Sunday, October 18, 2020
How the 'China virus' hurt China less than most others
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.

As we approach the end of this Covid year, with new restrictions popping up all over the place, cast your mind back nine months to January, when we had barely heard of the coronavirus, and it had yet to be christened Covid-19, let alone SARS-Cov-2, its current scientific identifier.

Nobody at that time expected a world recession. The UK economy was set merely for weak growth. The International Monetary Fund (IMF), which has just released a new world economic outlook, predicted in January that the world economy would enjoy a slightly better year in 2020 than in 2019, 3.3% growth versus 2.9%.

Its main worries then were rising global geopolitical tensions, and what it described as a further worsening of relations between the United States and its trading partners. Those issues remain important but they have been put in the shade by the coronavirus.

The time of deepest gloom about the global economy was in the spring and early summer, and again that can be tracked by the IMF’s forecasts. In June it predicted a huge 4.9% contraction in the global economy this year; a negative swing of more than eight percentage points compared with January. Advanced economies were predicted to slide by 8%, while a double-digit decline was forecast for the UK economy.

All these things are relative, but the latest position in slightly less gloomy than it was. This is because downturns in the April-June quarter in America and the eurozone were less extreme than feared, and in some cases recoveries have been stronger. It now expects a 4.4% slump in the world economy this year, followed by a 5.2% recovery next year.

The big difference is for advanced economies, now predicted to shrink by “only” 5.8%, followed by growth of 3.9% next year, which will leave some ground to be made up before getting back to 2019 levels. The UK numbers have been shaded slightly less than most; a 9.8% drop this year followed by a 5.9% recovery next.

The IMF was not the only body to have a look at global economic performance in a time of Covid in recent days. Citi, the investment bank, also did so as part of the Institute for Fiscal Studies’ annual green budget.

It found, perhaps unsurprisingly, that countries with the most effective lockdown and containment strategies had the best economic and political outcomes. In this respect, Britain is part of a cluster of poorly performing European countries along with France, which has just also introduced new restrictions, along with Spain and Italy. Japan, Germany and, in economic terms, America, have done much better.

One interesting aspect of this, highlighted by Citi is that, despite the heroic efforts of NHS workers, the UK entered the crisis with an underpowered health service. There were seven intensive care beds per 100,000 people, compared with 29 in Germany and 35 in America. Health spending as a proportion of gross domestic product, 10.3%, was among the lowest.

As Citi’s economists put it: “The UK had the worst starting point among the G7 countries and Spain.” That may be marginally better than having a good starting point and still getting it wrong. As they also point out: “The US had the best starting point but has had the worst pandemic, while Japan had one of the worst starting points but the best outcomes [in the G7] so far.”

Sunday, October 11, 2020
There's no quick fix for Britain's deep 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.

One of the topics I get asked a lot is about productivity. People don’t necessarily put it this way, but is this crisis unleashing the “creative destruction” that will propel us out of more than a decade of productivity stagnation? Is the working-from-home revolution and other changes that businesses have adopted, which in other circumstances could have taken years, good or bad for productivity?

What about the nature of the shakeout in jobs that we are seeing? Is the very bad news for the UK’s hard-hit hospitality sector, and the people who work in it, good news for economy’s overall productivity?

These are big questions and I cannot promise definitive answers on all of them. Before I try, let me give you another in the series of extraordinary statistics this crisis is throwing up. The Office for National Statistics (ONS) has just published figures for productivity in Britain’s public services. The measure used is slightly different from the way we typically measure productivity for the economy as a whole, which is on an output per hour or output per worker basis. Public services productivity is measured by the amount of inputs going in – public spending – versus the outputs emerging in return.

On this basis, productivity in public services plunged by 35.7% in the second quarter, compared with a year earlier. This was comfortably the largest fall since it was first measured on this basis, the previous record being the 3.8% annual drop in the first quarter.

