Sunday, June 24, 2018
We don't need a new Bank target - but we do need to raise our game
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.

Just when you think there is nothing new to say about one of the defining problems of our age – stagnant productivity growth – somebody comes up with something new. A report commissioned by John McDonnell, Labour’s shadow chancellor, has called for the Bank of England to be set an additional target, that of achieving productivity growth of 3% a year.

Productivity, output per worker or, as it is more commonly measured, output per hour, has been the missing link in the economy in the period since the financial crisis. Had it made up the ground lost then, something that usually happens after recessions, we could be looking at gross domestic product (GDP) per worker 20% higher than it is. That was where the pre-crisis trend, if maintained, would have left us.

Most of that would have translated into a level of GDP a fifth larger than it is, alongside much better public finances; the budget deficit, 1.9% of GDP in 2017-18, would have long been eliminated and there would be no worries about how to fund the £20bn-plus boost to National Health Service spending.

Sustained growth in productivity of 3% a year would be transformative, converting Britain from the seven-stone weakling of the international productivity comparison tables to a country capable of kicking sand in anybody’s face. We could laugh in the face of Brexit and the uncertainties and prolonged drag on economic growth it brings.

To put it in perspective, the Office for National Statistics has data on GDP per hour worked going back to 1972. In that time, productivity growth has averaged 1.8% a year, so 3% would be an improvement of 1.2 percentage points, or more than 60%, on that long-term average.

By decade, productivity growth averaged 2.2% in the 1970s, 2.4% in the 1980s, 2.3% in the 1990s, 1.4% in the 2000s and just 0.5% since 2010. McDonnell’s Labour is sometimes accused of wanting to go back to the 1970s but in terms of its productivity ambitions it wants to go further.

It is not impossible; there have been 11 years in the past 45 when productivity has grown by 3% or more, years of strong economic growth or falling employment. But it is a long way from where we are now. The last 3%-plus productivity year was in 2000.

Much of the response to the report commissioned by the shadow chancellor, written by the consultancy GFC Economics and Clearpoint Advisors, has been that it reflects muddled thinking. Monetary policy and financial stability, the Bank’s responsibilities, have no direct links to productivity and adding to its targets merely makes it more likely that it will miss its central one, that of controlling inflation.

Where central banks have adopted so-called dual mandates, targeting employment as well as price stability, as in America, Australia and, currently, in New Zealand, there is a logic. Low inflation is a necessary condition of rising employment. But when it comes to productivity, some of the best years for its growth in Britain have been alongside high inflation, including the infamous Barber boom of the early 1970s.

Sunday, June 17, 2018
Why jobs are booming when growth stays weak
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.

Today, away from the parliamentary kerfuffle over Brexit, Donald Trump’s dangerous protectionist rhetoric, higher interest rates in America, the prospective end in December of quantitative easing in Europe and other momentous issues, my attempt to answer something that has been puzzling me for a while. Why is Britain’s labour market so strong when growth is quite weak?

The latest official statistics brought news of what appears to be a continuation of Britain’s jobs’ miracle. The number of people in work in the February-April period, 32.39m, was 146,000 up on the previous three months and 440,000 higher than a year earlier.

The employment rate, the proportion of 16-64 year-olds in work, remained at a record high of 75.6%, while unemployment was down 115,000 on the year and, at 4.2%, the unemployment rate is at its joint lowest since 1975.

These are remarkable figures in any context, but particularly so in the light of other economic data. A few days ago the Office for National Statistics (ONS) gave us a Black Monday of official figures, with construction output in the latest three months dropping at its fastest rate for six years, and new orders also slumping; manufacturing output also dropping at its fastest rate since 2012 and the trade deficit widening because of a drop in exports of both goods and services.

All this translated, according to the National Institute of Economic and Social Research, into likely growth of gross domestic product of a mere 0.2% in the March-May period, only a touch above the “barely there” growth of 0.1% in the first quarter. A stronger bounce was expected, including by the Bank of England, from the effects of the “Beast from the East” weather disruption of March. The ONS, it should be said, played down the effects of the weather on the weak first quarter growth.

