Sunday, May 09, 2021
The makers are on the march - but can it last this time?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

It is not often I get a chance to say this, but manufacturing industry is on a roll. Surveys show that manufacturing is bouncing strongly. The numbers for manufacturing are more positive than for a very long time, and this is not just a UK phenomenon.

The purchasing managers’ index (PMI) for manufacturing came in a few days ago. Levels above 50 indicate expansion, and vice versa. At 60.9 in April, it was at a 27-year high, beaten only once in the survey’s history, in July 1994. There was, according to IHS Markit, which produces the survey, “a further acceleration in the rate of expansion of the UK manufacturing sector”, with growth in output and new orders at their best for years and a “solid” increase in employment.

The service sector also showed a strong recovery last month, its PMI rising to 61, the best for 7½ years, but we are more used to it being upbeat in our service-dominated economy.

Manufacturing hopes were supported by other evidence. The CBI’s quarterly industrial trends survey showed that manufacturing optimism in the three months to April increased at its fastest pace since April 1973. That was not unsurprising, given the deep gloom into which we were all thrust in January, but the survey also showed that investment intentions for plant and machinery were at their strongest since July 1997.

That looked like a rapid endorsement of Rishi Sunak’s policy of trying to ensure that investment plays its part in the post-pandemic recovery. The chancellor’s innovative budget announcement of a 130 per cent “super deduction” allowance for investment for the next two years is making a difference, though manufacturers would not be investing if they were not confident.

A separate CBI survey for small and medium-sized manufacturers showed optimism rising at its strongest rate for seven years and predictions for output growth at their best since 1988.

Things are looking up in the beleaguered motor industry. Though the vast majority of cars sold in the UK are imported, the industry will take comfort from the fact that new car registrations so far this year are up 16 per cent on last year’s depressed levels. Fleet buyers are contributing most to the increase, so the industry will be waiting to see how much of their savings private buyers are prepared to splash on a new motor.

Separate figures from the Society of Motor Manufacturers and Traders (SMMT) showed strong year-on-year rises in car, commercial vehicle and engine production, though car production in the first quarter was down on a year earlier.

Manufacturing revival is not, as I say, just a UK phenomenon. The eurozone manufacturing PMI last month was even stronger, at 62.9. European lockdowns have pegged back service sector activity in many countries but have had only a marginal impact on manufacturing. The Netherlands is at a record high of 67.2, Germany on 66.4.

Globally, manufacturing output is rising at its strongest rate since April 2010, when it was recovering from the financial crisis. The makers, it seems, are on the march again.

Can it last? As with all readings for the economy this year, a pinch of salt is required. Economies are bouncing back from their worst downturn in decades – in the UK’s case in more than three centuries – and the comparison will tend to flatter. When you have been through something as dramatic as the lockdowns, restrictions and collapse in output and sales of the past 14 months, a return to something like normality can seem like nirvana.

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Sunday, May 02, 2021
There is no economic silver bullet, but every little helps
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

Every so often people start to think great thoughts about improving the performance of the British economy. Nearly 60 years ago, there was a flurry of such thinking. We would give our eye teeth for the UK’s absolute performance in those days, but relatively speaking it was weak, particularly compared with the big European economies.

So, in 1962, the National Economic Development Council (NEDC) was established, bringing together the “three sides of industry” - government, business and the unions. Three years later the Labour government set up the Department of Economic Affairs (DEA) which, taking it leaf from successful French planning, launched a national plan for the UK.

Then, as now, there was a lot of excitement about new technology, Harold Wilson revelling in the “white heat” of the technological revolution. But these efforts were not successful. The DEA was short-lived, always overshadowed by the Treasury, in whose building it operated. The NEDC and the “little Neddies” it spawned, covering individual sectors, were finally put out of their misery in the 1990s.

The problem of relatively weak growth and persistently high inflation in the UK was instead tackled by entry into the European Economic Community (EEC) in 1973, the Thatcher revolution, the “Big Bang” in the City, the single market and Bank of England independence.

Toady we are at another of those crossroads, and plenty of people are thinking big thoughts about how to improve the UK’s performance in a post-pandemic, post-Brexit world. Some of that thinking is going on within government, though it tends to emerge in ambitious and eminently missable targets from the prime minister. You don’t get the impression that a huge amount of strategic thinking is going on.

