Sunday, April 13, 2014
Plenty of lessons for France in Britain's recovery
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.

Being British means we are easily embarrassed even by modest success. The default position, when it comes to the economy, is to grumble. There is usually plenty to grumble about even in the good times, so that keeps us happy.

So how should we respond to the fact that the International Monetary Fund now predicts that Britain’s growth rate this year, which it thinks will be 2.9%, will be the fastest in the G7?

Should we celebrate, or worry that all too often in the past pride in our economic performance has come before a fall? Can it, in other words, last?

Actually we should celebrate a little. Olivier Blanchard, the IMF’s chief economist, went much too far a year ago, warning George Osborne that he was “playing with fire” with his policies and has been proved spectacularly wrong. Hence the chancellor’s upbeat “victory roll” speech to the American Enterprise Institute on Friday.

Blanchard was not alone - misreading Britain’s economy from the other side of the Atlantic (and sometimes from this side) proved to be an occupational hazard - but he was perhaps the most prominent.

There is also a delicious irony, against the French-run IMF, in that if you were looking for an economy with growth problems, look no further than France, predicted to grow by just 1% this year after 0.3% last year and zero in 2012.

Its new prime minister, Manuel Valls, has outlined a programme of spending cuts, tax reductions and labour market reforms that almost sound Thatcherite. Time will tell whether it will work.

Sunday, April 06, 2014
Britain's balance of payments sinks in a sea of red ink
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.

One question keeps coming back to me from readers. Why, when it was such a big issue in the past, does the balance of payments no longer seem to matter anymore?

And, related to this, are we now entering a period in which it may indeed start to matter again, perhaps quite a lot?

There has never been a better time to write this piece than now and it may help to start by defining terms. The trade deficit is the gap between exports and imports of goods and services.

Traditionally we used to talk about the visible trade deficit – the gap in goods (£108bn last year) - but now it is customary, and helpful to Britain, to include services (the goods and services deficit in 2013 was a more manageable £27bn).

The current account deficit - £71bn last year - is the trade deficit plus two other flows, income and transfers, of which more in the moment. The current account deficit is the one to watch. Because the balance of payments has to balance, as every economics student is taught, there are two other accounts, the capital and financial accounts.

Actually, when I was first taught economics, we always expected the capital account to balance any red ink we recorded on the current account.

But, as the Office for National Statistics (ONS) reminds us, the combined current and capital account has been in deficit since 1983. For three decades we have relied on the financial account – direct and portfolio investment and, perhaps scarily, financial derivatives – to keep our heads above water.

IEA's shadow MPC votes 6-3 again for half-point rate hike
Posted by David Smith at 08:59 AM
Category: Independently-submitted research

In its most recent e-mail poll, which was finalised on Tuesday 1st April, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) decided by six votes to three that Bank Rate should be raised on Thursday 10th April.

This time, all six SMPC members who voted for an increase wanted to see a rise of ½%. Unlike in previous months, nobody advocated a ‘compromise’ ¼% increase in April. This more hawkish stance was partly to compensate for past delays in raising rates. However, one third of the IEA’s shadow committee still wanted to hold Bank Rate at ½%.

There were a number of reasons why a majority of the IEA’s shadow committee wanted a Bank Rate increase. One consideration was the belief that the home demand recovery had advanced far enough – relative to weak potential supply – for the need for ‘emergency use only’ interest rates to have passed.

The twin deficits on the balance of payments and the government’s fiscal position were seen as imposing further limits to monetary stimulus, if market confidence in British government securities and sterling was to survive.

Potential destabilisers included the political uncertainties over the next year or so and the disappointing progress with respect to fiscal retrenchment. Most comments on the March Budget welcomed the liberalisation of personal pensions. However, public borrowing was expected to come down more slowly than the Chancellor expected, even if current policies were persevered with after the May 2015 election.

Several SMPC members expressed concern about the apparent slowdown in the annual growth of M4ex broad money since mid-2013, even if some recovery was apparent in the February 2014 figure.

Sunday, March 30, 2014
Falling inflation lifts the mood and helps the Bank
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.

Inflation has been below the official 2% target for two months in a row, something it has not been possible to write for a long time.

You have to go back to 2009, five years ago, when the economy was falling off a cliff, for the last time this happened.

Inflation at 1.7%, as it was in February, has come down from more than 5% in the space of less than two and half years. Even last autumn it seemed we were stuck at closer to 3% than 2%.

The fall is a feather in Mark Carney's cap though I am sure, given the lags in monetary policy, he would give some credit to his predecessor, Lord King.