What the weather takes away, it can also give. The influence of the second-warmest May in 108 years, as well as the royal wedding, can be seen in the May retail sales figures, which showed a jump of 1.3% on the month. That may help the second quarter growth figures but it has not lifted the cloud over retailing, and will not. N.Brown, the Manchester-based company which has been operating since the 1850s, said it has begun a consultation process to close its remaining 20 high street stores. Its brands include High & Mighty, a store I fear I may now never visit.

Retail employment, in fact, is behaving as you would expect. The number of people employed in retailing, wholesaling and related activities has dropped over the past year and, given the recent spate of store closure announcements, is set to drop further.

The big picture, however, remains a puzzling one. Growth in the economy has slowed from around 3% in late 2014 and early 2015 to a fraction over 1% now. The Institute of Chartered Accountants in England and Wales (ICAEW) has just revised down its growth forecast for this year to 1.3%, citing weak business investment.

Sunday, June 10, 2018
The NHS: 70 years old and counting ... the cash
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


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

When Philip Hammond announced that he was scrapping the spring budget and the autumn statement in favour of an annual autumn budget, many people applauded. A single “fiscal event” each year had the merit of preventing chancellors from engaging in too much tinkering, and this self-imposed restraint was why he did it.

The chancellor, however, had reckoned without birthdays which, as everybody knows, can be very expensive. The National Health Service’s 70th birthday is on July 5th and, unlike many 70 year-olds who would be happy with a new pair of slippers and a bumper bag of Werther’s Originals, it wants a big present.

The NHS, which accounts for the vast bulk of UK public spending on health, has shown a formidable appetite for consuming taxpayers’ money over its lifetime. Efforts to put it on a diet have generally been time-limited or followed by a binge.

Since the NHS was established in 1948, health spending has risen from £12.9bn to £149.2bn a year, in today’s prices; in other words it is nearly 12 times what it was. This has been achieved by an average annual rise in real terms – on top of inflation - of 3.7% a year. Taxpayer-funded health spending has risen from 3.5% of gross domestic product (GDP) to its current 7.3%.

It has also been the cuckoo in the Whitehall nest, squeezing other spending, as it is now. In the NHS’s history, health spending has risen from a low of 10% of all outlays on public services in the early 1950s to 30% now. Yes, a third of all spending on public services is on health.

In arriving at this point, successive politicians have gone with the flow. The NHS is not seen by the public as the greedy child in the corner but, according to a survey last week, is the most-loved British institution. Nigel Lawson, who as chancellor had his own battles over NHS funding memorably described it as the closest thing the English have to a religion.

At this point I would normally say that even religions encourage fasting, and that the fast the NHS has been on since 2010, during which spending has risen by between 1% and 1.5% in real terms, a third of its long-run average, has led to greater efficiency. Productivity in the NHS has grown by 1.4% a year since 2010, outstripping the rest of the economy, which is unusual.

I have written many times about the need for greater efficiency in the way the NHS is run, of reforms that spread best practice, of forcing users of the NHS to behave better – charging for appointments mixed for example – and of reforming an organisation that is vast in size, roughly 1.5m employees. Each time I do so I am assured that no effort is being spared to raise efficiency and that the NHS is not as top-heavy as it is usually painted, managers only accounting for 3% of staff.

In any case, with the 70th birthday looming, time is of the essence. The government is in the happy position of knowing what the NHS wants. Three health think tanks, the King’s Fund, the Health Foundation and the Nuffield Trust, have written to the prime minister calling for a long-term settlement for the NHS which would provide a 4% a year increase in real terms. This, they say, “is the minimum required to keep pace with rising demand for services, provide some investment in key priorities such as mental health, cancer and general practice and continue the transformation of services set out in the NHS five-year forward view”.

Sunday, June 03, 2018
A nation that no longer values its shopkeepers
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.

Whatever else 2018 brings it is already on course to be a year to forget for Britain’s retailers, closely followed by casual-dining restaurant chains. It may not yet be retail Armageddon but a year that has already seen the disappearance of Toys R Us and Maplins and a string of profit warnings and store closures – including the announcement of a programme of more than 100 closures from Marks & Spencer – is gaining notoriety for all the wrong reasons.

As someone who has patronised Marks & Spencer since the days of St Michael – the label not the saint himself – it grieves me to see this British icon retrenching. A town centre is never quite the same again after it loses its M & S, as the people of Stockton and Darlington, those famous railway towns, as well as Northampton, Newmarket and Walsall, will soon discover.