It happened because inputs into public services, mainly health and social protection (benefits, free school meals, etc), increased sharply, while outputs fell. School closures hit the output of education, while non-Covid work in the NHS also dropped. No public sector workers were furloughed even when they were unable to work. The drop in the output of public services was a contributor to the 19.8% second quarter fall in gross domestic product.

These huge falls in productivity should not be taken as evidence that the public sector can never deliver productivity gains. Between 2010 and last year productivity in public services rose by more than 5%, with the biggest gains occurring during the period of maximum austerity. Old Treasury hands used to say that putting the squeeze on spending was the only sure ay of delivering such gains.

The official statisticians are still working on final productivity data for the whole economy in the second quarter, which will be published shortly. We will have to wait even longer to see how much productivity bounced back in the third quarter, if it did, as the economy recovered from its second quarter slump. Friday’s monthly GDP figures were a touch disappointing, showing only a 2.1% rise in August, but they left the economy on course for a 16% third quarter rise.

Sunday, October 04, 2020
This nation of unexpected savers has money to burn
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.

Extraordinary things have been happening during this coronavirus crisis, and it is throwing up some extraordinary numbers. I could give you second quarter gross domestic product, now revised down slightly to show a fall of 19.8% (from 20.4%), still more than seven times its previous biggest recorded quarterly fall, 2.7% during the three-day week in early 1974.

I could also give you the plunge in the number of people on payrolls, 695,000 between March and August, or anything related to the public finances, where the official projection, a £372bn budget deficit this year, is nearly two and a half times the previous peacetime record, £158bn in 2009-10.

Let me however today focus on another number, the saving ratio. For as long as I have been following these things, which is a very long time, the worry has been that people in the UK do not save enough. We are a nation of spenders not savers, unlike some other countries, and the worry has traditionally been that we leave ourselves unprovided for emergencies, reductions in income and retirement.

Well, for three months this year, all those worries were turned on their head. Typically, the saving ratio, the amount saved as a proportion of disposable income, is low. There are technical arguments about the definition of savings, but we can put them aside. Typically, the saving ratio shows that we put aside between a twentieth and a tenth of income, and usually closer to a twentieth.

In the second quarter, however, things changed dramatically. The saving ratio shot up to nearly a third of income. To be precise, it rose to 29.1%, from 9.6% in the previous quarter, 7.7% in the final “normal” three months of last year, and a recent low of just 4.7% during 2017.

Most of that exceptional increase in saving was involuntary. People saved because they could not spend, including the period when most non-essential shops were closed. Not everybody is able or willing to shop online. During this period of involuntary saving, there were also four consecutive months in which households repaid past borrowings in the form of consumer credit.

Not all of it was involuntary. One of the traditional motives for saving is the precautionary motive; people save because they fear tough times ahead, including unemployment, and the Office for National Statistics (ONS) detected some increase in voluntary saving “in response to the higher levels of uncertainty around their future employment prospects”.

The balance between the involuntary and voluntary motivations for the second quarter surge in saving is an important one. If it was mainly involuntary this would suggest that we ended the period of lockdown earlier in the year with a reservoir of unspent money. If it was mainly voluntary then you might fear that households will be battening down the hatches for some time to come. This would be Keynes’s paradox of thrift in which, by virtue of their saving, people make things worse for the economy and for their employment prospects.

Sunday, September 27, 2020
A question of confidence as we face a long six months
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.

Weeks like the one just gone do not come along too often. For economy watchers, the cancellation of the planned November budget and the scaling back of the comprehensive spending review was big news, as was their replacement by another emergency economic package.

Rishi Sunak’s winter economy plan, which we cover in greater detail elsewhere, was modest, probably costing no more than a few billion pounds compared with the £190bn plus the government has already spent.

The chancellor stuck to his promise of ending the furlough scheme, replacing it with a UK equivalent of Germany’s Kurzarbeit, under which workers employed for at least a third of their normal hours (paid by their employers) will have a third of their remaining hours paid for by the government, and a third by their employer. The maximum monthly cost to the government is just under £698 per employee.

