Sunday, July 15, 2018
Give young people the skills - or they won't do the job
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.

For British business, the question of skill shortages, never very far away, is now a pressing one. Though the government’s EU white paper failed to spell it out – detailed proposals on immigration are expected later in the year – Britain’s labour market after Brexit is likely to be less open to EU migrants than in the past.

That has yet to be negotiated, and it may be that the government will have to offer concessions. But the situation is already changing. The ready supply of EU workers, needed to fill key gaps, including gaps in skills, is already tailing off. Over the latest 12 months there has been a 28,000 drop to 2.29m in the number of EU workers in Britain.

Such workers account for 6% of employment across all sectors and regions, and are particularly important in some. Official estimates show that 13% of workers in London are EU nationals, a proportion rising to 28% in the construction industry.

Many people say to me that, if indeed we are heading for a future in which the supply of skilled EU migrants will be restricted, as well as those who perform less skilled tasks such as fruit picking, the solution is to better train and equip our own people, particularly young people.

While the unemployment rate is at its lowest since the mid-1970s, it still equates to a jobless level of 1.42m. There are 808,000 young people (16-24) who are Neets – not in education, employment or training – and that number has started rising again.

On the face of it, however, at a time when we should be boosting the skills of young people – and the rest of the workforce – we appear to be heading in the opposite direction. The introduction of the apprenticeship levy in April last year, a measure heavily criticised by business, has been associated with a sharp drop in new apprenticeships, not an increase.

Data for the first three-quarters of the 2017-18 academic year show 290,500 apprenticeship starts, a drop of 34% compared with the figures reported at this stage for 2016-17. The Institute of Directors says that without reform it will be impossible to meet the government’s target of 3m apprenticeship starts by 2020. Apprenticeships suffered with the sharp decline in manufacturing in the 1980s and it is not clear whether the current model is the answer.

When it comes to technical education, and equipping young people with the skills they need in a modern economy. Britain has arguably had a problem for even longer. As early as the time of the Great Exhibition of 1851, shortcomings in Britain’s technical education in comparison with Germany were being noted. A century later, the 1944 Education Act, brought in by R.A. Butler, envisaged a tripartite system of secondary education, with grammar schools, secondary moderns and technical schools. But technical schools were always the poor relation, and many local authorities chose not to open any.

Lord Baker, who as Kenneth Baker was education secretary under Margaret Thatcher in the 1980s – giving his name to the “Baker days” of in-service training for teachers which were not always welcomed by parents – has been a tireless campaigner for technical education in Britain. There have been many times when that campaigning has run up against the preferences of those in power for academic education, including the period when Michael Gove was education secretary in the coalition government.

Sunday, July 08, 2018
Speculation mounts. Yet the case for a rate rise is a weak one
Posted by David Smith at 09:00 AM


My regular column is available to subscribers on This is an excerpt.

We have reached that moment in the quarterly interest-rate cycle when speculation is again mounting about whether the Bank of England will bite the bullet and actually raise interest rates next month.

We have been here before, many times, and we know that it ends in one of two ways. Either the Bank’s monetary policy committee (MPC) raises interest rates, something it has done only once in the past 10 years. Or we face a re-run of a familiar script, with Mark Carney, the governor, accused again of being an “unreliable boyfriend” when it comes to interest rate guidance.

Why is there heightened speculation about an interest rate rise next month? It is mainly because the Bank’s view, that growth in the weak first quarter of the year was affected by severe “beast from the east” weather, and that there would be a bounce in the second quarter, is supported by the surveys and some official data.

The Office for National Statistics, it should be said, had played down these weather effects in reporting that gross domestic product (GDP) rose by just 0.1% in the first three months of the year, an estimate since revised up a little to 0.2%

Purchasing managers’ surveys for last month point to a strong bounce for the service sector, a more iffy picture for manufacturing and construction growing again. Taken together they are consistent with 0.4% GDP growth in the second quarter, which would be enough to lift the 12-month rate of growth from 1.2% to 1.4%.