The Centre for Retail Research lists 16 medium to large retail business failures in April this year alone, with more jobs potentially affected, over 13,000, than in the whole of last year, and twice the number of stores and employees affected as in the whole of 2015. In recent months the curtain has come down on established furniture retailers such as Multiyork and Warren Evans. Carpetright is struggling, as are Mothercare and House of Fraser.

Behind the big name difficulties, of course, lie very many thousands of smaller failures of family-owned retailers, restaurants, wine bars and the rest, each one a story of broken dreams. Every empty high street property is somebody’s minor tragedy.

The CBI, in a survey, described “a tale of two service sectors”, with business and professional services doing fine but consumer-facing firms struggling against a backdrop of falling sales volumes over the latest three months.

In that respect, the current struggles are not hard to explain. Growth in retail sales, unexpectedly strong even 18 months ago, has petered out. Latest figures show no growth in retail sales over the latest three months. The annual rate of growth of retail sales volumes has come down from a high of 6%-7%, and a typical rate of 3%-4%, to less than 1.5%.

Consumer confidence perked up slightly last month but is lower than it was in 2015, which was the best year since GfK-NOP began surveying it in the 1970s, and reflects deep pessimism among households over the outlook for the economy.

Anybody in the furniture or carpets business, meanwhile, is suffering from what appears to be a permanently lower level of housing transactions. The Bank of England reported that mortgage approvals in April were at their lowest level this year and their second lowest since August 2016, though unsecured borrowing picked up, while the Nationwide building society said house prices fell again last month for the third time in four months.

What the numbers do not full explain, however, is why now? Why is it that we are now seeing what the independent retail analyst Nick Bubb describes as a “perfect storm” affecting Britain’s high streets and shopping malls.

After all, while retail sales are weak, they have been weak before; very obviously in the recession of 2008-9 but also again from 2010 to the early part of 2013, under the impact of falling real wages and George Osborne’s 2011 hike in VAT to 20%. Consumer confidence is weaker than it was a couple of years ago but higher than in that earlier period. The housing market has never got back to pre-crisis levels of activity.

Sunday, May 27, 2018
Italy will work hard to avoid crashing out of the euro
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 comforting when normal service is resumed, by which I mean that Italy has taken its rightful place as the number one worry for the eurozone. The formation of a wacky coalition of the anti-establishment Five Star Movement and the right-wing, anti-immigration League, under an unknown and untested prime minister, Giuseppe Conte, is a little extreme even by Italian standards. But the fact of a populist Italian challenge to living under the eurozone yoke should not be a surprise.

Indeed, when I used to write and talk about the eurozone in the distant days before the financial crisis, I used to say that while the euro would survive it was unlikely to do with all its constituent parts intact and the country I picked as the most likely drop-out was Italy. Traditionally inflationary and fiscally-undisciplined Italy made a strange bedfellow for Germany, which was the opposite of those things.

Then, however, the global financial crisis led on to the eurozone crisis and, rather than Italy, other countries hovered near the euro exit door. Ireland was substituted for Italy in the original “pigs”, Portugal and Spain had their very nervous moments. Greece came within a whisker of crashing out in 2915. Italy was not immune from the crisis’s effects, far from it, but had a background role.

Now Italy is once again firmly in the foreground. Its new government wants to increase public spending and cut taxes, cocking a snook at the eurozone’s deficit rules. Even an Italian president of the European Central Bank, Mario Draghi, is outraged by suggestions that the Italian debt bought by the ECB under quantitative easing be written off. Italy, “too big to fail but too big to bail”, is in the spotlight.

Italy’s economic woes are not new; the peak of Italian post-war economic optimism was probably half a century ago in the 1960s. Its performance since the lira was shoehorned into the euro at its birth in 1999 has, however, been strikingly poor.

Based on full-year figures, in 2017 Italy’s gross domestic product (GDP), in real terms, was just 6.3% above its 1999 level, which averages out at growth of 0.3% a year, equivalent to prolonged stagnation; almost two “lost” decades.

