Sunday, January 20, 2019
After that defeat, even more reason to hug the EU close
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

I worry about the future of hairdressers in this country. I say so because, if business people continue to tear their hair out at the current rate over the political shenanigans over Brexit, there will be nothing left for them to cut.

The House of Commons landslide defeat for the withdrawal agreement negotiated by the government and the EU may have been predictable but was nevertheless depressing. Most depressing, perhaps, was the extent to which it was celebrated not just by hard Brexiteers, as expected, but also by hard Remainers. At both extremes of the Brexit debate are people who will never be reconciled.

I say this not because the deal negotiated by the prime minister’s team was wonderful; it was not but no compromise agreement was ever going to be. Her address to the nation after her government had survived the confidence vote was as tone deaf as you would expect, and almost as bad as her “citizens of nowhere” speech to the Tory conference in October 2016. It is a canard to say that because more than 80% of people voted for the Tories or Labour in the 2017 election, the country is united behind Brexit. Many voted Labour because of its fuzziness on Brexit, a fuzziness which persists.

By the same token, the country is poorly served by Jeremy Corbyn’s stance. Though avoiding a no-deal Brexit is of paramount importance, insisting that the prime minister rules it out before he will agree to consensus-building talks with her is infantile. That would remove the tiny bargaining chip May has with the EU; that we could still shoot ourselves in the foot but it would hurt you a bit too.

Whether that works or not on the politically toxic issue of the Irish backstop, the prime minister deserves praise for the central aim of her approach to Brexit. It has been, certainly since the 2017 election catastrophe, to deliver on the result of the referendum while minimising the economic damage from doing from doing so.

That task has been made more difficult by her own over-hasty adoption of red lines. There was no need in the first flush of her premiership to rule out a modified form of single market membership or staying in a customs union. But minimising the economic damage has been the watchword since mid-2017. The withdrawal agreement was intended, as Michael Gove has said, to get Britain over the line on March 29, after which during a lengthy transition period the battle could be joined on how close a future relationship has with the EU. It was never part of the plan that the withdrawal agreement should fail, and fail so badly.

I still think, as do most City observers, that some form of the agreement will be adopted, after modifications, though that appears quite likely to require an extension of the article 50 process. The risk of a no-deal Brexit, while low, has not gone away. J P Morgan, for example, sees a 45% probability of Brexit on a deal close to the existing one, 25% for a second referendum, 15% a general election, 10% an extension of article 50 into the second half of the year and 5% a disorderly no deal. These probabilities are, of course liable to change, and I would put the risk of a no-deal Brexit a bit higher, but they provide a very useful barometer.

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Sunday, January 13, 2019
Record numbers in work, so why is poverty going up?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

What are we worried about? Ipsos-Mori, the pollster, asks a sample of people every month what are the most important issues facing Britain. Its latest poll, released a few days ago, showed that the top two concerns, Brexit and the National Health Service, were as you might expect.

More surprising, perhaps, was the third biggest public concern; poverty and inequality, named by 21% of people, the highest in the more than two decades it has featured in the survey. It was ahead of the economy, unemployment and immigration, public concern over which has dropped to its lowest level since 2002 even though net migration, at 273,000 in the latest 12 months (mostly from outside the European Union), is not that far below all-time highs.

That people are worried about poverty and inequality reflects well on them, even though the usual response from somebody like me would be that it too does not correlate well with the facts. All the reliable evidence on inequality, for example, shows that while it did rise a lot in the 1980s, it has not done so since, and if anything has come down a little since the financial crisis.

As for poverty, sometimes you have to feel sorry for government ministers, though this is not a popular view at the moment. Once it was quite straightforward. Any government would give its eye teeth for the situation Britain has at the moment, of a record level of employment, a near-record employment rate (the proportion of working-age people in jobs) and the unemployment rate hovering around its lowest since the mid-1970s.

When that government is also presiding over significant increases in the national living wage, what used to be the minimum wage, which rose by 4.4% last year and is due to rise by nearly 5% this year, you might think that it had all bases covered. Last year’s increase directly and indirectly boosted the pay of 5m workers.

