Sunday, November 27, 2016
Why Brexit will mean a bigger debt burden
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

In announcing that Wednesday’s autumn statement will be the last (at least until a future chancellor decides to reinstate it), Philip Hammond abandoned one tradition.

He has, however, established another. This is that when he presents and responds to new forecasts from the independent Office for Budget Responsibility (OBR), as he will be required to do twice a year, it can be guaranteed that a storm of criticism will be unleashed.

In the toxic post-Brexit vote environment that we are in, we have already had plenty of prattle, as some Tory MPs and unnamed ministers queued up to attack the OBR for predicting that Brexit will mean somewhat slower growth and significantly higher debt and deficits. Most of those doing the attacking, I suspect, will not even have opened the OBR document.

Next year, when we will have two budgets, the last spring budget in March and the first of the new autumn super-budgets in November, I suspect we will see some more of this. The fact that Brexit, as well as causing an inflation-inducing drop in the pound, will mean more government borrowing and higher public sector debt is unsurprising. It was pointed out, including here, on many occasions before the referendum, and it is happening.

The striking thing about the OBR’s forecasts, notwithstanding the attempts by critics to undermine it, is that they could have been a lot gloomier. It sees a temporary and modest slowdown in growth to 1.4% next year, picking up to 1.7% in 2018 and 2.1% (in line with its pre-referendum forecast) in 2019.

Its predictions for growth are thus above-consensus and, incidentally, stronger than those from the Bank of England. It could have been a lot gloomier, particularly about prospects towards the end of the decade. Its forecast is supposed to be based on government policy, so naturally it asked the government for its policy on Brexit. In return it was sent two anodyne paragraphs from Theresa May speeches, which said nothing more than that the government will aim to achieve the best of all possible worlds. To assume a normal rate of growth in 2019 on the basis of a policy vacuum was more than generous to the government.

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Sunday, November 20, 2016
Hammond has no room for populist giveaways
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

Chancellors of the exchequer do not normally elicit much sympathy, usually falling effortlessly into the role of pantomime villain. It is hard, however, not to feel a bit sorry for Philip Hammond, as he prepares for his big day on Wednesday, his autumn statement.

If the new chancellor discovered a “there’s no money left” note from George Osborne in his Treasury office when he took over in the summer he has not yet let on. But he inherited the task of completing the job of restoring the public finances to health, and a continuing austerity programme.

Hammond also inherited, thanks to the Brexit vote – and perhaps his predecessor’s campaign tactics – a deteriorating outlook for the public finances. We do not know exactly what the Office for Budget Responsibility (OBR), the independent fiscal watchdog, will come up with on Wednesday. It is unlikely, however, to be too different to the cumulative £100bn underlying overshoot by 2020-21 (compared with the OBR’s March predictions) estimated by economists at PWC, the professional services firm.

Faced with a worsening of the public finances of this sort, due to the expectation of slower growth in the years ahead as a result of Brexit uncertainty, it would make little sense for the chancellor to weigh in with tax increases or additional spending cuts to try to bring his predecessor’s deficit reduction programme back on track.

This has already been acknowledged by the government, indeed by the new prime minister. No longer will the government aim for a budget surplus by the end of the parliament. The “automatic stabilisers” – tax revenues down and some government spending up as a result of slower growth – will be allowed to operate. That makes perfect sense.

What also makes sense is for the chancellor to focus on the two areas which need extra spending and support: infrastructure and business investment. The abandonment of Osborne’s fiscal rules – all three have been dumped or missed since the May 2015 election - gives him plenty of room for the former.

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Sunday, November 13, 2016
The last thing we need is a protectionist president
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

The way we used to worry about the intrusion of politics into the economy and business now seems quaint and old-fashioned, belonging to a very different era. It is hard to believe it is only 18 months since the Conservatives and Labour squared up in the 2015 general election.

And, despite everything written at the time, including by me, the economy’s path under the economic policies put forward then would not have been very different whatever the outcome, though Labour would not have had a referendum.

2016 has changed that. Politics has become predictably unpredictable. Brexit and Donald Trump’s victory will bring much more change than any conventional election. Change, after all, is what people voted for. And, with important French and German elections coming up next year, there is plenty of scope for more unpredictable outcomes.