By comparison, German GDP over the same period has risen by 27.4%, more than four times as much, underlining the difference between the eurozone’s haves and have-nots. Britain, which sensibly decided to stay out of the euro, puts both of them to shame, having recorded a 38.9% rise in GDP over the same period.

If Italy’s GDP performance looks terrible, bear in mind that it is smaller than the rise in population – 6.5% between 1999 and 2017 – over the same period. GDP per capita has therefore done even worse.

The unemployment rate, which averaged 10.9% in 1999, at the dawn of the euro, was 11.2% last year and 11% in March this year. The unemployment rate among under-25s is a staggering 31.7%, which is only exceeded by Greece and Spain. Italy’s legendary black economy may mop up some of the people officially measured as unemployed but not enough to seriously diminish what is a huge problem.

So why does not Italy just leave the euro, which has clearly been bad for growth, living standards and has done nothing to alleviate a chronic unemployment problem? Why does it not go the whole hog and follow Britain out of the EU, an Italexit? Italy has a justifiable gripe with the EU because it has had to carry the burden of refugees from North Africa and the Middle East, very large-scale immigration, without much help or even sympathy from the rest of the EU.

EU exit remains a very long shot, but what about an exit from the euro? After all, if I thought Italy was the most likely single currency faller a few years ago, before others intervened, it must surely be a very strong candidate to leave now.

Sunday, May 20, 2018
Long hours are part of the productivity problem
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.

After Ben Broadbent got into hot water a few days ago for his clumsy metaphor, I am determined today not to follow the Bank of England deputy governor and use language that anybody of any sex or age will be offended by. Having said that, I must also comment on what I can only describe as a worrying droop in productivity. Whatever the opposite of a virility symbol is, we appear to have it.

Those who have been following the productivity story will know that it is not been a happy one. I was sceptical about whether an apparent rebound in the second half of last year was another false dawn and rightly so, it turns out. The latest “flash” estimate from the Office the National Statistics showed a drop of 0.5% in productivity, gross domestic product per hour worked, in the first quarter, leaving it just 1.5% higher than ten years ago in the spring of 2008. In 10 years Britain has achieved less growth in productivity than would have been expected in a normal year in the past.

When I talk to business people about productivity, there is often puzzlement. Most are committed to raising productivity in their organisations, and can point to successes in doing so.

Rarely a day goes by when I do not receive a report pointing to ways of raising productivity. The Federation of Small Businesses says small firms could boost productivity significantly if given help by larger businesses further up the supply chain. A study by Oxford Economics, commissioned by Ricoh, says that £37bn of productivity gains could be unlocked, if we invested in what they describe as “the optimal office”; a better workplace resulting in greater efficiency.

When it comes to the macro figures for productivity, as opposed to micro solutions, the calculation is a very simple one. You have GDP which, despite its faults, is still the best overall measure of economic activity. And you have the labour input, measured in hours worked, of which more in a moment.

There are many reasons for Britain’s poor productivity performance. Investment as a share of GDP over the period 1997-2017 was the lowest of 34 advanced economies, including Greece and Italy. Low business investment and inadequate infrastructure are bad for productivity. Levels of skills also compare badly with other countries.

Since the crisis, the normal forces of “creative destruction”, in which inefficient, low-productivity firms fail and new growth leaders emerge has been thwarted. Too many zombies still roam Britain’s economy. A service-sector dominated economy is likely to be less productive than one with a larger manufacturing base.

There is, though, another factor and it goes back to the way that productivity is calculated. We can debate whether the numerator, GDP, is under-recorded, particularly in an increasingly digital age. It may be, but probably not by enough to make a serious difference.

The denominator, however, is also of interest. Throughout modern economic history, it appeared to be a certainty that the working week would decline. So, in Britain, the average working week, 60 hours or more in the 1850s, 55 by 1900, less than 50 in the inter-war years and close to 40 in the post-war period, would fall much further. Computers and automation would reduce the need for people to be in the workplace for so long.

This was the context in which Keynes, in his Economic Possibilities for Our Grandchildren in 1930, speaking out against “a bad attack of economic pessimism”, wrote of the prospect of 15 hour working weeks becoming the norm.

Sunday, May 06, 2018
Manufacturing's new dawn is starting to look like a falso one
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


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

When it comes to bright spots for Britain’s economy over the past couple of years, probably the best place to look has been in Britain’s factories. While the pound’s Brexit tumble pushed up inflation and squeezed household incomes, it provided a shot in the arm for manufacturing exporters.