It has drawn both praise and fire but seemed to me to be pretty well-judged, as was the extension of the temporary cut in VAT to 5% for the hospitality sector to the end of March. Involving both the TUC and CBI was politically astute, the former describing it as a “lifeline”, while the employers’ organisation said it will save hundreds of thousands of jobs over the winter.

It should, but it is hard to say how many. The chancellor has left it to employers to determine which are “viable” jobs and is under no illusions that there will, in spite of his efforts, be a substantial rise in unemployment this winter. The chancellor has left incentives to retrain and recruit until later. This was very much a firefighting operation, in response to a Covid-19 second wave that the government did not expect. Only weeks ago, after all, the talk was of autumn tax hikes.

How much unemployment rises depends on several factors. High amng them is the fact that the winter now looks, in economic terms, a lot colder.

I am not the first to say it, but the worst thing about the announcement last week from Boris Johnson, and the warm-up provided by Professor Chris Whitty, the government’s chief medical officer, was not the measures themselves but that they will have to remain in place “for perhaps six months”.

For half a year, unless things turn out a lot better than the scientists fear, not only are these latest restrictions unlikely to be lifted, but stricter measures may be introduced. This was a new and, for the economy, a damaging piece of messaging. When lockdown was introduced on March 23, there was always a hope that it would be lifted.

The prime minister said of the restrictions announced then: “We will look again in three weeks and relax them if the evidence shows we are able to.” It was not false hope; there was a progressive relaxation of the lockdown in subsequent weeks.

This time, no such hope was offered, only the threat of tougher measures. Maybe it would have been false hope; in March there was the warmer weather to look forward to, which offered the hope of naturally suppressing the spread of the disease. But the six-month timeframe was a serious blow, letting the tyres down on an economy that was still not properly motoring. You could almost hear the spirits drop.

What does it do for the recovery? As I have explained before, the path in and out of this recession is easy to describe. The precipitous fall in gross domestic product started around mid-March, even before formal lockdown, as people and businesses started changing their behaviour. It accelerated with lockdown and reached its nadir in April, the month of maximum lockdown.

The recovery since then, tentative in May, stronger in June and July, owed everything to the easing of restrictions and the re-opening of the economy. August should be fine as far as monthly GDP is concerned, helped by the success of the chancellor’s Eat Out to Help Out scheme, which has now given way, oddly, to “go home early to stay safe”.

The economy should also have continued to grow this month, despite the latest announcements, and a small slippage in the “flash” estimate of the closely watched purchasing managers’ index. One reason for September’s growth should be the return of schools. School closures had a big negative effect on measured GDP in the second quarter. I do not want to upset any parents tearing their hair out trying to understand their children’s schoolwork and attempting to teach it but home tutoring does not count towards GDP. Neither does housework.

Sunday, September 20, 2020
For Britain, Covid has been the worst of all worlds
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.

The Covid-19 crisis has seen the return of the public information broadcast, often accompanied these days by public information tweets. For those of us of a certain age, this brings back many memories, the broadcasts not the tweets. Public information films used to tell us to put seatbelts on in cars – “clunk, click, every trip” – though they were presented by Jimmy Savile. We were also told that “coughs and sneezes spread diseases”, a campaign that might be worth reviving now.

I say this because this is going to be a public information column, on the coronavirus pandemic and its impact. So get ready for some cold, hard facts. There are, I know, a lot of misunderstandings out there, and not just from the deluded anti-vaxxers, and their fellow travellers, who insist that Covid-19 is a myth. Fortunately, they are a tiny and nutty minority.

Let me start with Covid-19 itself. Many people will be aware of the daily figures for UK deaths from coronavirus, measured by people who have died within 28 days of having a first positive Covid-19 test. The cumulative total now stands at a little under 42,000. Even on the basis of this narrowest definition of Covid deaths, Britain has the fifth largest global death toll, after America, Brazil, India and Mexico.

