Sunday, March 25, 2018
A green light for the Bank to keep on raising rates
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It is reassuring, for those of us who write about economics, when things happen the way that economic theory says they should. When unemployment is low, pay pressure should increase, and it is finally happening.

Though the latest official figures were not as clean as might have been hoped – the number of people unemployed rose by a tiny 24,000 in the latest three months though the unemployment rate fell from 4.4% to 4.3% - they were accompanied by an acceleration in earnings growth.

The Phillips curve, the inverse relationship between unemployment and wage growth, is one of the first thing students of economics learn. Earnings growth excluding bonuses picked up to 2.6% and to 2.8% including them. Inflation, though for a little later than the November-January period to which those figures apply, is now 2.7%.

Behind these bald comparisons, and the welcome news that the Phillips curve is alive and well, though not necessarily for employers facing higher wage bills, there are quite a few implications. Let me take just two of them.

The first is whether the end of the wage squeeze, and the return of modest pay growth, will do anything for attitudes towards a job market which has been extraordinarily successful in generating unemployment but is still widely regarded as insecure and exploitative. The second is whether anything will stop the Bank of England raising interest rates in May, and again later in the year.

Britain’s flexible labour market continues to generate jobs at a significant rate, as it has done for several years. In the latest three months employment increased by 168,000, while over 12 months there has been an increase of 402,000.

There is a downside to this in the sense that rising employment alongside weaker economic growth means stagnant productivity, and the latest figures for hours worked suggest that that the pick-up in output per hour in the second half of last year was indeed a blip.

Overall, however, this is a picture of success. Some of the rise in employment has been achieved by bringing people out of economic inactivity, when they are not working or seeking work. The rate of inactivity among working-age people, 21.2%, is at its joint lowest since records began in 1971.

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Sunday, March 18, 2018
In spring a chancellor's thoughts turn to tax hikes
Posted by David Smith at 09:00 AM
Category:

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

One of the biggest challenges for people like me is writing about budgets. Though in recent years they have been held on Wednesdays at 12.30, just after prime minister’s question time, for a long time they were on Tuesday, with a 3.30 kick-off. The gap between a Tuesday budget and a Sunday economics column is a long one.

Now, sympathise with me if you will about the even longer gap between something that was not even a budget – Philip Hammond’s spring statement at 12.30 last Tuesday – and the time that you are reading this.

Fortunately, there is something to say, and it is what you might call a taxing question. How much will taxes need to go up to pay for the public services voters want, and provide the Conservatives with a better electoral platform? And which taxes might they be?

The scene was set, as so often on these occasions, by the Institute for Fiscal Studies. Paul Johnson, its director, provided a neat summary of the pressures on the public finances.

“The fact that even on current plans debt is not really due to fall is likely to make the chancellor especially cautious about opening the spending taps,” he noted. “Yet the pressures are undeniable. Many of the public services are struggling in a way that they were not two or three years ago. Safety in prisons is being compromised.

“The NHS is visibly failing to cope as well as it was. Local government, having done a remarkable job of coping with cuts, is showing the strain. The cap on public sector pay may have been lifted, but we don’t know where the money to pay for any increases above 1% will come from.“ A spending review is planned for next year.

But the tax side, as Johnson also noted, is in a bit of a mess and is vulnerable. Hammond hoped last year to tackle the tax gap between the self-employed and the employed by raising national insurance but had to admit defeat and, according to the Office for Budget Responsibility (OBR) the cost of these changing patterns of work will rise from £10bn to £15bn over the next five years.

Old reliables in the tax system like fuel duty are being allowed to wither on the vine. Not only has raising fuel duty apparently become impossible for any chancellor – for British politicians upsetting the motoring lobby is a bit like taking on the National Rifle Association in America – but the switch to alternative fuels will in any case erode this part of the tax base.

The biggest problem of all lies with income tax. Raising the personal allowance, the coalition policy enthusiastically maintained by this Tory government, takes increasing numbers of people out of tax every year. The result of this is a system even more skewed towards higher earners. This year, according to official figures, the top 1% of earners will account for 27.7% of income tax revenues, with the top 5% responsible for 48.1%.

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Sunday, March 11, 2018
The deficit's down - but Hammond can't risk a spending spree
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

If I were to allow a robot to take over the writing of this column, something I am gradually working towards, it would take previous known patterns and run with them. So a piece starting with the words ‘the chancellor will this week make a statement on the economy’, would automatically be followed by ‘and we can expect more bad news on growth and borrowing’.