Manufacturing has, additionally, looked like the one part of the economy taking advantage of the strengthening world economy. The upturn in global growth to something close to pre-crisis norms (the pre-crisis norm being 4%), has been good for industry globally, and in Britain. Until very recently, based on official figures, ministers could boast of the longest run of monthly growth in manufacturing since the late 1960s.

This bright spot was to be welcomed, and we should never fall into the trap of thinking that, because of the rise of services, we are now a post-industrial economy and manufacturing does not really matter.

Though manufacturing has a weight of only 10.1% in the official gross domestic product (GDP) calculation, new research suggests it is much more important and influential than that. The research, by the consultancy Oxford Economics for the Manufacturing Technologies Association, suggests the true impact of manufacturing, taking into account its direct impact, its effect on supply chains and the spending power of people employed directly and indirectly in the sector, is equivalent to 23% of GDP. And, rather than the conventional figure of 2.6m people employed in manufacturing, the “true” figure for jobs dependent on the sector is 7.4m, according to the research.

As the report puts it: “Those numbers give a truer picture of the importance of manufacturing to the UK economy. The reasons are clear: over the last 40 years, manufacturing has increasingly outsourced activities which used to be done in-house—in areas as diverse as logistics and catering. There are also companies, from design houses to accountancy practices, whose activity, or at least a large part of it, is predicated on serving manufacturing businesses.”

It is not just nostalgia that has led some people to yearn for a future in which Britain’s factories play an even more important role in the economy, though it is hard to fund any examples of economies in which the share of manufacturing in GDP has risen after a long decline.

Though some visions of Britain’s post-Brexit future, including those set out by certain Brexit supporters, see only further decline, for others hope springs eternal, and for good reason. Compared with the economy as a whole, manufacturing jobs are characterised by higher skill levels, higher productivity, and better pay and job security.

There is also the not-so-small matter of Britain’s trade deficit in manufactured goods. It appeared for the first time since the industrial revolution in 1982 and has not gone away since. Last year it was an eyewatering £97.6bn.

Sunday, April 29, 2018
A record spending squeeze puts us back in the black
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.

A milestone has been reached, somewhat earlier than officially expected, and I feel honour bound to take note of it. After the global financial crisis wreaked havoc on Britain’s public finances, part of the repair process has now been completed.

The current budget, the difference between day-to-day public spending and tax revenues moved back into surplus in the fiscal year just ended, 2017-18. This was the first time this has happened for 16 years. The deficit on this measure peaked at £100.4bn in 2009-10. Now it is surplus, admittedly by a tiny amount, £112m, but in surplus nonetheless.

In the context of the disappointing growth figures, a 0.1% increase in gross domestic product in the first quarter and just 1.2% over the past year, this is surprising.

In eight years, more than £100bn has been taken off the deficit. George Osborne’s original 2010 target, of eliminating the current budget deficit, has been achieved, admittedly a couple of years later than he hoped. He also hoped to still be around as chancellor to celebrate this moment but events intervened.

True, Britain still las an overall budget deficit, £42.6bn in 2017-18. But that was the lowest since 2006-7, has come down to just 2% of gross domestic product, and was £2.5bn lower than the Office for Budget Responsibility predicted only last month. It, by the way, was more than £110bn below its 2009-10 peak.

The OBR’s forecast miss, which may or may not be confirmed as more data become available for last year’s revenue and spending, provides a snapshot of what has been an extraordinary period of spending restraint. The OBR did not get its forecast wrong because tax revenues beat its forecast. They actually came in a little lower than it had expected.

The biggest mistake it made was in overestimating government spending. It came in some billions of pounds lower than it had expected. Spending undershot and local authorities borrowed less than expected.

And that, in a nutshell, is the story of Britain’s public finances and the fiscal repair of recent years. Look at government receipts, mainly tax revenues, relative to GDP and not much has happened. Their current level of between 36% and 37% of GDP is no different to what it was in 2010-11 and 2011-12.

This measure of the tax burden, which has not been above 37% of GDP in the past 30 years, has not broken new ground, despite some well-publicised tax hikes (alongside some notable reductions).