So why the heightened concern? Some of it may be seasonal. In winter, and in particular in the run-up to Christmas, people are made more aware of poverty. This newspaper’s Homeless in Britain appeal, in association with Crisis, was an example.

But there is more to it than that. On inequality, even though the big rise occurred a long time ago, people are still entitled to take the view that absolute levels of it are too high, even though those levels are not changing very much. There is, too, a difference between what conventional inequality measures show and the perception that the extremely rich are pulling away from the rest of us.

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Sunday, January 06, 2019
Mind the gap - this could be the year we fall into it
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.

We are just a few days into 2019, resolutions have already been made and broken, and many people have had a stab at predicting the outlook for the year. Forecasts are just forecasts, of course, and the real world can and does have a mind of its own.

In that sense, my piece a week ago recording that most forecasters had a good year in 2018, which generated much more than the usual interest, could be both a comfort and a warning. The comforting part is that forecasters do get it right. Less reassuring might be the thought that lightning does not strike twice.

While I am on that, many people, including my colleague Irwin Stelzer, have asked whether there is any consistency to the performance of the forecasters. I have been running my league table for at least a quarter of a century and, while I cannot promise to go back that far, I should be able to provide a running order for the past three3, five5 and 10 years. Watch this space.
For this year, consensus forecasts for the economy — as compiled by the Treasury each month — have been remarkably stable in recent months, despite the many political twists and turns.

They are for economic growth of 1.5%, a touch stronger than last year, and for inflation to head down to its official target rate of 2% (from 2.3% now) by the end of the year. Unemployment surprised on the downside last year and is expected to hold broadly steady at 4.1% of the workforce.

Britain’s balance of payments is expected to remain significantly in the red, with a deficit similar to last year, which I estimate to have been £85bn. I shall return to that in a moment. As for interest rates, the general expectation is that they will edge higher, with at least one, and possibly two, quarter-point increases from the current 0.75% level. Government borrowing is expected to edge up to about £33bn for the 2019-20 fiscal year, from £31bn in 2018-19.

These forecasts seem perfectly fair. I should say, as you have probably already noticed, that they are conditional on the prime minister getting something close like to her EU withdrawal agreement through the House of Commons and (though you would not describe anything related to Brexit as being smooth)) an orderly Brexit being achieved. This is despite the government’s stepping up its no-deal preparations. I: it cannot be long, amid the controversial chartering of ferries, before a minister invokes the little ships of Dunkirk.

On this basis, Samuel Tombs of Pantheon Macroeconomics predicts growth this year slightly better than the consensus, at 1.6%,; an unemployment rate of 3.9%; and inflation coming down to 1.8%. He thinks there will be a bounce in business investment if there is a deal, as do the chancellor and Bank of England governor (thoughI am a little sceptical). He also sees scope for a significant appreciation in the pound, to $1.40 and €1.27, from $1.26 and €1.11 now, partly on the back of a rise in Bank rate to 1.25%.

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Sunday, December 30, 2018
A good year for the forecasters
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 table to accompny this article is also in The Sunday Times.

So we get ready to say goodbye to a year that, in the end, was a disappointing one. Much of that disappointment relates to the global economy. Back in January it was possible to look at a world economy firing on all cylinders, with strong growth in North America, Asia, the emerging world and, most surprisingly, Europe.

It appeared, at long last, that the world was shaking off the doleful influence of the financial crisis, and that the hangovers, financial and fiscal, had finally gone away. A couple of years of global growth very close to the pre-crisis norm of 4%, with world trade also on the up, appeared to be in prospect.

Sadly, it has not turned out like that. Growth has not collapsed but it has disappointed, closer to 3.5% rather than 4%. We end the year with worries on the increase and the optimism of a year ago taking a back seat. Countries most exposed to world trade, such as Germany, have been caught in the downdraft, ending the year with growth slowing and business confidence weak,

As Charles Dumas of T S Lombard put it in a recent report: “The global slowdown seems to have started in mid-2018, and shows the now decisive importance of emerging markets to the world economy. China and other emerging markets account for 40% of world GDP and their slowdown led to a sharp mid-year reduction in world trade growth … In Europe, export dependence led to a negative third quarter GDP change in Germany and Italy.”