The robot would be blameless. I have written something like that so often that, even under human control, I am struggling to prevent the keyboard from doing so again.

But not this week. On Tuesday, Phillip Hammond will deliver his spring statement. Advance briefing suggests it will be short, no more than 15 minutes or so. Though it is roughly on what would be budget day in normal years, it will lack most of the usual paraphernalia. It will not, the Treasury says, be a “fiscal event”, in other words there will be no important tax and spending decisions (though the option to include some exists). That is why my inbox, usually creaking with budget submissions and predictions, has been empty of such things.

The spring statement will nevertheless contain good news. Growth this year and next will be forecast to be a little higher than the Office for Budget Responsibility (OBR) predicted in November. Instead of the 1.4% growth for this year and 1.3% for 2019 predicted then, consensus forecasts point to figures of 1.6% and 1.5% respectively, perhaps even a little higher. Growth over the next few years is still likely to be a little weaker than the OBR predicted in March last year but it is heading in the right direction.

Even more dramatic will be the figures on government borrowing, the budget deficit. Instead of the £49.9bn the OBR expected for this year, 2017-18, in November, and the £58.3bn it predicted a year ago, the deficit is likely to come in at around £40bn.

The greater significance of this is that it will show that the deficit is 2% of gross domestic product or below, a level not seen since 2001-2. The current budget deficit, borrowing excluding public investment – spending on the infrastructure and so on – has been eliminated.

Achieving that, which again has not happened since the early 2000s, was George Osborne’s original aim in 2010. It has come about three years too late, and it was superseded by a tougher target of getting to an overall budget surplus. But it is a milestone nonetheless.

It raises a couple of questions. Was the austerity needed to get the deficit down worthwhile? And, with the deficit down to a level which bothers nobody very much, is it time for the government to start spending a lot more?

First, for those who are unaware of the history and wondering why it is necessary for the chancellor to be on his feet at all this week, a brief recap. For the past 40 years or so, since the 1975 Industry Act became law, the government has been required to publish two economic forecasts a year.

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Sunday, March 04, 2018
Don't worry, be happy - even when confidence is weak
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

If we’re happy and we know it we should probably clap our hands, as I think I remember singing many years ago. And, however you may feel today, the official verdict is that we are indeed getting happier.

Thanks to an initiative a few years ago by David Cameron, the former prime minister, the Office for National Statistics now measures happiness, alongside whether life is worthwhile, life satisfaction and anxiety.

The latest results, just released, show that in the year ending last September there were what the ONS described as slight improvements in all these wellbeing measures.

Anxiety has risen over the past two years, is higher among women than men, and is only up compared with when it was first measured in 2011-12 among the young, those aged 16 to 24, and the old, those of 90-plus. High anxiety, as in the Mel Brooks film, has been broadly stable.

Though the measures only go back a few years, you could say that we have never felt happier since records began. Many would choose to go back a bit further, perhaps to the 1950s, for a time when they were really happy and you could leave your back door unlocked at night. Even then, however, Harold Macmillan had to reassure voters that they had never had it so good.

Only after a longer run of data will a fuller picture emerge. It is worth saying that the survey was launched when things were pretty grim, a combination of high inflation and a lot of worries about unemployment and austerity.

The official happiness measures raise some questions. How do the statisticians know? And how do we square rising happiness with other measures, like consumer confidence, which suggest people are feeling squeezed and rather miserable?

The answer to the first is that the ONS carries out a survey of a sample of people aged 16 and over. They are asked to respond to four questions: how satisfied are they with life, whether the things they do are worthwhile, how happy were they yesterday and how anxious did they feel.

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Sunday, February 25, 2018
Productivity's up - but keep the champagne on ice
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Amid the flurry of economic news in recent days, one number stood out. This was that, after a strong rise in productivity in the third quarter of last year, there was another strong rise in the fourth. Taking the two together, productivity was rising at an annualised rate of about 3.5% in the second half of last year.

I am sure I do not need to tell you how much it would mean if it marks the start of a sustained revival in productivity. Productivity, the amount of value-added we produce for what we put in, is the ultimate driver of living standards. Without rising productivity there can be no increase in real wages.

It matters for competitiveness, and the huge productivity gap between Britain and our main competitors, in their favour. Closing that gap is important, and not just for national pride.

It is also important for the public finances. The Office for Budget Responsibility (OBR), which looks to have been too gloomy about the budget deficit again – it is likely to undershoot its November forecast by a significant margin – took a red pen to its productivity assumptions then, with important negative implications for the public finances over the medium-term. That productivity downgrade came amid the recent productivity revival. If it was premature in doing so, that would suggest Philip Hammond will have more room for manoeuvre in coming years than he feared.