Others are doing so, however. The CBI is undertaking its own exercise, and the Resolution Foundation think tank is combining with the London School of Economics for its Economy 2030 inquiry, which will be formally launched later this month. “The country lacks a clear sense of its path to prosperity,” the think tank says.

The first of these exercises, the final report of the Covid Recovery Commission, was published a few days ago. Set up in July last year, and chaired by John Allan, chairman of Tesco and Barratt Developments, this business-led commission consisted of 10 leading business figures, including the chief executives of Vodafone and Heathrow, and the chairs of Shell UK, Admiral Insurance and Babcock International and the managing partner of McKinsey in the UK, It was advised by a 23-strong advisory group and a 19-strong policy panel. It was an impressive line-up.

The UK, it concluded, needs a “national prosperity plan” led by business, government and civic society, to address longstanding problems of weak productivity and inequality. It uses the example of the speedy development of the Oxford/AstraZeneca vaccine as an example of the kind of thing this country can do when the chips are down One of its commissioners is UK president of AstraZeneca.

The commission addresses the UK’s key weaknesses, on skills, infrastructure, investment, competitiveness, regional inequality and income inequality. It will be necessary, it says, to build on the UK’s strengths: “our leading universities, world-class innovation and R&D, our businesses and financial system, our democracy, our institutions and governance”.

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Sunday, April 25, 2021
The Covid debt isn't going away. We will have to live with it
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

Cast your mind back a couple of years, if you can, to the spring of 2019. At that time, most of the indicators relating to Britain’s public finances were flashing green. The budget deficit, which for the 2018-19 fiscal year came in at less than 2 per cent of gross domestic product, had ceased to be a source of major concern.

It had been a painful process, and some of that pain, such as the freeze on most working-age benefits, was still in place. But the public finances, to all intents and purposes, had been fixed. There was a small current budget surplus, on day-to-day spending, in 2018-19. Public sector debt, at £1.77 trillion, was high, but it was no longer rising very much in cash terms, and is was falling relative to GDP, to a shade over 80 per cent by the end of March 2019.

Maybe we should have known then that something nasty was about to come along to shock us out of what was a false sense of security. It was known that Brexit would damage the public finances, but that was built into official forecasts that showed debt continuing to fall as a percentage of GDP, the deficit falling further and current budget surpluses becoming the norm.

Nobody could have predicted, however, quite how dramatically things would change, as a result of the pandemic and the government’s response to it. Figures on Friday showed that the budget deficit for 2020-21 came in at £303 billion and, while this was lower than the £355 billion projected by the Office for Budget Responsibility (OBR) alongside the budget early last month, a big undershoot, roughly £27 billion of that undershoot reflects expected government write-offs on pandemic loan schemes that have not yet been incorporated into the figures.

The debt, meanwhile, is £2.14 trillion, 97.7 per cent of GDP. And, while it will increase at a slower rate from now on as the deficit comes down, it will increase nonetheless. The OBR predicts that it will peak relative to GDP at just under 110 per cent in 2023-24, but continue to rise in cash terms, reaching £2.8 trillion by 2025-26.

What to do about it? The chancellor had a first bash in last month’s budget, including an increase in corporation tax from 19 to 25 per cent in April 2023 and a freeze in income tax allowances and thresholds from next year. He has also set out some reasonably tight public spending numbers. Those are incorporated in the OBR figures.

A new report from the National Institute of Economic and Social Research, Niesr, funded by the Nuffield Foundation, ‘Designing a New Fiscal Framework: Understanding and Confronting Uncertainty’, should be read by anybody interested in UK fiscal policy.

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Sunday, April 18, 2021
Pluses and minuses of the return to business as usual
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

Things are changing, and not so imperceptibly. If you have ventured out to the shops in recent days you will have noticed that there are people around. Not necessarily madding crowds, at least in the ones I have visited, but certainly what retailers would call decent footfall.

There is also another change underway. The talk is of a return to the office, even for people for whom over the past 12 months, a daily commute, sitting at a desk and face-to-face meetings have seemed about as likely as a trip down the Amazon.

Indeed, there are hard facts to back this up, The Office for National Statistics (ONS), in its latest weekly assessment of coronavirus and its impact on the economy and society, found that the proportion of the workforce at their normal place of work rose to 49 per cent in the two weeks to April 4 and is clearly on a rising trend.