Most people will also be aware, I hope, that this underestimates the true total. The Office for National Statistics’ weekly comparison, of numbers where Covid-19 is mentioned a cause of death on the death certificate, gave a total of 56,840 in the period to September 4. It is “a” cause of death for a reason; most victims – not all – had underlying health conditions. 56,840 is equivalent to a town the size of Macclesfield or Aldershot.

How does the death toll for Covid-19 compare with other causes of death? The answer is that many more people have died from other causes during the period of the pandemic, including dementia and Alzheimer’s disease, cancer, heart disease and strokes. Since late June more people have died each week with influenza and pneumonia – which often takes away the elderly - mentioned as a cause of death than Covid-19.

Overall, between the start of the pandemic – the first deaths - and September 4, 16.9% of deaths were attributed to Covid-19, the rest to other causes.
Before moving on, it is worth also mentioning another important figure, which is for excess deaths; those above the five-year average for this period. There were 57,793 excess deaths in England and Wales until September 4 and scaled up for Scotland and Northern Ireland gives a figure of around 65,000.

Shocking though these figures are, each representing a family tragedy and in many cases a lonely death, I hope it is not too callous to say that the economic consequences of the crisis are, when expressed in hard numbers, even more striking.

At the start of this year, the consensus among independent economists, as sampled by the Treasury in its monthly compilation of independent forecasts, was that the economy would grow by a modest 1.1% this year. It was not looking like a good year, the slowest since the financial crisis, for an economy beset by Brexit and other uncertainties.

Little did we know. Now the consensus among economists is that the economy will contract by a huge 10% this year. “Contract” is too mild a word for that, as is shrink. Plunge would be better. Taking 2019’s gross domestic product as a starting point, and ignoring inflation, the difference between an economy growing by 1.1% and one plunging by 10% is £246bn.

In round numbers, the economy has taken a £250bn hit this year, and that is not the end of the story. There will be a cumulative loss of GDP in future years. Bouncing back is not just a question of getting back to where you were. It is also making up the lost ground with a period of stronger growth than was previously expected and that looks unlikely. Even in five years, the economy will be several percentage points smaller than previously expected.

To the human cost of the crisis in deaths and illness can be added the human cost in unemployment. At the start of the year, the consensus among economist was that the unemployment rate would end the year at 3.9%. It is already higher than that, as the latest figures show, and is now forecast to rise to 8.3%. The difference is equivalent to more than 1.5m additional people becoming unemployed, taking the total to just under 2.9m.

The Office for Budget Responsibility (OBR) in its central scenario sees unemployment rising to 3.5m total this year, which implies that more than 2m people will have become unemployed as a result of the pandemic.

Its numbers for the public finances are even more eyecatching. This year government borrowing – the budget deficit – will be £267bn more than it expected before the pandemic, and £87 billion more next year, 2021-22. By the end of this parliament, government debt will be £600bn higher than it previously predicted. That is more than £9,000 for every man, woman and child in the country.

What do we conclude from these numbers? Many people will look to the example of Sweden, which did not have the same kind of lockdown as the UK, relying on voluntary social distancing, restrictions ion gatherings of more than 50 people, table-only service in bars and restaurants and limits on care home visits (where, as in this country, the coronavirus problem was worse). Sweden will suffer a smaller fall in GDP this year, 7.8% according to the OECD, and Covid-19 deaths there per 100,000 people are lower than in Britain.

Sunday, September 13, 2020
We priced ourselves into jobs last time. Can it happen 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.

We are just coming up to the end of the first two weeks of September and you would have to say that the autumn has not started too well. On Covid-19, it has been a case of one step forward – the overwhelming majority of schools returning – and at least one back; new national restrictions on people gathering, the so-called rule of six, that could be in place for many months.

These lurches do nothing for confidence. One minute the talk is of a return to work, the next is the threat of a national lockdown – something I thought had been ruled out by the preference for local responses – if these restrictions do not work.