Even in Britain, the next election would at least throw up the possibility, however remote, of a shift away from the narrow territory around the centre-ground; in the form of a Labour government under Jeremy Corbyn.

What will the latest intrusion of a different kind of politics mean for Britain? If you were looking for historical precedents, Donald Trump could be seen as a hybrid of Dwight D Eisenhower and Ronald Reagan; rebuilding America’s crumbling infrastructure and slashing taxes to boost America’s growth rate.

That, notwithstanding the impact of this expansionism on America’s debt and deficits – which will worry some - together with his pledge that Britain would be at the front rather than the back of the queue when it comes to new trade deals, sounds very positive.

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Sunday, November 06, 2016
Sterling's ill-wind could blow us back to balance
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

You would have to say that it has been bracing, not least for the pound. Blown in one direction – down – by the referendum result and government indications that it will be pursuing a harder form of Brexit – sterling was blown back up a little on Thursday by the High Court’s ruling that Parliament must have a vote on the triggering of the formal Article 50 process and ended the week above $1.25.

But the pound remains very substantially lower than it was, which will have some of the consequences, notably higher inflation, we are familiar with. It is an ill wind, however, which blows nobody some good.

Manufacturers are benefiting from the lower pound. The latest purchasing managers’ survey for the sector from Markit showed that export orders are driving a mini-revival in Britain’s factories.

That is good news but perhaps most remarkably, if a new forecast is right, one of Britain’s longstanding Achilles’ heels will, in just a few years, have been eliminated. I am referring to the current account deficit, the balance of payments gap, the amount that this country is in the red in its transactions with the rest of the world. Times have changed, but it used to be regarded as one of the best measures of the nation’s economic health.

The deficit, as regular readers will know, has been running at record levels. Last year it was no less than £100.2bn, 5.4% of gross domestic product. In the first half of this year it averaged 5.8% of GDP. It was this that led Mark Carney, who has had a busy week, to say that Britain would be dependent on the kindness of strangers to fund all this red ink.

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Sunday, October 30, 2016
Hard or soft Brexit? Britain needs a middle way
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

To the frustration of many MPs, and the concern of many businesses, the shape of Britain’s post-EU future remains clouded in uncertainty. When Jeremy Corbyn said to Theresa May a few days ago that her cunning plan was that she did not have one, it was not just his own MPs who nodded in approval at a rare hit for the Labour leader.

The prime minister continues to insist that she will seek combine maximum possible access to the single market with controls on EU migration. The fact that the economy has so far held up well in the face of the Brexit vote, with third quarter gross domestic product rising by 0.5%, may strengthen her hand, and those of the Brexiteers in the government. It is, though early days, and Brexit will be a long process. Even more encouraging was the decision by Nissan to build the new Qashqai and X-trail in Sunderland. It has clearly been led to expect than any future deal will involve something close to existing single market arrangements for cars.

As I noted last week, second-guessing the government is probably not the most productive thing to do at the moment. Fortunately, there is plenty happening outside government, which one would hope will have an impact on the official negotiating position. Does Brexit have to be “hard” or, given that a “soft” Brexit – one involving continued unrestricted free movement – is unlikely, is there a middle way that would work to the benefit of both Britain and the EU?

Let me begin with some definitions. Economists at HSBC, in a useful recent report “Brexit getting harder”, took eight conditions and applied them to different arrangements between Britain and the EU. As an EU member Britain is in the single market, has duty free trade in goods, market access for services but cannot negotiate its own trade deals. It must adhere to EU social and employment rules, contribute to the EU budget, is in the Common Agricultural Policy (CAP) and cannot restrict EU migration.

Of the six other models HSBC looked at, the hardest were the WTO (World Trade Organisation) and Canada models. Under a WTO model none of the eight conditions of EU membership would apply. Under a Canada-style agreement, similar to the on-off-on comprehensive economic and trade agreement between Canada and the EU, there would be duty free trade in goods and partial access for services.

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Sunday, October 23, 2016
Stormier weather ahead for a nation of shoppers
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

For Britain’s retailers – at least those who are not threatened with having their knighthood taken away – this should be a time of celebration. The latest official figures show that the volume of retail sales in the three months to September was 5.4% up on a year earlier.