It is worth putting the recent rise in productivity in perspective. Though it has been customary to talk of productivity stagnation, this is not quite accurate. What is true is that in the middle of last year, output per hour was no higher than at the end of 2007. Having fallen in the crisis, recovered, then falling again from 2011, productivity has been creeping higher in recent years, though creeping is the operative word. Its performance in the second half of last year represented a step change.

It is worth digging into that step change. The productivity numbers were based on a rise in gross domestic product rose of 0.4% in the third quarter and 0.5% in the fourth quarter of last year. The fourth quarter number was revised down to 0.4% after the release of the productivity figures. Revisions to earlier quarters cancelled each other out.

So how do you get to increases in output per hour of 0.9% and 0.8% respectively?

The answer is that in both quarters hours worked fell, by 0.6% and 0.3% respectively. This is, it should be said, a little odd. The job market is tight and full-time jobs have dominated the recent rise in employment, so why are people working fewer hours?

That is why, taking another measure of productivity, output per worker, there is little in the figures to get excited about. It rose by a reasonable 0.5% in the third quarter of last year, but by only 0.2% in the fourth, and at the end of 2017 was a mere 0.5% up on a year earlier (compared with 1.1% for the output per hour) measure. Adjust those figures for the downward revision to GDP and output per worker rose by only 0.1% in the fourth quarter and was just 0.4% higher than a year earlier.

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Sunday, February 18, 2018
Blooming Europe needs to grasp the nettle of reform
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

As impressive recoveries go, it is up there with Jesus raising Lazarus from the dead, four days after he had apparently shuffled off this mortal coil. The corpse that some said Britain was shackled to now looks very sprightly.

For those who have long memories of relations between Britain and Europe, this is a kind of reverse “Up Yours, Delors!”. Instead of moping around in disappointment at Britain’s decision to leave the EU, the European economy has been on a victory roll.

It reminds me of nothing more than the French taunters in Monty Python and the Holy Grail, who told the English knights of King Arthur that they could go and boil their bottoms and promised to spit, or something like that, in their general direction.

France is on a political roll. It has Emmanuel Macron, and his world view, who always rises to the occasion in speeches and interviews. We have Boris Johnson.

The figures tell the story. Last year, according to new figures from Eurostat, the eurozone and wider EU economies grew by 2.5%, the best for 10 years. In the final quarter, eurozone gross domestic product (GDP) was up by 2.7% on a year earlier, almost double Britain’s 1.5%.

Not so many years ago, the eurozone ‘s difficulties seemed likely to condemn the region to permanent stagnation, a drunken lurch from crisis to crisis. Now growth has returned, even to the worst of the crisis-==hit countries, including Greece. The days when Britain;s growth rate comfortably exceeded that in the eurozone are fading in the memory.

Mario Draghi, criticised for his quantitative easing (QE) programme, particularly in Germany, has one from zero to hero. That QE programme should come to an end soon.

In that final quarter of last year there were strong growth performances from Spain and the Netherlands, both 3.1%, but also from Germany, 2.9%, and even Italy, 1.6%.

Britain is not shackled to an EU corpse but it is still part of the EU, and benefiting from its recovery. Without it, indeed, growth in Britain over the past year or so would have been significantly weaker. Some of the numbers for British exports to EU member states in the year to the fourth quarter are striking: France up 24.6%, the Netherlands 15.2%, Ireland 8.5%, Germany 7.7% and Sweden 7.6%. Outside the EU, exports to China grew by an excellent 24.1% from a low base (and remain below British exports to Ireland), but exports to America fell by nearly 5%.

There is no sign yet that the return of EU and eurozone growth is a flash in the pan. The latest purchasing managers’ index for the eurozone, produced by IHS Markit, showed growth at a near 12-year high, and well spread across countries and sectors.

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Sunday, February 11, 2018
Be braced for a bumpy ride back to normal
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The economic story of the week was the Bank of England’s “hawkish” signal that interest rates could rise “somewhat earlier and to a somewhat greater extent” than it expected three months ago. The financial story of the week was the record 1,175 point fall in the Dow Jones on Monday. It wasn’t a Black Monday, but it was pretty grey.

It was followed by wobbly Thursday, another 1,000 point fall, before a small recovery on Friday.

My task today is to draw these two things together, and it is not as hard as it sounds.

In normal times the Bank’s more hawkish stance on interest rates would be looked at through the spectrum of what Mark Carney, the governor, described as “the shallowest investment recovery in more than half a century”.

