Saturday, February 09, 2019
Not just a slowdown - we're stuck in a low gear
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.

Like all the best famous quotes, it is far from clear that Harold Macmillan, the former Tory prime minister, ever said when asked what he most feared: “Events, dear boy, events.” He certainly did not say another thing usually attributed to him, “you’ve never had it so good”, but a variation on it.

I could write a whole column on this. John Maynard Keynes probably never said: “If the facts change, I change my mind. What do you do, Sir?” Many of us have, however, written that he did. Fortunately these days we have an electronic record of what Donald Trump, or Donald Tusk, said, or at least tweeted.

Anyway, whether he said it or not, events do not just matter for politicians. They are hugely important for central bankers. In America, the Federal Reserve has backed off further interest rate rises, having done nine so far (but only to a level of between 2.25% and 2.5%), because of growth concerns.

The European Central Bank has ended its programme of quantitative easing (QE) but, in the light of a sharp slowdown in the eurozone’s big three economies – Germany, France and Italy – will be wondering privately whether it was right to do so.

As for the Bank of England, never before have I seen events, and in particular the single event of Brexit, dominate one of its quarterly press conferences as much as the one on Thursday, when to the surprise of nobody it left interest rates unchanged and, though the extent of it was slightly more of a surprise, significantly revised down its growth forecasts.

The impact of events on the Bank is not just that Mark Carney, its governor, has to answer more questions on Brexit than he is comfortable with, and who quipped that he no longer wakes up in the mornings but in the middle of the night, but also that it has taken it further away from what it wanted to do.

Plan A for the Bank was to gradually raise interest rates to a “new normal” of about 2%, from 0.75% now, in response to rising wage pressures and other indicators of limited spare capacity in the economy and because, after a long period in which official rates have bene close to zero, it made sense to think about normalising them.

Plan A has not yet been entirely torn up, but it has evolved into what might be best described as Plan A-minus. The Bank still sees scope for “limited and gradual” rate rises in coming years, for similar reasons as before, but they are now expected to be more limited, and more gradual.

There was a time when many in the City expected the next rise in interest rates to be in May. But what Carney described as “the Brexit fog” will not have lifted by then. Nor, looking at the Bank’s new forecasts, will there be much scope for raising rates in August or November. With the governor set to depart at the end of January next year – less than 12 months from now – the likelihood of him going without any further rate rises under his belt is increasng.

By the time of any sunlit uplands in the Bank’s new forecast, an eventual pick-up in growth to a hardly-booming 2% by 2022, it will be Carney’s successor who is in charge.

That the Bank has reduced its forecasts is not a surprise. Business surveys have pointed to a sharp softening of growth. The January purchasing managers’ surveys for manufacturing, construction and services were all weak, suggesting the economy has all but ground to a halt.

Sunday, February 03, 2019
Bogged down in Brexit while the economy festers
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 sometimes said that the gulf between businesses and ordinary folk has never been greater. People do not necessarily think that what is good for firms is good for them. An annual survey by Edelman, the public relations firm, just updated, found that 52% of people don’t think the way business is done is good for society, though they are even more damning of government.

On one thing, however, businesses and households are united. They are all feeling gloomy, thoroughly cheesed off with politicians and fed up with a Brexit process which goes around in ever decreasing circles.

I sympathise with that. As a news junkie, I will listen to pretty well everything but rarely have I used the off button more than in recent months. And don’t get me started on Question Time.

Anyway, the ICAEW, the Institute of Chartered Accountants in England and Wales, produces a reliable quarterly survey of business confidence, which I follow. It latest, for the first quarter, will be published tomorrow but I have had a sneak preview.

It shows that confidence has fallen to an index level of -16.4, the lowest since the economy was mired in recession 10 years ago during the global financial crisis. As the ICAEW demonstrates, confidence is closely linked to the politics of the Brexit process.

