Sunday, October 17, 2021
Global Britain badly needs to improve its export 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. Not to be reproduced without permission.

Trade is in the news again. Felixstowe has been clogged up with tens of thousands of uncollected containers and big ships have been diverted elsewhere to ports within the EU. There are said to be similar strains at other ports, caused in part by a shortage of HGV drivers. Global Britain’s window on the world has not closed but it is barely ajar.

There have been faint rumblings of a trade war between the EU and the UK over the Northern Ireland protocol, adding to the restrictions put in place by the government’s thin trade deal, though those rumblings have faded in recent days.

There is a wider issue about trade that I wanted to discuss today, however, and it has long-term relevance for the government’s global Britain ambitions. The latest figures for the economy as a whole – the monthly gross domestic product figures – suggested that a return to pre-pandemic levels, those prevailing in February 2020, is getting closer.

The official statisticians suggest monthly GDP is now only 0.8 per cent below where it was in February 2020. I have mentioned before that there is a slightly tougher test, based on quarterly GDP data, but progress is being made there. The number of employees on payrolls is above pre-pandemic levels, though the number of self-employed people is not. There is a pattern here.

It is not, though, a pattern that applies to trade. The trade figures tell the story. In the three months to August, UK exports of goods, at £80.3 billion, were more than 13 per cent lower than in the corresponding period of 2019, before the pandemic. Adjusted for inflation, the fall was even bigger, 14 per cent.

There was an even bigger fall in exports of services, the dominant sector of the UK economy, which dropped by 14 per cent in cash terms and more than 20 per cent in real terms.

This is, on the face of it, very odd. This is a year of strong recovery in world trade, with the International Monetary Fund a few days ago predicting a rise of 9.7 per cent in global trade volumes this year, more than making up for the 8.2 per cent fall last year.

The weakness in exports of services is, for now, best kept in the pending tray. There was an even bigger slump in UK imports of services, roughly 30 per cent. Coronavirus restrictions have severely impacted trade in services. Travel and transport are important components of trade in services and are only slowly returning to normal. The absence of foreign tourists in Britain, and British tourists travelling abroad, helps explain the data.

There are also some temporary factors in trade in goods. When a shortage of microchips means fewer cars are rolling off production lines, for example. Exports of machinery and transport equipment in the latest three months were down by 17 per cent on two years’ earlier, while imports showed a fall of 15 per cent.

Caveats aside, however, there is still something rather worrying about the UK’s trade performance. The trade deficit in goods, £163 billion over the past 12 months, looks set to break new records this year. The biggest annual deficit on record was £142 billion in 2018. And, while exports of goods have slumped compared with two years ago, imports are down by a mere 1 per cent.

As with so many things happening at present, a combination of Brexit and Covid is at work, and it is difficult to disentangle the two. Indeed, the figures suggest that this combination is throwing up some odd effects.

Exporters are finding it tougher to sell into the EU but you would not necessarily know it from the figures. In the latest three months, exports of goods to the EU, £40.2 billion, accounted for just over half of all goods exports, £80.3 billion. The share of exports going to the EU, indeed, is higher now that it was when we were a member, even though such exports are down by a couple of billion on a quarterly basis on where they were two years ago.

The rise in the EU export share reflects a slump in exports to the rest of the world. Non-EU exports are down by a huge 21 per cent compared with two years ago. These are the markets that, according to the government, we left the EU to exploit.

Sunday, October 10, 2021
Sunak on tenterhooks over a rise in borrowing costs
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.

In the elegant Court Room of the Bank of England’s Threadneedle Street headquarters, there ls one of the most famous weathervanes in the world. Installed more than two centuries ago, its function was to tell the Bank which direction the wind was blowing, and thus when cargo ships were likely to arrive at the Port of London. This was information vital to controlling the supply of credit.

I am not aware of such a weathervane at the Treasury, though it sometimes employs a hawk to keep the pigeons at bay. Its electronic equivalent, however, monitors closely what is happening in the markets; the financial wind blowing from the east, the City and Canary Wharf.

For Rishi Sunak, who has racked up more debt for every month of his tenure than any of his predecessors – an average of nearly £24 billion a month since February last year - what happens to the east of SW1, in the financial markets, is crucially important.

The Bank, if it raises interest rates, will add to the cost of servicing that debt. It currently stands at £2.2 trillion (£2,200 billion) and is at its highest relative to gross domestic product – 97.6 per cent – since 1963, when it was still coming down after the war.

Even if the Bank does not act in the face of the inflationary shock the economy is facing, the gilt market may do so. Indeed, the reaction in the gilt market – the market for UK government bonds – could be greater if traders were to perceive that inflation was being allowed to get out of control.