One minute the chancellor is musing openly about how he might go about the task of repairing the public finances, the next Downing Street is talking of a “moonshot” of 10m tests a day, which could cost £100bn. The only comfort for the Treasury is that there is about as much change of this non-existent technology delivering as there is of Britain landing a man or woman on the moon next year.

It reminds me, painfully, of how non-existent technology was going to solve the problem of the Irish border, and the state of the Brexit negotiations and the government’s deliberate breaking of international law is another sorry start to the autumn. It seems like a long time since we could have our cake and eat it and the German car manufacturers would appear on the horizon and come to our rescue. They won’t. The head of the BDI, which represents German industry, said that the British government “is losing credibility on a huge scale”. I will write about the Brexit mess, but not just yet.

Instead, amid all this gloom, I wanted to try to offer just a tiny glimpse of optimism. A sharp rise in unemployment later in the autumn and over the winter would compound what the government’s chief medical officer, Professor Chris Whitty, has predicted will be a “difficult” few months for Covid-19.

It is quite hard to be optimistic about unemployment. I have written before that keeping the total below 3m (from 1.34m now) would be an achievement. Gordon Brown, the former chancellor and prime minister, has warned of a “tsunami” of mass unemployment, said that pleas for help are falling on “deaf ears” at 10 and 11 Downing Street, and urged a package of measures

The Office for National Statistics will provide an update on Tuesday, though covering a period under furlough, which has held down recorded unemployment. Rishi Sunak and Boris Johnson have both ruled out an extension of the furlough scheme, though the Johnson premiership has characterised by U-turns.

The House of Commons Treasury committee said on Friday that the chancellor could carefully consider a targeted extension of the furlough scheme. It also warned that his job retention bonus, paying employers £1,000 for every furloughed employee they keep on until the end of January, was not effectively targeted and unlikely to be good value for money.

So where is the glimpse of optimism I promised? It comes in two parts. The first, while it may not be enough when set against the tsunami to come, is that we are seeing some job creation announcements amid the gloom. We know which sectors are suffering, notably city centre hospitality, transport and travel, and so on, and tomorrow’s restrictions will not help.

Sunday, September 06, 2020
Sunak's toxic tax problem as spending hits wartime levels
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 easy sometimes to forget what an extraordinary period we are living through. There are many ways to capture it with statistics but let me today provide you with just one. What will public spending be this year as a proportion of the economy? What will the state’s share be?

The answer, according to the government’s fiscal watchdog and forecaster, the Office for Budget Responsibility (OBR), is no less than 54% of gross domestic product. That is on the basis of its central scenario. If things turn out worse than it expects, the spending share could be as high as 58%. Even in its optimistic take it is 50%

Let me put that in perspective. In 1976, the peak spending share when Britain had to turn to the International Monetary Fund for a humiliating bailout was much lower, 46.4%.

It was also lower in 2009-10, when high levels of spending and borrowing prompted the coalition government’s austerity programme. Then the peak level of spending was 46.3% of GDP.

The level of spending we are seeing this year is normally only witnessed during wartime, when the state mobilises the private sector to pursue the war effort. Indeed, to add to the comparison, this year’s 54% would be the highest since 1946, at the start of post-war demobilisation.

There has been a flavour of wartime mobilisation during the Covid-19 crisis in the quickly negotiated (and in some cases very bad) personal protection equipment contracts, schemes to quickly make ventilators and to buy up future vaccine supplies and, most notably, in policies like the job retention scheme. The government paid people’s wages, not in this case to fight the enemy, but to stay at home on furlough.

This Covid-19 version of the war effort has so far resulted in £178bn of additional public spending this year, out of £192bn of fiscal support, the rest in the form of tax measures. That is unlikely to be the final bill, So, when we are looking at the public spending share of the economy, the numerator has gone up a lot.

At the same time, of course, the denominator, GDP, will show a fall this year of a magnitude that we have not seen for a century. The OBR predicts a 12.4% drop in GDP this year, slightly more than the 10% drop which is the average among independent forecasters. Either way, a large contraction in the economy and a big increase in public spending can only mean one thing: a substantial rise in the state’s share of the economy.