Its survey came too late to encompass the latest parliamentary votes but they will have done nothing to bolster confidence; dead-ends tend not to. The gloomiest sectors in the survey are retail and wholesale, followed by property and construction.

Its results are consistent with growth slowing to a crawl, just a 0.1% rise in gross domestic product this quarter, alongside a sharp slowdown in investment. More on that in a moment.

I said businesses and consumers are at one on this. The latest GfK index of consumer confidence was at -14 in January, the same as in December but five points lower than a year earlier and lower than in the immediate aftermath of the referendum. Households are now experiencing real wage increases again, according to official figures, and unemployment has not been this low since the mid-1970s. With inflation also coming down the “misery index” (the unemployment rate plus the inflation rate) is at low levels. People should be quite optimistic.

They are, however, worried about the future, and particularly about the economic outlook. A net 39% of people think the economic situation will get worse over the next 12 months, the gloomiest people have been on this for seven years, and approaching the level of concern we saw during the financial crisis.

The uncertainty that is driving down confidence will eventually lift. The House of Commons version of the withdrawal agreement that Theresa May will take to Brussels has little chance, but a version should eventually emerge that satisfies both sides and parliament. When that is, and how long an extension of the Article 50 timetable will be required beyond March 29 remain open questions. The risk of a no-deal Brexit is higher than it was before last week’s votes and is of great concern for business, which found the latest political shenanigans as unhelpful as any we have seen.

Getting beyond all this remains the challenge. Businesses complain that, because of Brexit, nothing else is happening, particularly in government. They are being asked to reassure customers while being offered nom reassurances or certainty themselves.

Sunday, January 27, 2019
The jobs keep coming - but where are they coming from?
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.

Britain’s labour market continues to both dazzle and puzzle. It dazzles because, as official figures last week showed, we have now have the highest employment level (32.5m) and employment rate (75.8%) on record and the joint lowest unemployment rate, just 4%, since the mid-1970s.

This is good news. Though as discussed here recently a job is no longer a guarantee of a decent standard of living, or even an escape from poverty, it is better than the alternative of not having a job.

In the latest 12 months, 328,000 more people are in work and 68,000 fewer are unemployed. The difference between the two is largely accounted for by the fact that significant numbers of people have come into work out of economic inactivity; not working and not looking for work. The economic inactivity rate, 21%, is the joint lowest since 1971. Employers are struggling to recruit, vacancy levels are high and pay growth is at its strongest for 10 years.

Nobody expected this. Normal economic relationships would have pointed to a slowdown in the labour market alongside the slowdown in economic growth. Normal relationships would also have suggested that, by now, productivity growth would have reasserted itself. Instead, Britain has strong employment but flatlining productivity. When growth is weak but employment strong, simple arithmetic means that output per worker, productivity, will suffer.

That is not the only puzzle. The good news in the figures on employment and unemployment coincides with some gloomy headlines on jobs, whether it is Jaguar Land Rover or Patisserie Valerie. It may not be such a puzzle. It takes time before such announcements feed through to the figures and it is also quite possible for quiet job creation to trump high-profile redundancy announcements. Just as we have moved away from the era of big negotiated pay settlements across the economy, so we are no longer in a world where announcements of job cuts by big employers shape the labour market.

That does not entirely remove the puzzle. Retailing is a sector which, through thick and thin, has tended to generate jobs, even as others were cutting back. According to the British Retail Consortium, however, there were 70,000 fewer people employed in retail at the end of 2018, compared with a year earlier. Those high street woes we keep writing about are real.

So let me, partly as a public service and partly in response to reader demand, try to solve some of these puzzles. The first concerns the short-term. How come, with so much Brexit uncertainty around, were firms so willing to recruit late last year? Employment rose by 141,000 in the September-November period compared with the previous three months.

Sunday, January 20, 2019
After that defeat, even more reason to hug the EU close
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.