There was a taste of this a few days ago, when gilt yields – the market interest on them – spiked higher in response to a surge in international gas prices. Yields, and thus the cost of borrowing, remain remarkably low, however. The yield on 10-year gilts, roughly 1.1 per cent, sometimes a little higher, is above the 0.1 per cent last year, but lower than typical levels of between 3.5 and 4 per cent in the early 2010s when David Cameron and George Osborne embarked on their austerity programme, fearful of what the markets might do it they did not.

In his speech to the Tory conference in Manchester, the chancellor took a rhetorical hard line against debt. “I believe in fiscal responsibility,” he said. “Just borrowing more money and stacking up bills for future generations to pay, is not just economically irresponsible. It’s immoral.” He sounded, rarely at the Manchester gathering, like a traditional Tory, and even praised his Tory predecessors.

His big fear is not just what he sees as the immorality of high debt. It is the cost of servicing that debt. Current very low interest rates, and the Bank’s extensive quantitative easing (QE), mean borrowing is cheap. By the end of the year significantly more than 40 per cent of the gilt market will be owned by the Bank, and that is as close as it can be to free borrowing for the government.

In 1963, when government debt was last this high relative to the size of the economy, the government’s debt interest bill was 3.2 per cent of GDP. Now it is 1.1 per cent. Were it now to rise to that 1963 level, it could add nearly £50 billion to the government’s debt interest bill.

Sunday, October 03, 2021
As pandemic support ends, get ready for the hard yards
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 some good news on the economy a few days ago, which you may have seen. The economy grew by 5.5 per cent in the second quarter, up from an initial 4.8 per cent estimate of the rise in gross domestic product. It meant that the UK’s inferiority complex in relation to other big European countries is over.

UK GDP in the second quarter was 3.3 per cent below the pre-pandemic level in the final quarter of 2019, which sems like a very long time ago. This was exactly the same as Germany, fractionally worse than France but better than Italy. America got back to pre-pandemic GDP levels in the first quarter and China did so last year.

The GDP rise in the second quarter was driven by consumer spending, which rose by 7.9 per cent as restrictions were lifted. The saving ratio fell quite sharply, to 11.7 per cent of disposable income, and the statistics point to a slightly smaller wall of savings money waiting to be spent than previously estimated. There was also a big rise in government spending, by an upwardly revised 8.1 per cent.

Businesses have yet to respond to the generous investment incentive unveiled by Rishi Sunak in his March budget, the so-called super deduction against corporation tax. Though on the face of it there was healthy 4.5 per cent rise in business investment in the April-June period, official statisticians point out that much of this was in buildings, which do not qualify for the incentive. Investment in equipment and machinery, which does qualify, was flat.

For those who are captivated by historical comparisons, we may have to drop the “worst in 300 years” label for last year’s plunge in GDP. I quite liked that label, so it is a pity.

The latest revision, a drop of 9.7 per cent last year rather than 9.8, means that the appropriate comparison is with the tumultuous year of 1921, when GDP also fell by 9.7 per cent, rather than the Great Frost of 1709.

In 1921 the Irish war of independence was raging, culminating in the Anglo-Irish treaty at the end of the year, which paved the way for an independent Ireland, initially the Irish Free State, and the creation of Northern Ireland. Among other things to happen in 1921 was the Chequers became the prime minister’s official residence, England suffered a whitewash in the Ashes in Australia and Agatha Christie’s first novel was published in England.

That is looking back a long way. And, while the second quarter news was better, it too is a little historic. We have now reached an interesting, perhaps pivotal moment. Having been given an enormous amount of support during the pandemic, the economy is on its own.

The furlough scheme ended at midnight on Thursday, and Friday saw an increase in VAT on hospitality and one or two related areas from 5 to 12.5 per cent. The cut in stamp duty, extended to September 30 in the March budget, also came to an end on September 30. Most controversially, the £20 a week universal credit uplift will end this Wednesday.

Sunday, September 26, 2021
Amid chaos, this recovery is starting to look very messy
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.

The story so far. Energy suppliers are dropping like flies and millions of households and businesses face higher bills. The government has just paid an American-owned fertiliser manufacturing firm tens of millions of pounds to keep production going and head off a crisis in the availability of carbon dioxide, vital to food supplies.

There are empty shelves in supermarkets and warnings that many products will not be available for Christmas. Fresh produce is rotting in fields because a lack of pickers. Panic buying of petrol is resulting in huge traffic jams.