All of which is rather interesting. Both of these examples of a degree of normality returning have pluses and minuses. The opening up of non-essential retailing is an undoubted plus for the retailers concerned, particularly those which have eschewed an online presence. It is great news for high streets and shopping malls, which have taken on an eerie feel over the past year.

Similarly, the return of people to offices will transform city centres, particularly the centre of London, restore the viability of public transport and allow the tens of thousands of businesses dependent on legions of office workers, and busy offices, to get back on their feet.

All these are undoubted economic and social benefits, along with restoring all the other things missing from our lives during three lockdowns and other restrictions over the past year, including pubs, restaurants, cinemas, theatres, travel and, perhaps most of all, freedom to do more or less what we want.

But, and there has to be a but, it is also important to recognise that there are minuses in the return to business as usual. One of these could be in the most important driver of prosperity, productivity; the amount we produce per worker, or – a better measure – per hour worked.

A few days ago the ONS published data for productivity in last year. They showed that it was a volatile year, with sharp movements from quarter to quarter and a different picture depending on which measure is used. But output per hour across the whole economy rose by 0.4 per cent last year, during the deepest recession for more than 300 years. This was in sharp contrast to the experience of the last recession, when output per hour fell in both 2008 and 2009.

The simple reason for this was that hours worked fell even more sharply than gross domestic product. Behind this, however, something else important was happening. Productivity held up because of what statisticians call the allocation effect. It means that if you take out the least productive parts of the economy, average productivity improves. You can explain this by reference to batting averages. If you don’t play the three weakest members of the team, or they never get to bat, the average of the team as a whole improves.

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Sunday, April 11, 2021
The virus cost trillions, but the world is bouncing back
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

Every six months by tradition, to coincide with its spring and autumn meetings, the International Monetary Fund provides an update on the outlook for the global economy. In recent years it has supplemented that with world economic outlook updates in January and late June or July.

Many things have changed as a result of the pandemic. The meetings these economic assessments are intended to inform have moved online, as has a lot else. Time will tell whether such gatherings resume, and in what form.

Nonetheless, these world economic outlooks provide a useful framework for analysing the enormous economic impact of the pandemic. In January 2020, when the IMF’s outlook provided the backdrop for the world economic forum in Davos – the last such meeting – people had begun to be aware of a new and potentially dangerous virus in China, but few thought it would have much of an economic impact.

In the IMF’s January 2020 world economic outlook, neither coronavirus nor Covid-19 merited a mention, the latter unsurprising because it had not yet been named. At that time, the IMF thought the world economy would show a modest acceleration compared with 2019, with global growth of 3.3 per cent in 2020 and 3.4 per cent in 2021 after 2.9 per cent in 2019.

The IMF saw risks to that outlook, most notably from the US-China trade war, but also climate events such as fires and flooding. Prospects for America were dull, with 1.6 per cent growth predicted in both 2020 and 2021, not much better than the weak growth then seen in prospect for Britain, 1.4 and 1.5 per cent respectively, continuing the poor post-2016 trend.

Advanced economies, including the US and the UK, would grow only slowly, 1.6 per cent a year. The world economy would be pulled along by emerging and developing economies, growing by 4.4 and 4.6 per cent respectively, and in particular by emerging Asia, with growth of nearly 6 per cent a year.

Things have changed, and the point here is not to attack forecasters, but to show the impact of a pandemic that, even 15 months ago, few saw as a big short-term risk to the economy.

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Sunday, April 04, 2021
Will Britain's consumers splash their stash of cash?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

Many conversations about the UK economy involve consumer spending, which is not surprising. In normal circumstances – counting 2018 and 2019 as normal – it accounts for 62 per cent of the country’s gross domestic product. Most of those conversations, over the years, have been about whether consumers are over-exuberant, and are taking on too much debt to fuel their spending habit.

Today, the situation is rather different. The health warning I have to provide at this point is that not everybody had the opportunity during the pandemic to build up savings – some have had a very tough time – but in aggregate this has been what happened.

Official figures last week showed that the final quarter of 2020 completed a trio of very high saving ratios, gross savings as a proportion of disposable income. It ended the year at 16.1 per cent, having leapt to 25.9 per cent in the second quarter, and come in at a still high 14.3 per cent in the third quarter. For last year as a whole it averaged 16.3 per cent, a record high, up from 6.8 per cent in 2019.