Housing market activity remains very soggy, as described here last week. And, while the Bank offered hope that the squeeze on real incomes will ease this year, thanks to bigger pay rises and falling inflation, we are not there yet. Normally these would not be the conditions in which the Bank would contemplate rate hikes, with the smart money on May.

These are, of course, not normal times. A stronger world economy has provided for a modest upgrade of the Bank’s growth forecasts, although they remain notably weaker than it was expecting two years ago. But the economy’s capacity to grow has also suffered, thanks to low investment and weak productivity. Growth of 1.75% a year compared with a speed limit of 1.5%, means more “limited and gradual” rate rises. We wait to see whether the Bank delivers on its hints.

Part of what the Bank is embarked upon is what is known in the jargon as normalisation. Monetary policy has been abnormally loose, and the aim is to return policy to something a little more normal. That may only mean 2% or 2.5% official interest rates in Britain, in time, but it is higher than the near –zero rates that have prevailed for the past decade.

There is, however, a bigger story here, and it takes us back to that plunge on Wall Street. Part of the normalisation will be achieved through higher interest rates, but part of it comes through reversing quantitative easing (QE), the assets purchased with electronically created money that central banks employed to prop up crisis-hit economies.

The great QE experiment is coming to an end. In America, the Federal Reserve is running down its QE holdings by the simple expedient of not reinvesting the proceeds of the maturing bonds it has on its books. Barring a disastrous cliff-edge Brexit, we are unlikely to see any more QE from the Bank. The European Central Bank will wind down its monthly QE purchases to zero this year.

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Sunday, February 04, 2018
Why a soggy housing market should concern us all
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

There are large parts of the economy in which it is relatively easy to work out what is going on. The housing market, it is fair to say, is not one of them. Contradictory information abounds, on prices, activity and just about everything else.

Nevertheless, it is also fair to say that, cutting through the undergrowth, we have a picture of a housing market that, if not “broken” – the government’s preferred phrase when talking about something that is on its watch – is certainly badly injured. It is a picture of weak, and probably weakening activity, slowing or stagnant house-price inflation and buyers and sellers who are so conditioned to expecting disappointment that they have given up on the market.

I base that on three pieces of evidence. The first comes with the Bank of England’s figures for mortgage approvals. They dropped by 6% in December to 61,039 and, before you ask, the figures are seasonally adjusted.

Mortgage approvals are a great barometer of housing market activity. In the 10 years leading up to the financial crisis, they averaged 104,000 a month, with monthly peaks of 134,312 in 2003 and 128,915 in 2006, both comfortably more than double the latest figure. They slumped to just 26,684 in the autumn of 2008, subsequently recovered to nearly 75,000 but are now at their lowest for three years.

The latest monthly fall has been attributed by some to the fact that the Bank raised interest rates to 0.5% in November, the first increase in official interest rates for more than 10 years. Did that have the immediate effect of cooling the housing market?

If it did, that would suggest a housing market, and indeed an economy, acutely sensitive to even very small changes in interest rates. I suspect that there was not that much of a direct effect – by the time people apply for a mortgage they have been in the process of house hunting for some time - though I would not rule out the possibility that some of the commentary around the November rate rise, that it was likely to be the first in a sequence, had a dampening effect.

The second bit of evidence is on house prices. You could go quietly mad trying to reconcile the various house price measures, some of which are measuring different things. There are asking price measures, which tend to be the most volatile, and measures of house prices at the mortgage approval stage. One of these, from the Nationwide Building Society, showed what it described as a “surprising” acceleration in house-price inflation from 2.6% to 3.2% last month.

It was indeed surprising. I tend to look at another measure, produced for LSL Property Services by the consultancy Acadata. It uses actual price data at which properties are bought and sold, including cash purchases.

It will provide a January update shortly but for December, and 2017 as a whole, it showed that house prices in England and Wales stagnated, rising by just 0.2% through the year. That, it should be said, reflected considerable price weakness in Greater London, where prices dropped by 4.1%, and a subdued picture for the rest of the south-east, with a rise of just 1%. Without the drag from them, house-price inflation was 3%, though that was still well down on the 7% reached in the first half of 2016.

The evidence on house prices suggests, with some certainty, a slowing of inflation, which few people will begrudge. The big question is whether falling prices in London ripple out to the rest of the country, as has happened in the past. Nationally, with continued very low interest rates (even with a rise or two this year) and limited supply, the scope for meaningful house price falls is limited. Stagnant prices are, however, very likely.

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