It never rains but it pours, and this looks like a perfect storm. “Events, dear boy, events,” is the most overused phrase in politics but these are the kind of events that can make any government look incompetent, and this government has less of a journey to make than many.

They remind us that in normal circumstances the economy, which is a highly complex mechanism, works pretty well, even if some of those workings are below the surface. Many people will have been surprised both by the widespread need for carbon dioxide and that you need to be making fertiliser to produce it.

What has gone wrong? What has happened to post-pandemic, post-Brexit sunlit uplands, made possible by a successful vaccination programme? Why is there a level of chaos that was avoided during previous crises? Why does it start to feel a bit like the 1970s?

Let me introduce a new analogy into the discussion. I have an old sports car, as well as a sensible vehicle. It is not a vintage model, though when I can get petrol it will fall foul of the expanded London ultra low emission zone, which comes in next month. I think I cut quite a dash in it with the top down - the car's not mine - though others disagree.

At 50 mph, the car goes along smoothly. At 60 it starts to rattle and at 70 I hear it saying: "What do you think you are doing?" At much more than 70, not only would I risk a speeding fine but I would expect the attentions of the national society for the protection of cruelty to cars.

For Britain's economy, one or two per cent growth is the equivalent of 50 mph. We are comfortable pootling along at this unremarkable speed. Three per cent growth is achievable, perhaps equivalent to 60 mph. It used to be a regular occurrence but we have not had growth of three per cent or more since 2005.

Now, how about the 6.7 per cent growth for this year for the UK predicted a few days ago by the OECD? It is not the highest growth prediction for this year but is the most recent. It is the kind of growth rate, even as a bounce from last year's near 10 per cent slump, which in motoring terms would have bits falling off and a screaming engine threatening to explode on the carriageway.

Sunday, September 19, 2021
There's a real risk that the inflation cat is out of the bag
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.

As inflation shocks go, the one unveiled a few days ago was quite a big one. The jump in consumer price inflation from 2 to 3.2 per cent in August was, according to official statisticians, the largest ever recorded increase in the rate, though the data only goes back to January 1997.

For those who still follow the retail prices index, and I know from my mailbag that many do - though the Office for National Statistics would rather they did not - inflation on this measure rose to 4.8 per cent, from 3.8 per cent. The RPI is still widely used, including for student loans (RPI inflation plus 3 per cent).

There were temporary factors in the rise in inflation. August this year compared with the Eat Out to Help Out price cuts of a year ago, courtesy of the chancellor. A rise of 18.4 per cent in used car prices since April is very odd and reflects supply shortages of new vehicles.

There are, on the other hand, many reasons to think inflation will go higher. Food prices rose by 1 per cent last month alone and while the increase over 12 months was a mere 0.3 per cent, that annual rate seems bound to rise. Similarly for household energy prices. Gas prices last month were 4 per cent down on a year earlier. They are now on the up

“Pipeline” measures of inflation, meanwhile, are also increasing. Industry’s raw material and fuel prices last month were 11 per cent up on August 2020, up from 10.4 per cent. Output or “factory gate” prices were up 5.9 per cent, from 5.1 per cent.

Other countries are experiencing high inflation. In America there was reassurance that consumer price inflation dipped, but it only fell to 5.3 per cent from 5.4 per cent and remains high. The UK’s inflation rate was the highest since March 2012, but Canada’s rose to an 18-year high of 4.1 per cent.

Some of the influences are global, though we have we or two special factors of our own, but the effects of inflation are local. And despite a long list of temporary factors, including the fact that higher prices are concentrated in a few areas rather than across the board, the question of whether the inflation cat is escaping from the bag is a live one.

What does the Bank of England do? Its monetary policy committee (MPC) meets this week and has a decision to make. I got quite excited earlier this month when the governor, Andrew Bailey, told the House of Commons Treasury committee that the committee was split 4-4 last month on whether the conditions had been met for a rise in interest rates.

Sunday, September 12, 2021
After this dog's dinner. can we sustain record taxes?
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 have had some momentous announcements in the past week, dwarfing most budgets, though without the red box, the choreographed photo opportunities and the usual theatre. There are a couple of big questions I want to try to answer about these announcements, but first let me offer a quick assessment.

The policy package unveiled by the government to “fix” social care, and which included a big 2.5 percentage point in national insurance contributions – 1.25 points from employees, 1.25 from employers – was a dog’s dinner. So much of a dog’s dinner was it, in fact, that Pedigree, for years the manufacturers of Chum, could legitimately sue for breach of copyright. It may prolong this government’s active life, to recall a successful canine advertising slogan, but otherwise there was little to be said for it.