That was mighty strong. You have to go back to early 2015 for anything stronger. A jump in retail sales in July, the month after the referendum, was followed by a flat August and September. Even so, it is hard to see anything resembling consumer retrenchment in these figures.

So why the long faces? Some of the strength of sales was because, perhaps because of all those staycations, we bought more petrol and diesel. Even excluding those, however, retail sales volumes were up 5.1% in the third quarter.

Some retailers have always had difficulty reconciling their own experience with the official figures but they can agree on one message from the numbers. This is that they have to work hard, though discounting and special sales events, to achieve their sales.

In more normal times – times of higher inflation than in recent years – the growth in sales values always exceed that of volumes, Two things drove shop takings; the number of goods sold and the price, usually rising, at which they were sold. That, however, is not the case now. While volumes of retail sales (excluding fuel) were up by 5.1% in their third quarter, values – which are what we really count – were up only 3.4%.

The bigger worry is what comes next. Last week brought news of a bigger rise in inflation than expected. True, consumer price inflation only rose from 0.6% to 1% (inflation on the old retail prices index is 2%) but pretty well everybody thinks this is the beginning of a long climb. The median expectation among forecasters is of a rise in inflation of 2.5% next year, with the gloomiest expecting something closer to 4%. Last year, when we had no inflation at all, on the consumer price index measure, looks to have been a one-off.

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Sunday, October 16, 2016
Uncertainty to choke off business investment
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

What is the biggest risk to Britain’s economy over the next couple of years? Anybody watching sterling’s gyrations in recent days might conclude that, as on so many occasions in the past, it is the exchange rate, itself the product of the government’s uncertain steps towards the Brexit door.

The pound’s performance is, however, merely the canary in the coalmine, a symptom of a wider uncertainty. Its average value, its trade-weighted index, fell to an all-time low last week. Its volatility adds to that uncertainty; for businesses, individuals and for the government. Whether or not a downward adjustment in sterling was needed, which is debatable, the process itself is unsettling.

When it comes to being unsettled, there are three central risks to growth over the next couple of years. They are that, in an atmosphere of uncertainty, businesses will be very cautious about investing, that a similar caution will affect recruitment, and that the inflationary impact of sterling’s fall will squeeze real incomes and consumer spending, more than offsetting any beneficial effect on exports. After that, the risks will centre on the nature of Britain’s new relationships both with the European Union and the rest of the world, including trade and migration.

Let me this week take just the first of those risks; business investment. If you were looking for an explanation of Britain’s poor productivity performance, business investment would be high on the list. It has been lower, over time, than most of our competitors. Some but not all of that reflects the larger decline in manufacturing, which is more investment-heavy than other sectors.

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Sunday, October 09, 2016
More nasty lurches ahead on this sterling rollercoaster
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

The pound in your pocket is worth a lot less than it was, as Harold Wilson did not quite say. Actually, the reference to the most famous devaluation broadcast in history is not inappropriate. The former Labour prime minister was trying to tell people in 1967 that a 14% fall in the pound would not make them any poorer. After another torrid week, sterling’s average value is also 14% lower than it was in late May, before referendum jitters set in.

It was torrid even before the “flash crash” that hit sterling in the early hours of Friday morning, and which pushed it as low as $1.15, before it settled at a weak $1.24.

The current prime minister, who last week declared herself untroubled by the pound’s renewed tumble, will not be broadcasting to the nation about it. She also broke the unwritten rule, adopted by ministers and prime ministers since independence in 1997, of not criticising the impact of the Bank of England’s policies. This was not the first time she had criticised low rates and quantitative easing (QE), though I doubt it will have any impact on what the Bank decides to do in coming months.

Is Theresa May right to be sanguine about the pound’s drop to new 31-year lows against the dollar and a five-year low against the euro?
In the short-term, up to a point. A weak pound is providing a safety-valve for the economy now, as it did in 2007-9, when the global financial crisis hit.

Together with the actions of the Bank, it represents a dramatic loosening of monetary conditions, at a time when the economy needed it. The rebound from the July wobbles owed at least something to the sterling safety-valve.

And, while the pound in your pocket will be worth less as the inflationary impact of sterling’s fall comes through via higher import prices, it is better that that process starts when inflation is very low (0.6%) and oil and commodity prices relatively weak. One of the reasons that there has been less of an inflationary uptick so far is that we had a weak summer for oil prices.

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