Why the disappointment? High on the agenda are two separate developments in America; Donald Trump’s trade wars and the decision by the Federal Reserve, America’s central bank, to raise interest rates four times during the year, with the last coming earlier this month.

Trump’s tariffs, initially on steel and aluminium but then extending into a more general trade war with China, nipped in the bud a promising recovery in world trade. And, as economists warned, protectionism turned out to be bad for growth.

The Fed, which felt emboldened enough to raise rates for the ninth time since the crisis, and at a faster pace than before, attracted Trump’s ire. But, in its efforts to keep US inflation under control, was also in the vanguard of what was a significant monetary policy reversal. After years of stimulus, via ultra low interest rates and quantitative easing (QE), central banks shifted into reverse gear. Even the European Central Bank ended its QE.

What about Britain? Economic forecasters would be the first to acknowledge that they have good years and bad ones. Most had a couple of bad years around the time of the financial crisis, mainly because even when it was under way, they underestimated how bad its impact on growth would be.

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Sunday, December 23, 2018
Confidence zapped as no-deal worries return
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 would be great to report that we are ending the year on an upbeat note, with uncertainty banished and confidence riding high. Unfortunately, and though I don’t want to spoil anybody’s festive fun, neither of those things are true.

According to the closely-watched GfK consumer confidence index, which has been running since the 1970s, households are ending the year “on a pessimistic note”, with confidence lower even than in the immediate aftermath of the referendum. Though this did not prevent them taking advantage of Black Friday bargains last month, they are downbeat about prospects for their own financial situation, and markedly so about the outlook for the economy. Confidence has not been this low for five years.

Business confidence, meanwhile, is also in the doldrums. On some measures, including the ICAEW (Institute of Chartered Accountants in England and Wales) index, it is it at is lowest since the financial crisis. On others, such as the Federation of Small Businesses’ index, it is at a seven-year low.

It is not hard to see why. Business groups have been at best lukewarm and in some cases openly hostile about the proposals set out in the government’s immigration white paper, of which more below.

More worryingly for business, many thought that talk of a no-deal Brexit, which as I described here recently as madder than any number of mad things you can think of – I left out George the Third – had been safely buried. But, like the many-headed hydra or the black knight in Monty Python’s Holy Grail it will not lie down, and is revived on almost a daily basis, usually by spivs or failed politicians.

The fact that the government has stepped up its no-deal preparations, and is allocating £2bn to government departments and putting 3,500 troops on standby, has added to the concern. Though Downing Street continues to insist that the prime minister’s deal will prevail, if it was certain it would not have embarked on these preparations.

Such is the weird mood that people cannot make up their minds whether the latest phase of the EU’s no-deal preparations would make a disruptive Brexit slightly less disruptive or are an attempt to stitch this country up.

The measures, which will extend equivalence for some financial products, allow flights between the UK and EU and allow UK hauliers to carry goods into the EU for nine months, are intended to minimise the effects on the 27 of the abrupt exit of the 28th. They do not make a no-deal Brexit any less silly.

The disadvantages of a no-deal Brexit are many and large. It would not, as constitutional experts have assured me, absolve Britain of the responsibility for most, an d probably all, of the £39bn “divorce bill”, unless this country wants to start its new era as a pariah state which leaves without paying. We do not, as many continue to exasperatingly claim, trade with the rest of the world on “WTO terms”. We trade on the basis of agreements and arrangements, negotiated by the EU, which are superior to basic World Trade Organisation terms, and which we probably could not carry over in the event of a no-deal Brexit.

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Sunday, December 16, 2018
Something needs to turn up to lift our feeble growth rate
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 would be easy at this moment to despair. Political stability is something we usually take for granted in this country; governments acting in the national interest and most politicians supporting them in that aim. It is one of the hidden but important components of economic stability and success.