It was dog’s dinner because, even with a couple of minor tweaks, national insurance (NI) was the wrong tax to increase, as I pointed out a couple of weeks ago. The alternative to raising £12 billion a year (and we even had the triple counting horror of calling it £36 billion) would have been a two-percentage point increase in income tax.

The government chose not to do that, even though it would have been fairer, partly because all governments hate raising the highly visible income tax rate, preferring the more mysterious and widely misunderstood NI, which does not affect most pensioner incomes. Not only that, but as most taxpayers are probably unaware, income tax is already due to start going up from next year, through the stealthy route of freezing the personal allowance and higher rate threshold for four years. That will mean 1.3 million more taxpayers, and 1 million more on the higher rate, as well as higher taxes for all income taxpayers relative to indexing those allowances.

Even if NI was your chosen tax, there were better ways of doing it, as a useful London School of Economics/Warwick University report pointed out. It estimated that removing existing NI exemptions and earnings limits could raise considerably more than £12 billion a year, making room for a cut rather than an increase in the NI rate. As it is, last week’s announcement has further complicated our ludicrously complex tax system and introduced an even bigger discrepancy into the tax treatment of the employed and self-employed.

It was also a dog’s dinner because the extra money, overwhelmingly for the NHS, was not accompanied by any meaningful reform to ensure that the money is well spent, or even that it achieves its aim of eliminating the Covid backlog of treatments. Social care, the poor relation of the announcements, will remain a creaking and largely unreformed system, staffed by poorly paid but dedicated workers who are now in short supply. Anybody who thinks last week’s announcements have fixed social care has swallowed a lot of snake oil. When the elderly and infirm and their families get stung with the hotel costs of residential care, they will realise that the prime minister’s promises did not add up to very much.

It was a mess, and no way to make policy because, as we have seen quite often during the pandemic, we have a fiscal watchdog, the Office for Budget Responsibility (OBR), but it remains chained up at key moments. There has been some sterling work by the Institute for Fiscal Studies and Resolution Foundation, but the OBR has not been allowed a growl, and the package was nodded through the House of Commons without proper scrutiny.

Sunday, September 05, 2021
Sunak turned on the spending taps - can he turn them off again?
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.

One of the encouraging signs that things are returning to some kind of normal is the extent of the jousting ahead of the Treasury’s comprehensive spending review, which is expected at the end of October. Rishi Sunak has asked the Office for Budget Responsibility (OBR) to prepare a forecast for publication on Wednesday October 27, which is significant clue to the timing.

The jousting includes a demand for £10 billion extra for next year for the National Health Service in England to deal with the Covid backlog of treatments and operations. The demand, from the NHS Confederation and NHS Providers, is on top of plans already outlined.

For similar reasons – the Covid backlog – head teachers and some academy chains want £6 billion extra, which is significantly more than the government has committed.

Meanwhile, 100 organisations have written to the government calling for the £20 a week universal credit uplift introduced last year to be extended or made permanent. And an army of pensioners is ready to march on Downing Street – some of them having got in a bit of practice during the Extinction Rebellion protests – in defence of the triple lock for the state pension.

The chancellor faces a challenge. Having turned the taps full on during the pandemic, during which money sometimes seemed to be no object, he now has to resort to a more traditional Treasury posture. Public spending in 2020-21 reached the equivalent of 52 per cent of gross domestic product, by some margin a peacetime high. When the UK was forced to turn to the International Monetary Fund in 1976 for a bail-out, spending was 46 per cent of GDP.

A couple of these battles appear to have been resolved, though you can never say for sure until the ink is dry on the documents. The £20 a week universal credit uplift was, like the furlough scheme, a pandemic measure. And, unless the coronavirus has more shocks in store for us over the autumn and winter, it will go. The government will argue that it is better to target help on those most in need of it, rather than through a blanket increase in universal credit.

Similarly, the government seems prepared to risk the wrath of pensioners by not increasing the state pension in line with the Covid-distorted average earnings figures, which in the latest figures showed an annual rise of 8.8 per cent. The increase over two years, unaffected by the furlough distortion, was 7.1 per cent.

Both of these decisions, assuming they remain decisions, are right, though they will be met with protests. Universal credit worked very well as an emergency top-up during the pandemic, and it followed a four-year freeze on working-age benefits but targeting makes sense. It would be wrong, too, to provide state pensioners with a windfall as a result of distorted average earnings figures.

What about the bigger picture? The chancellor stands to benefit from the fact that the OBR’s forecasts for the budget deficit are turning out to be too high. In the first four months of the current fiscal year, April-July- borrowing was hefty £78 billion, but this was £26 billion below the OBR’s projections.