I worry about the future of hairdressers in this country. I say so because, if business people continue to tear their hair out at the current rate over the political shenanigans over Brexit, there will be nothing left for them to cut.

The House of Commons landslide defeat for the withdrawal agreement negotiated by the government and the EU may have been predictable but was nevertheless depressing. Most depressing, perhaps, was the extent to which it was celebrated not just by hard Brexiteers, as expected, but also by hard Remainers. At both extremes of the Brexit debate are people who will never be reconciled.

I say this not because the deal negotiated by the prime minister’s team was wonderful; it was not but no compromise agreement was ever going to be. Her address to the nation after her government had survived the confidence vote was as tone deaf as you would expect, and almost as bad as her “citizens of nowhere” speech to the Tory conference in October 2016. It is a canard to say that because more than 80% of people voted for the Tories or Labour in the 2017 election, the country is united behind Brexit. Many voted Labour because of its fuzziness on Brexit, a fuzziness which persists.

By the same token, the country is poorly served by Jeremy Corbyn’s stance. Though avoiding a no-deal Brexit is of paramount importance, insisting that the prime minister rules it out before he will agree to consensus-building talks with her is infantile. That would remove the tiny bargaining chip May has with the EU; that we could still shoot ourselves in the foot but it would hurt you a bit too.

Whether that works or not on the politically toxic issue of the Irish backstop, the prime minister deserves praise for the central aim of her approach to Brexit. It has been, certainly since the 2017 election catastrophe, to deliver on the result of the referendum while minimising the economic damage from doing from doing so.

That task has been made more difficult by her own over-hasty adoption of red lines. There was no need in the first flush of her premiership to rule out a modified form of single market membership or staying in a customs union. But minimising the economic damage has been the watchword since mid-2017. The withdrawal agreement was intended, as Michael Gove has said, to get Britain over the line on March 29, after which during a lengthy transition period the battle could be joined on how close a future relationship has with the EU. It was never part of the plan that the withdrawal agreement should fail, and fail so badly.

I still think, as do most City observers, that some form of the agreement will be adopted, after modifications, though that appears quite likely to require an extension of the article 50 process. The risk of a no-deal Brexit, while low, has not gone away. J P Morgan, for example, sees a 45% probability of Brexit on a deal close to the existing one, 25% for a second referendum, 15% a general election, 10% an extension of article 50 into the second half of the year and 5% a disorderly no deal. These probabilities are, of course liable to change, and I would put the risk of a no-deal Brexit a bit higher, but they provide a very useful barometer.

Sunday, January 13, 2019
Record numbers in work, so why is poverty going up?
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.

What are we worried about? Ipsos-Mori, the pollster, asks a sample of people every month what are the most important issues facing Britain. Its latest poll, released a few days ago, showed that the top two concerns, Brexit and the National Health Service, were as you might expect.

More surprising, perhaps, was the third biggest public concern; poverty and inequality, named by 21% of people, the highest in the more than two decades it has featured in the survey. It was ahead of the economy, unemployment and immigration, public concern over which has dropped to its lowest level since 2002 even though net migration, at 273,000 in the latest 12 months (mostly from outside the European Union), is not that far below all-time highs.

That people are worried about poverty and inequality reflects well on them, even though the usual response from somebody like me would be that it too does not correlate well with the facts. All the reliable evidence on inequality, for example, shows that while it did rise a lot in the 1980s, it has not done so since, and if anything has come down a little since the financial crisis.

As for poverty, sometimes you have to feel sorry for government ministers, though this is not a popular view at the moment. Once it was quite straightforward. Any government would give its eye teeth for the situation Britain has at the moment, of a record level of employment, a near-record employment rate (the proportion of working-age people in jobs) and the unemployment rate hovering around its lowest since the mid-1970s.

When that government is also presiding over significant increases in the national living wage, what used to be the minimum wage, which rose by 4.4% last year and is due to rise by nearly 5% this year, you might think that it had all bases covered. Last year’s increase directly and indirectly boosted the pay of 5m workers.