One set of crossroads has been written about a lot. Is this the point when wages - average earnings - start to rise faster than prices, the consumer prices index? As regular readers will know, my view is that this has been happening for some but it will not be generally accepted until the monthly data from the Office for National Statistics confirms it.

Friday, March 28, 2014
A nasty looking current account
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Today's GDP figures - the third take on the final quarter of 2013 - showed a rise of 0.7%, as before, and confirm that business investment contributed significantly to that growth. Overall wages and salaries rose by 3% in 2013 compared with 2012. More here.

The bad news today with in the balance of payments. The first estimates for the third quarter currnet account deficit were awful, a deficit of just over £20 billion. Today's showed that deficit revised up, to £22.8 billion, and only a small fall to £22.4 billion, 5.4% of GDP, in the fourth quarter.

These are big numbers, though they are not mainly driven by the trade deficit, which narrowed to £5.7 billion in Q4 from £10 billion in Q3. The 2013 deficit narrowed from £33.4 billion to £26.6 billion. The damage is being down by a collapse in investment income, traditionally in surplus. It was in deficit by £17.4 billion in 2013, mainly in the final two quarters of the year. More here.

Tuesday, March 25, 2014
Inflation falls - and a puzzle
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

The February inflation figures were good, showing a drop in consumer price inflation from a below-target 1.9% to even further below target at 1.7%. If the squeeze on real wage growth had not already ended - as I think it had - it is clearly on the run now.

Inflation has not been this low since the depths of the crisis, and then only briefly. Goods inflation, at 1.2%, is behaving but service-sector inflation, traditionally the driver of above-target UK inflation, has also come down and now stands at just 2.4%.

The drop in inflation is really quite pronounced. Only last June it stood at 2.9% and as recently as September 2011 it was more than 5%. It looked more sticky than it has turned out to be.

There is a puzzle in these figures. RPI inflation slipped, but only from 2.8% to 2.7%, and is a full percentage point above CPI inflation. It has been boosted by rising house prices. But the CPI measure which includes owner-occupiers' housing costs, CPIH, showed a drop in inflation from 1.8% to 1.6%.

The answer may be in the method of calculation. RPIJ, using a different method - Jevons - similar to that used for CPI, has inflation at 2%. The RPI, while widely-watched, is no longer regarded as a national statistic, though it will allow some to claim real wages are still falling.

The broad message is that inflation is falling and has made a rare excursion into below-target territory. The hope has to be that it will last. More here.

Sunday, March 23, 2014
Export gloom rains on Osborne's parade
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.

So, was it one of those budgets that will last about as long in the memory as the spring daffodils, or was it more enduring than that?

In the two pieces I wrote ahead of Wednesday’s budget, one said there should and could be no big giveways given the state of the public finances. The other, last Sunday, said the budget must be firmly focused on lifting Britain’s dismal productivity performance.

Though the Institute for Fiscal Studies rightly pointed out that the budget was not quite as neutral as claimed, because small giveaways now are funded by unspecified spending cuts later, my judgment is that Osborne passes the “no significant giveaway” test.

Not only that but, apart from the pledge to raise the personal allowance to £10,500, and maybe even including that, these modest adjustments (which added up to a net cost of just over £0.5bn in bother 2014-15 and 2015-16) fell into the “good giveaway” category.

You cannot be too hard on a budget which doubles the annual investment allowance to £500,000 and increase incentives for savings, with a new ISA limit of £15,000 and, as touched on here ahead of the budget, no limit within that on how much can be put into a cash ISA.

Wednesday, March 19, 2014
Osborne's responsible giveaway
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

George Osborne's aim in the budget was to demonstrate that the government's plan is working and to show that he has not given up on rebalancing the economy.

Did he succeed? The Office for Budget Responsibility's numbers are unremarkable - growth of 2.7% this year and 2.3% next - but they help. So does the downward revision of borrowing to £108 billion this year and £95 billion next (2014-15). Borrowing is still a long way above the 2010 projections but the gap is narrowing.

As for individual measures, the chancellor did just about enough to claim this was a budget for exports, investment and, with a £7 billion package, large energy users. Industry should be pleased with all this.

The most eye-catching individual announcement was the doubling of the annual investment allowance to £500,000, extended until the end of 2015. This went further than expected.

The "rabbit" in the budget was the increase in the ISA allowance to £15,000 and the removal of the restriction on cash ISAs. This and far-reaching pension reforms - the budget's most significant announcement - will stay in the memory. They count, unusually, as a responsible giveaway, distinct from the usual pre-election fare.