But Brexit, as well as casting a long shadow over business and the economy, is breaking British politics. The Tories, who once described themselves as the party of business, are now fatally divided and have done much to damage business over the past three years. The prospect of a coming to power of Labour, also badly divided, is regarded with barely-disguised horror by many people I come across.

When President George H W Bush died recently, he was described as the last of the greatest generation, those who had served in the second world war and then devoted themselves to public service. In Britain, we have a different and far-from-great generation of politicians, too many of whom think they are still fighting the second world war, though they would probably have been spared on the grounds of flat feet, and know little of public service.

We should not despair too much. An old Treasury hand reminded me the other day that we do get through these things, however difficult and intractable they seem at the time. As a fully signed-up member of the “something will turn up” school, this is a view I happily endorse, though the fact that neither of us could quite see the way through the current mess was a touch worrying.

In this spirit of looking beyond the current turmoil I will not dwell this week on the pall that has descended on the economy with markedly weaker fourth quarter growth figures (though a surprisingly sprightly labour market) and a moribund housing market. Exasperation and uncertainty are the dominant sentiments among business people as we head towards the year-end.

Instead it is time, as promised, to look forward, and there is a good excuse to do so. I have not yet written about the IPPR economics prize, under the auspices of the Institute for Public Policy Research. The prize money, totalling £150,000, is underwritten by John Mills, the founder of JML, and is the world’s third biggest economic prize after the Nobel (the Bank of Sweden award) and the Wolfson prize.

I like the idea of prizes like this. They remind us of a time when solving problems like longitude, as John Harrison’s marine chronometer helped do in the 18th century, could be facilitated by the offer of a prize. There is a modern version of the longitude prize running now, awarded to scientists for their work on tackling the problem of antibiotic resistance.

The IPPR prize consists of a main award of £100,000, runners-up prizes totalling £25,000 and a separate £25,000 prize for under-25s. Initial 5,000 word submissions are due in by Sunday January 6; offering an opportunity to fill in the downtime over Christmas. They should be sent, not to me, but to EconPrize@ippr.org.

The aim is straightforward, if ambitious. The prize will be awarded to the best proposal for raising Britain’s sustainable growth rate from its current 1.5% to between 3% and 4%. The judging panel will be headed by Stephanie Flanders and will include, as well as Mills, of Lord John Eatwell of Cambridge University, Dame Helena Morrissey, head of personal investing at Legal & General and Shriti Vadera, chair of Santander UK.

Many economists would say that achieving a sustainable growth rate of 3% to 4% for Britain is a much harder task than anything Harrison faced 300 years ago. Though growth touched a little more than 3% on a quarterly basis just over three years ago, it has since slowed to half that, at best, with the risks to the downside we all know about.

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Sunday, December 09, 2018
Be braced for more chaos, but give thanks to the Bank
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.

How do you like your uncertainty? Like bad luck, it comes in threes. There is the uncertainty of whether the prime minister can survive this week’s House of Commons vote on her EU withdrawal agreement, assuming it takes place, and what happens to the Brexit process if, as overwhelmingly expected, she loses.

There is the uncertainty of the prospect, which is greater than it was, of a Labour government under Jeremy Corbyn. Most people in business I speak to think Brexit will be a big enough disaster. Combine it with a Corbyn government, the only virtue of which might be that it would not be for ever, and you crank up the disaster dial to Titanic levels.

And then there is the risk of crashing out of the EU without a deal next March, the madness of which I discussed last week. In this you combine uncertainty effects with the real impact on supply chains for the most dangerous of cocktails.

There is, I should say, a glimmer of light on this. The advocate general’s recommendation to the European Court of Justice on Britain’s unilateral revoke article 50 unilaterally, together with one of Theresa May’s parliamentary defeats last week, on the Dominic Grieve amendment, has reduced the chances of a no-deal Brexit.

Malcom Barr of J P Morgan, who has been following the twists of turns of Brexit very closely, had put the probabilities as 20% for no-deal, 60% on an orderly exit along the lines proposed by the prime minister or something similar, and 20% for no Brexit. Now he puts the probabilities as just 10% for no deal, 50% orderly Brexit and 40% no Brexit. A no-deal Brexit could still happen, but the chances have fallen, which is good news, and it was this which helped sterling recover from its lows for the year against the dollar a few days ago.