Carney, in a very good speech in Newcastle warning of the risks posed by Donald Trump’s knuckleheaded protectionism (my words, not his), said “the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate”. Though he did not specify next month, he said households were right to be prepared for a rate rise in the next year.

The Bank is also concerned about what the governor described as a firming up of pay and domestic cost pressures. The latest report from the Recruitment & Employment Confederation suggests that candidate shortages have pushed pay growth for permanent staff to a three-year high, lending support to such fears.

There is also the weight of numbers on the MPC itself. Three of its nine members voted for a rate hike last month, so only two more need to move over to the hawkish side of the fence to give a majority for hike. Given that one of the three hikers, Ian McCafferty, will have his final vote at the committee’s August 1-2 meeting before leaving the committee, there may be no time like the present.

There may be another reason, even if only subliminally, for raising rates now. The next realistic opportunity after next month will be November, given that decisions to change rates usually coincide with the publication of a new quarterly Bank forecast. By then, Britain could be embroiled in even more Brexit uncertainty than now, and too close to the cliff-edge for comfort. Raising rates under those circumstances would look inappropriate.

Sunday, July 01, 2018
Falling inequality - and other things nobody ever believes
Posted by David Smith at 09:00 AM


My regular column is available to subscribers on This is an excerpt.

Every so often some figures come along which challenge most people’s perceptions of what has been happening to the economy. Those perceptions, indeed firm beliefs, encompass three things: inequality is rising; incomes were growing fine until the bankers wrecked the economy 10 years ago but have struggled since, and cossetted pensioners have benefited by being protected from the worst of the pain.

If I were to tell you that none of these three things were true, you might imagine that I had stumbled across a dodgy dossier from a right-wing think tank. But the findings, hailed by George Osborne, the former chancellor, and his one-time economic adviser Rupert Harrison, were in a report from the Institute for Fiscal Studies and co-funded by the Joseph Rowntree Foundation.

The report, ‘Living standards, poverty and inequality in the UK: 2018’, based on two official UK household surveys, does indeed challenge some strongly-held beliefs.

It shows that, since the post-crisis recovery in incomes began in 2011-12, median household incomes rose by an average of 1.6% a year in real terms until 2016-17. This is lower than the 2% annual average in the four decades leading up to the financial crisis but better than the 1.2% a year from 2002 to 2007, the five years leading up to that crisis.

This, on the face of it, is hard to square with the fact that consumers were spending freely in those years, in an economy driven along by consumer exuberance. But there was also a lot of borrowing; mortgages and consumer credit often growing by 15% a year. With hindsight, the fact that incomes were growing so weakly was a warning signal of the horrors that were to come.

Those horrors, the effects of the crisis and recession, explain why, though income growth in recent years has been better than generally thought, few see much cause for celebration. Mostly in the past there has been a period of catch-up after a recession.

This time, in the several moving parts that make up incomes – strong growth in employment but weak wages and cuts to benefits and tax credits – the sense has been that we have been lucky to see any income growth at all, let alone make up for lost time. After five years of recovery this time, real incomes were about 4% above their pre-recession peak. In the 1980s at the same stage they were 16% higher.

The outlook, meanwhile, is nothing to write home about. The IFS authors suggest that, because of weak earnings growth and a continued squeeze on benefits and tax credit. Living standards will, if anything, growth more slowly from now on that over the five years from 2011-12. Figures released on Friday showed that real household disposable income fell by 0.5% last year, for familiar reasons, while on a per capita basis there was a drop of 1.1%.

The second counterintuitive finding is on pensioners. The perception is that, while workers have endured a squeeze and often falls in real wages, the triple lock and other factors have protected pensioners. It is not true, at least since 2011, since which time real incomes for both pensioners and non-pensioners have risen by around 8%.

What is true, however, is that pensioners fared much better during the worst of the crisis and that advantage has stayed with them. In 2011, pensioner incomes were 5% above pre-recession levels while non-pensioner incomes were 4% down. Again, workers have not made up the lost ground; their incomes are less than 4% above pre-crisis levels while pensioners are up by 13.5%.