To put some numbers on this, household gross saving last year was £238 billion, compared with £99 billion in 2019, a jump of £139 billion, or nearly 7 per cent of last year’s GDP. Most of these savings were, in the jargon, involuntary. People could not spend on the things they normal spending on; transport and travel, leisure, entertainment, eating out, and so on, so they put the money aside instead.

There are some figures on this too. Last year consumer spending fell per cent in real, inflation-adjusted, terms by 10 per cent. The fall included an 11.8 per cent drop in spending on clothing and footwear, 33 per cent in transport, 5.8 per cent in recreation and culture and a huge 42.1 per cent on restaurants and hotels.

All these things are interlinked. Not going so much to the office, and maybe not at all, reduces spending on transport and office wear, while not going out so much at all means that people did not need to buy as many new clothes. Some elements of spending did rise, with food and drink up 7.7 per cent, alcohol and tobacco by 7.9 per cent and household goods and services 4.5 per cent higher.

As for debt, the past year has been anything but debt-fuelled as far as consumer spending is concerned. While households have been taking on more mortgage debt, reflecting the surprisingly strong pandemic housing market, levels of outstanding consumer credit have been falling. In February they stood at £197 billion, nearly £28 billion lower than a year earlier.

What happens now? It is the key question for very many businesses. It will determine the strength of the post-lockdown bounce for hospitality, travel and tourism and high streets, as physical retail resumes. It is key to whether private new car registrations, down in the first two months of the year by 38 per cent on a year earlier, recover. It is, given the importance of consumer spending in the economy, central to the strength of the recovery.

There are three possibilities. The gloomiest in terms of spending would be if households not only hang on to all the savings they have accumulated during the pandemic but also extend their new prudence into the post-lockdown period. We will not know the answer to this for a while because, when we get figures for the first quarter in a few weeks, it is likely that the saving ratio will have remained high because of the lockdown.

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Sunday, March 28, 2021
Europe's third wave will not derail the recovery
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

Boris Johnson is famously said to be an admirer of the mayor in the Jaws, who kept the beach open despite the shark, though that has not been reflected in his lockdown strategy. And, as the promotions for that film said, just when you thought it was safe to go back into the water … something big and scary looms into view.

The third wave of coronavirus in Europe, or more properly the second wave seen in the UK in recent months, with the “English variant” running amok across the Channel, is the new danger. The prime minister, in words reminiscent of previous change of strategy, has warned that “previous experience has taught us that when a wave hits our friends, I'm afraid it washes up on our shores as well”.

Taken together with the fact that, while deaths and hospitalisations as a result of Covid are still falling sharply, daily case numbers appear to have plateaued or are increasing slightly. Is this a reason to worry? Could the roadmap be torn up, hampering this year’s expected strong economic recovery?

There have been false dawns before. Lockdowns 2 and 3 came after reassurances from the government that it would do its best to avoid further lockdowns. Such reassurances probably delayed action last September, to deadly effect. This time, however, it is different.

It is different this time because the vaccination programme makes it much more difficult to justify another lockdown. If vaccines are effective in preventing hospitalisations, which they appear to be, and if those most likely to be hospitalised are inoculated, as they will be quite soon, it will be hard to use the “protect the NHS” slogan again to justify another lockdown.

The only circumstances in which it could be justified would be the emergence of a variant that vaccines do not protect against. In the absence of that, further lockdowns look politically very difficult and, while you can never say never, unlikely.

This is not to say I have any sympathy with lockdown sceptics, still less the sad characters who go on anti-lockdown marches. Yes, lockdowns have damaged the economy and disrupted lives, but the damage would have been far greater had the virus been allowed to run out of control. I have even less time for the innumerate loons who question Covid-19 deaths and try to argue that it has been a fuss about nothing.

Even with social distancing, restrictions and lockdowns, more than 148,000 people have died in the UK with Covid-19 on their death certificate and more than 133,000 where it was the main cause of death. The coronavirus has reversed, temporarily we hope, many years of declining mortality. The crude mortality rate last year was 14 per cent above its average for the past 10 years, while the age-standardised rate was eight per cent up on its 10-year average.

The 608,000 total for UK deaths last year was the highest since 1918, another pandemic year, when the population was a lot smaller, and only one of two years to break the 600,000 level. Al this would have been a lot worse without restrictions as, most likely, would have been deaths from flu. Covid deaths, sadly, did not stop at the end of 2020.

