness” in new housebuilding and repair and maintenance of private houses. Having expected a recovery in the second half, it now did not, and was cutting 250 jobs (in addition to a 150 reduction in the second half of last year) and closing a factory in Scotland.

One of the factors cited by Marshalls was rising interest rates and, to nobody’s surprise, the Bank of England increased the dose on Thursday, increasing the official interest rate from 5 to 5.25 per cent. This, the 14th hike in a row, took the rate to its highest in a decade and a half. It is striking to think that Bank Rate now is higher than in 2003, a year when the UK economy grew by more than 3 per cent.

New gross domestic product (GDP) figures will be published this week but something extraordinary would have to happen if they change the current anaemic picture. In May, the latest figures, monthly GDP was 0.4 per cent below May last year. The big picture is one of stagnation.

With interest rate rises biting – look too at the latest results from the housebuilder Taylor Wimpey – and the economy stagnant, the surprise is how resilient the labour market has been. Job cuts, as I say, are a rarity these days, with most headlines about worker shortages and recruitment difficulties The unemployment rate has crept up from a low of 3.5 per cent last summer to 4 per cent now, but that largely reflects a fall in economic inactivity, and the return of some people – not all – to the job market.

Employment slipped fractionally in the latest three months, and is a touch below pre-pandemic levels, but it has recovered well, rising by 190,000 over the latest 12 months (to just over 33 million) and by more than 900,000 from its post-pandemic lows.

Employers have been desperate to recruit in a tight labour market, and to hang on to those workers that they have. The fact that they have been doing this during the present period of economic stagnation has meant, as a former member of the Bank’s monetary policy committee (MPC) pointed out to me the other day, that productivity has been taking the hit so far, rather than employment.

Sure enough, the latest official figures show that productivity, measured by output per hour, has fallen more over the past year than at any time since 2013. It was already disturbingly weak. Output per worker, another way of measuring productivity, fell even more.

Can this possibly continue? The latest readings for manufacturing, the purchasing managers’ index (PMI), suggest that the sector is weaker than at any time since May 2020, when the economy was in the first Covid lockdown, the most economically damaging of the three that were imposed.

And, while it has not been making the headlines, the PMI suggests that manufacturing employment has been falling for the past 10 months in a row, and that the pace of job cuts accelerated last month as the sector’s downturn deepened. That is not yet borne out by official figures, which suggest manufacturing employment has plateaued rather than fallen, but something is happening.

The UK is not, of course, mainly a manufacturing economy these days, for which some would say more the pity. It accounts for less than a tenth of GDP and less than a tenth of employment. Something is also happening in the service sector, however. Its PMI also fell sharply last month, and the pace of job creation eased “amid reports of some hiring freezes”. One service sector firm, the retailer Wilko, has served a notice of intention of calling in administrators, potentially putting 12,000 jobs at risk, and has already shed 400.

Sunday, July 30, 2023
Don't mention the Germans when going for faster growth
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. Not to be reproduced without permission.

When, a few days ago, the International Monetary Fund released its latest growth forecasts, there was not very much to celebrate. The world economy this year and next will grow by 3 per cent, it said, which is about three-quarters of what used to be regarded as cruising speed. For the UK, it predicted weak growth, 0.4 per cent this year, 1 per cent next, which is better than mild recession, though not much better.

For many people, however, there was an important source of comfort. This year at least, we will be doing better than Germany. The Federal Republic will be in mild recession, the IMF expects, contracting by 0.3 per cent this year, while the UK will be on the right side of zero. Next year, if the forecast is right, and there is no guarantee of that, Germany will grow a little faster than the UK, which will have the weakest growth in the G7 group of major economies except for Italy, but that is for later.

For now, and the word schadenfreude (delight in others’ misfortunes) could have been invested for the purpose, many are cheered by Germany’s discomfort. There is a still a strong sense that if we are doing better than Germany we cannot be doing badly. Jeremy Hunt, though perfectly aware that there are plenty of other economies we should be comparing ourselves with, is fond of saying that the UK has grown as fast as Germany since 2010, so by implication Tory management of the economy cannot be that bad.

Our obsession with Germany has many roots. The image we have of Europe’s biggest economy is that of an all-powerful industrial machine, with which we have always struggled to compete. Even at the time of the Great Exhibition of 1851, British manufacturers were nervous about the higher quality of what Germany had to offer. For the first trade mission to China, undertaken by Lord Macartney in 1793, German engineered products were taken along, as well as British ones, in an attempt to wow the Chinese emperor.

More recent history has, of course, given added piquancy to comparisons with Germany. Younger people will regard this as quaint but there was a time when the only thing to watch on TV on a wet Sunday afternoon were black and white war films. The 1966 World Cup victory over (West) Germany has entered the mythology in a way that many other defeats have now.

But there has also been a sustained economic rivalry. When, in the 1950s and 1960s, Germany, defeated in the war, was seen to be doing economically better than Britain – this was the time of the Wirtschaftswunder or German economic miracle – the clamour grew, particularly among businesses, for the UK to join the then European Economic Community.

Even after that there was a perception that what became the European Union in the early 1990s was designed for the benefit of Germany, as was the euro, though many Germans were opposed to giving up the deutschemark. One Tory cabinet minister, Nicholas Ridley, was forced to resign more than 30 years ago for describing the EU as “a German racket”.

In growth terms, however, the EEC and EU were more of a British racket. Having been outgrown by Germany in the 1950s and 1960s, the UK turned the tables. From 1973 until the referendum in 2016, cumulative real-terms growth in the UK economy was 139 per cent, ahead of Germany’s 128 per cent.

The UK’s growth advantage increased later. From 1993, when the European Communities became the EU, until 2016, the UK economy grew by 62 per cent, notwithstanding the 2008-9 financial crisis. Germany’s growth over the same period was a much smaller 38 per cent. Many factors feature in these comparisons. The UK, as well as benefiting significantly from EEC/EU membership had the Thatcher reforms. Germany, following unification in 1990, had to absorb the much weaker East Germany economy. Germany’s economic reforms came later and did not go as far.

This tells us that matching or doing slightly better than Germany is not a particularly challenging metric for the UK. Germany in recent decades has been more of a lumbering if not slumbering giant than a growth machine. If we are looking for faster UK growth, Germany is the wrong country for comparison.

Why is Germany struggling at the moment even more than most of its EU partners? Before the Russian invasion of Ukraine, it was highly dependent on Russian gas, reflecting political and commercial decisions in the past which now look misguided. High inflation, currently running at 6.4 per cent and, as in this country not falling as fast as the authorities would like, probably has a bigger effect on the German psyche than in many other countries.

Most of all, however, industry, the traditional driver of the Germany economy, has been struggling. Manufacturing represents just under a fifth of German gross domestic product, tice as much as the UK. But, for many reasons, some of which date back to the “dieselgate” scandal of the mid-2010s, which undermined confidence in Volkswagen and other German motor manufacturers, German industry has underperformed in recent years. More generally, as one of the world’s top three exporters (after China and America), Germany has been held back by the slower growth in world trade since the global financial crisis. The eurozone crisis did not help.