Perhaps most striking, however, is the finding on inequality. Rising inequality is so much part of the discourse in this country that I have almost given up trying to correct it. It seems it explains the rise of Jeremy Corbyn and the fact that Labour can happily propose higher taxes on the better-off. Indeed, Philip Hammond has hinted at something similar when he gets round to working out which taxes will have to rise to pay for the £20bn-plus funding boost for the National Health Service.

Sunday, June 24, 2018
We don't need a new Bank target - but we do need to raise our game
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.

Just when you think there is nothing new to say about one of the defining problems of our age – stagnant productivity growth – somebody comes up with something new. A report commissioned by John McDonnell, Labour’s shadow chancellor, has called for the Bank of England to be set an additional target, that of achieving productivity growth of 3% a year.

Productivity, output per worker or, as it is more commonly measured, output per hour, has been the missing link in the economy in the period since the financial crisis. Had it made up the ground lost then, something that usually happens after recessions, we could be looking at gross domestic product (GDP) per worker 20% higher than it is. That was where the pre-crisis trend, if maintained, would have left us.

Most of that would have translated into a level of GDP a fifth larger than it is, alongside much better public finances; the budget deficit, 1.9% of GDP in 2017-18, would have long been eliminated and there would be no worries about how to fund the £20bn-plus boost to National Health Service spending.

Sustained growth in productivity of 3% a year would be transformative, converting Britain from the seven-stone weakling of the international productivity comparison tables to a country capable of kicking sand in anybody’s face. We could laugh in the face of Brexit and the uncertainties and prolonged drag on economic growth it brings.

To put it in perspective, the Office for National Statistics has data on GDP per hour worked going back to 1972. In that time, productivity growth has averaged 1.8% a year, so 3% would be an improvement of 1.2 percentage points, or more than 60%, on that long-term average.

By decade, productivity growth averaged 2.2% in the 1970s, 2.4% in the 1980s, 2.3% in the 1990s, 1.4% in the 2000s and just 0.5% since 2010. McDonnell’s Labour is sometimes accused of wanting to go back to the 1970s but in terms of its productivity ambitions it wants to go further.

It is not impossible; there have been 11 years in the past 45 when productivity has grown by 3% or more, years of strong economic growth or falling employment. But it is a long way from where we are now. The last 3%-plus productivity year was in 2000.

Much of the response to the report commissioned by the shadow chancellor, written by the consultancy GFC Economics and Clearpoint Advisors, has been that it reflects muddled thinking. Monetary policy and financial stability, the Bank’s responsibilities, have no direct links to productivity and adding to its targets merely makes it more likely that it will miss its central one, that of controlling inflation.

Where central banks have adopted so-called dual mandates, targeting employment as well as price stability, as in America, Australia and, currently, in New Zealand, there is a logic. Low inflation is a necessary condition of rising employment. But when it comes to productivity, some of the best years for its growth in Britain have been alongside high inflation, including the infamous Barber boom of the early 1970s.

Sunday, June 17, 2018
Why jobs are booming when growth stays weak
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.

Today, away from the parliamentary kerfuffle over Brexit, Donald Trump’s dangerous protectionist rhetoric, higher interest rates in America, the prospective end in December of quantitative easing in Europe and other momentous issues, my attempt to answer something that has been puzzling me for a while. Why is Britain’s labour market so strong when growth is quite weak?

The latest official statistics brought news of what appears to be a continuation of Britain’s jobs’ miracle. The number of people in work in the February-April period, 32.39m, was 146,000 up on the previous three months and 440,000 higher than a year earlier.

The employment rate, the proportion of 16-64 year-olds in work, remained at a record high of 75.6%, while unemployment was down 115,000 on the year and, at 4.2%, the unemployment rate is at its joint lowest since 1975.