How is the uncertainty playing out? The latest purchasing managers’ surveys, which are closely watched, suggested that the construction industry had a good November and manufacturing held up better than feared. But the alarm bells are ringing for the service sector, with its index dropping to its lowest level since July 2016, the immediate aftermath of the referendum, with Brexit mainly to blame.

As Chris Williamson, chief economist at IHS Markit, which produces the surveys, put it: “The surveys are so far consistent with 0.1% GDP [gross domestic product] growth in the fourth quarter, thanks to the expansion seen back in October, but growth momentum has since been lost and risks are clearly tilted to the downside.” Instead of striding confidently into departure from the EU, Britain will be getting there on hands and knees.

It is in this context that the Bank of England has been coming in for some undeserved flak, including from the previous governor Lord (Mervyn) King. While the reputations of many institutions have deteriorated in recent years, including parliament, the Bank’s I would say has been enhanced. Mark Carney, now more than five years into the role as governor, made it his job to reorganise and professionalise the Bank.

And, while some of us have had run-ins with him, few can doubt his attention to detail. The Bank did not want to publish its internal work on Brexit scenarios but did so in response to a request from the Commons Treasury committee. Not to have published the scariest stress-test scenarios in response to that request would have been dishonest.

Nor was this, as the American economist and New York Times columnist Paul Krugman has argued, a product of “black box” modelling. The Bank has done the work, involving 20 senior economists and the expertise of 150 other professionals over two years.

And, as Krugman also pointed out: “It’s truly amazing that Britain finds itself in this position. If the downsides are anywhere close to what the BoE asserts, given the risk — which we’ve known for a long time was substantial — of a hard Brexit, it was an act of utter folly not to have put in backup capacity at the borders.”

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Saturday, December 01, 2018
In or out, we really need to shake things about
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.

When does a flurry turn into an avalanche? We have certainly had a flurry of economic assessments of the consequences of leaving the European Union in recent days. Any more and I will have to conclude that it is something more powerful.

Let me start today by offering a little guidance on the assessments we have had from the government, the National Institute of Economic and Social Research, the UK in a Changing Europe (UKandEU) and the Bank of England.

The first three look at the long-term consequences of Brexit under different scenarios; where the economy will be in 2030 compared with where it would have been in the absence of Brexit, looking purely at the impact of leaving the EU. The Bank’s assessment, which was drawn up to inform its banking stress tests, is different in that a short-term exercise, looking at only the next few years.

Two of the assessments, from the government and the Bank, would have been kept private if not for the insistence of parliament, and in particular the Commons Treasury committee. All show the economy faring worse than had Britain voted to stay in the EU, though by differing degrees.

To fill in a little detail. The National Institute, attempting to model the government’s proposed deal, finds that the economy will be 4% smaller under it than by remaining in the EU, with gross domestic product per capita down 3%. The UKandEU assessment is that GDP per capita will be between 1.9% and 5.5% lower than otherwise

The government’s assessment is that by 2030 GDP will be between 0.6% (the government’s proposed deal) and 9.3% (no-deal) lower compared with staying in. Its numbers are close to those of others for no-deal but flatter the government’s proposals by assuming that it will be possible to negotiate trade deals with many other countries as well as frictionless trade with the EU by 2030.

As for the Bank, it is not all doom and gloom. If parliament agreed on the government’s proposals, growth could be slightly better in coming years than it projected last month, though still weaker than it thought in May 2016, before the referendum.

The headlines it has generated relate to its “disruptive” no-deal (“tariffs introduced suddenly, no new trade deals, disruption in financial markets) and “disorderly” scenarios (border infrastructure cannot cope, EU trade agreements with third countries are not carried over and UK assets are sold off heavily). Under these, GDP falls by between 7.75% and 10.5% relative to the May 2016 growth path, and by 4.75% to 7.75% relative to the Bank’s latest forecast. This implies, as well as a deep recession and a big rise in unemployment, higher inflation, a sharp sterling sell-off and a 30% fall in house prices.

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