So why the heightened concern? Some of it may be seasonal. In winter, and in particular in the run-up to Christmas, people are made more aware of poverty. This newspaper’s Homeless in Britain appeal, in association with Crisis, was an example.

But there is more to it than that. On inequality, even though the big rise occurred a long time ago, people are still entitled to take the view that absolute levels of it are too high, even though those levels are not changing very much. There is, too, a difference between what conventional inequality measures show and the perception that the extremely rich are pulling away from the rest of us.

Sunday, January 06, 2019
Mind the gap - this could be the year we fall into it
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 a few days into 2019, resolutions have already been made and broken, and many people have had a stab at predicting the outlook for the year. Forecasts are just forecasts, of course, and the real world can and does have a mind of its own.

In that sense, my piece a week ago recording that most forecasters had a good year in 2018, which generated much more than the usual interest, could be both a comfort and a warning. The comforting part is that forecasters do get it right. Less reassuring might be the thought that lightning does not strike twice.

While I am on that, many people, including my colleague Irwin Stelzer, have asked whether there is any consistency to the performance of the forecasters. I have been running my league table for at least a quarter of a century and, while I cannot promise to go back that far, I should be able to provide a running order for the past three3, five5 and 10 years. Watch this space.
For this year, consensus forecasts for the economy — as compiled by the Treasury each month — have been remarkably stable in recent months, despite the many political twists and turns.

They are for economic growth of 1.5%, a touch stronger than last year, and for inflation to head down to its official target rate of 2% (from 2.3% now) by the end of the year. Unemployment surprised on the downside last year and is expected to hold broadly steady at 4.1% of the workforce.

Britain’s balance of payments is expected to remain significantly in the red, with a deficit similar to last year, which I estimate to have been £85bn. I shall return to that in a moment. As for interest rates, the general expectation is that they will edge higher, with at least one, and possibly two, quarter-point increases from the current 0.75% level. Government borrowing is expected to edge up to about £33bn for the 2019-20 fiscal year, from £31bn in 2018-19.

These forecasts seem perfectly fair. I should say, as you have probably already noticed, that they are conditional on the prime minister getting something close like to her EU withdrawal agreement through the House of Commons and (though you would not describe anything related to Brexit as being smooth)) an orderly Brexit being achieved. This is despite the government’s stepping up its no-deal preparations. I: it cannot be long, amid the controversial chartering of ferries, before a minister invokes the little ships of Dunkirk.

On this basis, Samuel Tombs of Pantheon Macroeconomics predicts growth this year slightly better than the consensus, at 1.6%,; an unemployment rate of 3.9%; and inflation coming down to 1.8%. He thinks there will be a bounce in business investment if there is a deal, as do the chancellor and Bank of England governor (thoughI am a little sceptical). He also sees scope for a significant appreciation in the pound, to $1.40 and €1.27, from $1.26 and €1.11 now, partly on the back of a rise in Bank rate to 1.25%.

Sunday, December 30, 2018
A good year for the forecasters
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 table to accompny this article is also in The Sunday Times.

So we get ready to say goodbye to a year that, in the end, was a disappointing one. Much of that disappointment relates to the global economy. Back in January it was possible to look at a world economy firing on all cylinders, with strong growth in North America, Asia, the emerging world and, most surprisingly, Europe.

It appeared, at long last, that the world was shaking off the doleful influence of the financial crisis, and that the hangovers, financial and fiscal, had finally gone away. A couple of years of global growth very close to the pre-crisis norm of 4%, with world trade also on the up, appeared to be in prospect.