It helps explain why the chancellor’s thoughts are turning to tax increases, as revealed by this newspaper last weekend, and in the speaking notes for a meeting with Tory MPs he inadvertently gave us a glimpse of last Wednesday.

I have argued here before that a one-off increase in the spending share and in public borrowing need not result in tax hikes. Yes, the crisis means more borrowing and higher debt, but if the extra borrowing is short-lived, that need not be a problem.

The context for that view was the OBR’s first look at the impact of the coronavirus, back in April. Then it expected that the impact of Covid-19 on the public finances would be sharp but temporary, with the path of public borrowing quickly returning to what it had expected before the crisis.

Things have changed. The OBR, like other forecasters, no longer expects a short, sharp fiscal shock. The hangover for the public finances will last for some years. Even in 2024-25, it thinks the budget deficit will be nearly 5% of GDP, compared with a pre-crisis prediction of just over 2%. The deficit then is expected to be double in cash terms what was previously expected. That is why, in his own words, Rishi Sunak wants to “correct our public finances” and re-establish the Tory reputation for “sound finance”.

Sunday, August 23, 2020
A post-lockdown housing boom. But will it turn to bust?
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.

There are many things you might have expected to happen as lockdown was eased but I suspect that a housing boom was not one of them. At a time when it has been harder than expected to get people out of their homes, it was not obvious that the first thing on the minds of many would be moving to a new one.

That there has been a burst of housing activity and a jump in prices is not in doubt, and I shall come onto some of the evidence in a moment. It is possible, of course, that some of this has been stimulated by the experience of lockdown itself, and the prospect of permanent changes in working arrangements.

Who would not want to work from home in a thatched cottage in St Mary Mead, rather than slogging in on the 7.32 to Waterloo, followed by a sweaty Tube journey? Other cities will have their variations on this.

Some estate agents say this has been an important factor, though they are pretty good at talking their own book, and I doubt that it has been the key influence. Even in the strange world in which we are living, most house moves are local.

So what is driving a market that, according to the Nationwide building society saw prices rise by 1.7% last month, with the Halifax only fractionally behind at 1,6%, pushing prices to record levels and annual rates of house-price inflation higher?

The Royal Institution of Chartered Surveyors (RICS) suggested that the easing of lockdown – the housing market reopened three months ago – lifted buyer enquiries out of their post-referendum torpor. According to the RICS’ residential market survey, a net balance of 75% of surveyors (those reporting a rise rather than those reporting a fall) saw a rise in in new buyer enquiries last month.
Surveyors also had something to sell, with a net balance of 59% recording an increase in instructions to sell. In the past few weeks the market has come back to life with a bang.

The first and most obvious reason for the strength of the market in recent weeks has been the bunching effect from a combination of stalled pre-lockdown purchases and pent-up demand. Some of the activity that would normally have occurred in the period between late March and mid-May has instead happened since.

There has been a second factor, supported by traffic figures from Rightmove, the property portal, and its rivals. When Brits were at home, they did not just watch Netflix, bake bread and grow beards. Many scoured the property websites. To this can be added the fact that the normal housing market summer lull, as people disappear to foreign parts, has not really happened this year.

A third factor is, of course, that the chancellor, Rishi Sunak, could not rely on these natural forces to continue lifting the market, so in his summer economic update last month increased the stamp duty threshold in England to £500,000. Some other parts of the UK have lower thresholds, reflecting lower house prices. He was worried that the housebuilders were reluctant to start work on new sites and wanted to provide the additional boost to consumer spending that stronger housing market activity provides. When people move, they spend, on furniture, furnishings and other things.

There is, it seems, a definite stamp duty effect. Knight Frank, the estate agent, reported that the number of offers accepted in the UK market between July 8 and August 3, after the stamp duty announcement, was 146% above the five-year average for that period. Not all of that was the impact of the stamp duty cut, but much of it was.