Sunday, August 29, 2021
A Brexit headwind the UK recovery could do without
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.

The script for the economy’s post-pandemic recovery did not include a sequence in which a series of economic indicators started pointing downwards, and yet that is what we have been seeing. Why is it happening, and how serious is the threat to the upturn?

To rehearse some of the evidence, official figures a few days ago showed a surprise 2.5 per cent fall in retail sales last month. Though some diversion of spending from shops to hospitality had been expected, this was not the opening-up spending boost retailers had expected. The volume of sales fell back in May after April’s re-opening of non-essential retail, trod water in June and then fell last month.

You write off the British shopper at your peril and the CBI’s latest distributive trades survey, covering part of this month, was buoyant, though also reported very low retailer stocks and mounting supply problems. There is no doubt, however, that this period is proving to be a lacklustre one. The latest Springboard footfall data, monitored on a weekly basis by the Office for National Statistics, showed that footfall in the week from August 15 to 21 (inclusive) was 80 per cent of equivalent levels in 2019, and down by two percentage points on the previous week.

Housing transactions also fell back sharply last month, as the industry paused for breath following the rush to benefit from the full stamp duty reduction, which was extended by the chancellor to June 30 in his March budget. Though a fall was expected, July’s 62.8 per cent drop between June and July was heftier than anticipated.

Then there was the headline-grabbing announcement from the Society of Motor Manufacturers and Traders (SMMT), that only 53,348 cars were made in the UK last month, the lowest since 1956 and 37.6 per cent down on last year, when the industry was coming out of the first lockdown. July is usually an important month for production, in the run-up to the September registration change, though most cars built in Britain are exported, and most sold here are imported.

The immediate weakness of car production was the result of global chip shortages and the “pingdemic” which kept workers away from factories. Overlaying it, though, is the impact of Brexit. In the run-up to the EU referendum, strongly rising production suggested that the industry was on course to beat the all-time high of 1.92 million cars, achieved as long ago as 1972. But the industry has lost capacity as a result of Brexit, as was inevitable, and even before the pandemic struck rolling 12-month output had slumped by nearly half a million to 1.3 million.

The closely-watched purchasing managers’ surveys tell the story well. Taking manufacturing and services together, the “flash” composite output purchasing managers’ index (PMI) has fallen to 55.3 this month, its lowest for six months, and down from 59.6 last month and recent levels above 60.

So what is happening? The UK economy is being affected by a cocktail of factors, some of them global, some very much local. The global factors are well known. Supply bottlenecks, sharply rising shipping costs and microchip shortages are affecting industries the world over, though they not sufficient to prevent a strong global economic recovery.

The Delta variant of the coronavirus is also a global factor which is affecting some countries, including America, more than others, and has seen lockdowns reintroduced in parts of the world. The UK has very high case numbers but, thanks to a successful vaccination programme, only a fraction of the hospitalisations and deaths of previous Covid waves.

But the UK’s vaccination advantage, which earlier provided a springboard for recovery, has faded. The share of the population fully vaccinated in the UK is now exceeded by about a dozen countries, including several in Europe, and others are closing fast.

Then there is Brexit, our very own millstone. While the UK’s PMI fell last month, the eurozone equivalent held up well at 59.5, “close to a 15-year high”, according to IHS Markit, which is responsible for the data.

There remains a dispute about precisely how many EU migrant workers left the UK last year, and we may never know precisely, though people in the haulage, hospitality and construction industries have a pretty good idea. All this was both predicted and predictable.

There are labour shortages in other countries, it should be noted. Covid seems to have resulted in a reduction in the effective supply of labour, particularly for certain jobs, for a variety of reasons Brexit is one reason for the shortages in the UK but it is not the only one.

The government, in response to pleas from various industries to ease migration rules for EU workers has said, in effect, that people voted for this and will have to lump it. With retailers already warning of disruptions to Christmas supplies that is an approach that Yes Minister’s Sir Humphrey Appleby would describe as “brave”. Boris Johnson already has one Christmas debacle under his belt. Steve Murrells, chief executive of the Co-operative Group, says “Brexit and issues cause by Covid” are causing the worst supermarket shortages he has ever seen.

Even before post-Brexit rules have been implemented, the UK’s single market exit is exacerbating supply shortages in the UK. Many firms complain of the difficulties of accessing supplies from the EU. Official figures show that, even after a sharp recovery in the second quarter of the year, imports from the EU in cash terms were 16 per cent down on their 2019 level. The full picture will only emerge when all the distortions drop out of the figures but the omens do not look good.