Sadly, it has not turned out like that. Growth has not collapsed but it has disappointed, closer to 3.5% rather than 4%. We end the year with worries on the increase and the optimism of a year ago taking a back seat. Countries most exposed to world trade, such as Germany, have been caught in the downdraft, ending the year with growth slowing and business confidence weak,

As Charles Dumas of T S Lombard put it in a recent report: “The global slowdown seems to have started in mid-2018, and shows the now decisive importance of emerging markets to the world economy. China and other emerging markets account for 40% of world GDP and their slowdown led to a sharp mid-year reduction in world trade growth … In Europe, export dependence led to a negative third quarter GDP change in Germany and Italy.”

Why the disappointment? High on the agenda are two separate developments in America; Donald Trump’s trade wars and the decision by the Federal Reserve, America’s central bank, to raise interest rates four times during the year, with the last coming earlier this month.

Trump’s tariffs, initially on steel and aluminium but then extending into a more general trade war with China, nipped in the bud a promising recovery in world trade. And, as economists warned, protectionism turned out to be bad for growth.

The Fed, which felt emboldened enough to raise rates for the ninth time since the crisis, and at a faster pace than before, attracted Trump’s ire. But, in its efforts to keep US inflation under control, was also in the vanguard of what was a significant monetary policy reversal. After years of stimulus, via ultra low interest rates and quantitative easing (QE), central banks shifted into reverse gear. Even the European Central Bank ended its QE.

What about Britain? Economic forecasters would be the first to acknowledge that they have good years and bad ones. Most had a couple of bad years around the time of the financial crisis, mainly because even when it was under way, they underestimated how bad its impact on growth would be.

Sunday, December 23, 2018
Confidence zapped as no-deal worries return
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 would be great to report that we are ending the year on an upbeat note, with uncertainty banished and confidence riding high. Unfortunately, and though I don’t want to spoil anybody’s festive fun, neither of those things are true.

According to the closely-watched GfK consumer confidence index, which has been running since the 1970s, households are ending the year “on a pessimistic note”, with confidence lower even than in the immediate aftermath of the referendum. Though this did not prevent them taking advantage of Black Friday bargains last month, they are downbeat about prospects for their own financial situation, and markedly so about the outlook for the economy. Confidence has not been this low for five years.

Business confidence, meanwhile, is also in the doldrums. On some measures, including the ICAEW (Institute of Chartered Accountants in England and Wales) index, it is it at is lowest since the financial crisis. On others, such as the Federation of Small Businesses’ index, it is at a seven-year low.

It is not hard to see why. Business groups have been at best lukewarm and in some cases openly hostile about the proposals set out in the government’s immigration white paper, of which more below.

More worryingly for business, many thought that talk of a no-deal Brexit, which as I described here recently as madder than any number of mad things you can think of – I left out George the Third – had been safely buried. But, like the many-headed hydra or the black knight in Monty Python’s Holy Grail it will not lie down, and is revived on almost a daily basis, usually by spivs or failed politicians.

The fact that the government has stepped up its no-deal preparations, and is allocating £2bn to government departments and putting 3,500 troops on standby, has added to the concern. Though Downing Street continues to insist that the prime minister’s deal will prevail, if it was certain it would not have embarked on these preparations.

Such is the weird mood that people cannot make up their minds whether the latest phase of the EU’s no-deal preparations would make a disruptive Brexit slightly less disruptive or are an attempt to stitch this country up.

The measures, which will extend equivalence for some financial products, allow flights between the UK and EU and allow UK hauliers to carry goods into the EU for nine months, are intended to minimise the effects on the 27 of the abrupt exit of the 28th. They do not make a no-deal Brexit any less silly.

The disadvantages of a no-deal Brexit are many and large. It would not, as constitutional experts have assured me, absolve Britain of the responsibility for most, an d probably all, of the £39bn “divorce bill”, unless this country wants to start its new era as a pariah state which leaves without paying. We do not, as many continue to exasperatingly claim, trade with the rest of the world on “WTO terms”. We trade on the basis of agreements and arrangements, negotiated by the EU, which are superior to basic World Trade Organisation terms, and which we probably could not carry over in the event of a no-deal Brexit.