Though further lockdowns are unlikely - even if some restrictions will remain in place, including on international travel, for quite a long time – the likely absence of lockdowns is not the only reason to be optimistic about recovery.

We have, as I have noted before, got better at adapting to restrictions. The falls in gross domestic product (GDP) in November and January were a fraction of what we saw in April last year. We also adapt during lockdowns. The latest rapid indicators from the Office for National Statistics, covering the period until a few days ago on everything from debit and credit card payments to traffic and job advertisements, show a continued recovery from the lows of January.

The Recruitment and Employment Confederation (REC) says that the two latest weeks have seen the largest number of new job adverts being placed since the start of the pandemic, a combined total of more than 300,000 over two weeks.

This upward economic momentum, absent in January and February last year, when the economy was limping even as we went into the coronavirus, is important. It is most evident in the latest “flash” purchasing managers’ surveys, which measure business-to-business activity and track GDP pretty well.

The flash UK purchasing managers’ index (PMI) for March showed a jump to 56.6, from 49.6 in February, with both services and manufacturing posting index levels well above the 50 level which marks the difference between expansion and contraction.

As Chris Williamson, chief business economist at IHS Markit, which produces the data, put it: “The UK economy rebounded from two months of decline in March, with business activity growing at its fastest rate since last August as children returned to schools, businesses prepared for the reopening of the economy and the vaccine roll-out boosted confidence. Companies reported an influx of new orders on a scale exceeded only once in almost four years, and business expectations for growth in the year ahead surged to the highest since comparable data were first available in 2012.”

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Sunday, March 21, 2021
The deepest recession, but also easily the weirdest
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

This time last year, give or take a few days, I was giving a talk in Birmingham. I had arrived late the night before and had not been out that morning. A couple of members of the audience remarked, however, on how eerily quiet the streets were. A lockdown had not been announced but people had already started to change their behaviour. Little did we know as we exaggeratedly bumped elbows – something I have not done much since – how strange the next 12 months would be.

What was on the way, of course, were more than 125,000 Covid-19 deaths, tens upon tens of thousands of stories of personal tragedy and loved ones unable to see each other even at times of serious illness, death and severe mental strain. What followed were the most onerous restrictions on everyday life and normal business activity that most of us have ever seen and would hope not to see again. Lives were blighted, particularly the lives of the young in education.

For the economy, what followed was, frankly, off the scale. A year ago, the economy was sliding into recession, even before the first lockdown. Gross domestic product fell by 7 per cent in March 2020, contributing to a 2.9 per cent fall in the first quarter of the year, the biggest drop since the three-day week of 1974.

That was just the appetiser. In April, GDP plunged by a further 18 per cent as the economy locked down. That was the main contributor to the 19 per cent slump in GDP in the second quarter of last year, easily the biggest on record. If this is the first draft of history, economic historians will be marvelling at these numbers for decades to come.

But then something rather different happened as restrictions were lifted. Starting in May, the economy grew for six months in a row. It slipped back in November, by 2.3 per cent, grew in December and managed to eke out 1 per cent growth in the fourth quarter, before falling back again by 2.9 per cent in January. We thus got very much better at handling lockdowns compared with the first.

The result of this is that, in the worst recession since the Great Frost of 1709, measured by GDP, there was monthly growth in seven of the 11 months for which we have data. This quarter will see at most a modest fall in GDP. As fort hat “worst since 1709” comparison, which I have used extensively, there are questions whether it its appropriate to compare with a time before the industrial revolution, when the harvest-related swings in economic activity were huge, in both directions, and nearly two and a half centuries before GDP was invented in the way we know it today.

Though the “worst recession for a very long time” label is likely to stick, it may be that the current estimate of a 9.9 per cent GDP fall last year will be revised lower as more data comes in. The Office for National Statistics has said that its estimates are subject to greater than usual uncertainty because of the pandemic.

That is not the odd thing about the past 12 months. Despite all the despair and tragedies I described above, and the severe setbacks for many individuals and businesses, on many measures it did not seem like a recession at all. Corporate and individual insolvencies have, as the Insolvency Service notes, remained low since the first national lockdown. Last month company insolvencies were 49 per cent lower than in February 2020, while individual bankruptcies and debt relief orders were down 42 per cent.

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