These are remarkable figures in any context, but particularly so in the light of other economic data. A few days ago the Office for National Statistics (ONS) gave us a Black Monday of official figures, with construction output in the latest three months dropping at its fastest rate for six years, and new orders also slumping; manufacturing output also dropping at its fastest rate since 2012 and the trade deficit widening because of a drop in exports of both goods and services.

All this translated, according to the National Institute of Economic and Social Research, into likely growth of gross domestic product of a mere 0.2% in the March-May period, only a touch above the “barely there” growth of 0.1% in the first quarter. A stronger bounce was expected, including by the Bank of England, from the effects of the “Beast from the East” weather disruption of March. The ONS, it should be said, played down the effects of the weather on the weak first quarter growth.

What the weather takes away, it can also give. The influence of the second-warmest May in 108 years, as well as the royal wedding, can be seen in the May retail sales figures, which showed a jump of 1.3% on the month. That may help the second quarter growth figures but it has not lifted the cloud over retailing, and will not. N.Brown, the Manchester-based company which has been operating since the 1850s, said it has begun a consultation process to close its remaining 20 high street stores. Its brands include High & Mighty, a store I fear I may now never visit.

Retail employment, in fact, is behaving as you would expect. The number of people employed in retailing, wholesaling and related activities has dropped over the past year and, given the recent spate of store closure announcements, is set to drop further.

The big picture, however, remains a puzzling one. Growth in the economy has slowed from around 3% in late 2014 and early 2015 to a fraction over 1% now. The Institute of Chartered Accountants in England and Wales (ICAEW) has just revised down its growth forecast for this year to 1.3%, citing weak business investment.

Sunday, June 10, 2018
The NHS: 70 years old and counting ... the cash
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.

When Philip Hammond announced that he was scrapping the spring budget and the autumn statement in favour of an annual autumn budget, many people applauded. A single “fiscal event” each year had the merit of preventing chancellors from engaging in too much tinkering, and this self-imposed restraint was why he did it.

The chancellor, however, had reckoned without birthdays which, as everybody knows, can be very expensive. The National Health Service’s 70th birthday is on July 5th and, unlike many 70 year-olds who would be happy with a new pair of slippers and a bumper bag of Werther’s Originals, it wants a big present.

The NHS, which accounts for the vast bulk of UK public spending on health, has shown a formidable appetite for consuming taxpayers’ money over its lifetime. Efforts to put it on a diet have generally been time-limited or followed by a binge.

Since the NHS was established in 1948, health spending has risen from £12.9bn to £149.2bn a year, in today’s prices; in other words it is nearly 12 times what it was. This has been achieved by an average annual rise in real terms – on top of inflation - of 3.7% a year. Taxpayer-funded health spending has risen from 3.5% of gross domestic product (GDP) to its current 7.3%.

It has also been the cuckoo in the Whitehall nest, squeezing other spending, as it is now. In the NHS’s history, health spending has risen from a low of 10% of all outlays on public services in the early 1950s to 30% now. Yes, a third of all spending on public services is on health.

In arriving at this point, successive politicians have gone with the flow. The NHS is not seen by the public as the greedy child in the corner but, according to a survey last week, is the most-loved British institution. Nigel Lawson, who as chancellor had his own battles over NHS funding memorably described it as the closest thing the English have to a religion.

At this point I would normally say that even religions encourage fasting, and that the fast the NHS has been on since 2010, during which spending has risen by between 1% and 1.5% in real terms, a third of its long-run average, has led to greater efficiency. Productivity in the NHS has grown by 1.4% a year since 2010, outstripping the rest of the economy, which is unusual.

I have written many times about the need for greater efficiency in the way the NHS is run, of reforms that spread best practice, of forcing users of the NHS to behave better – charging for appointments mixed for example – and of reforming an organisation that is vast in size, roughly 1.5m employees. Each time I do so I am assured that no effort is being spared to raise efficiency and that the NHS is not as top-heavy as it is usually painted, managers only accounting for 3% of staff.

In any case, with the 70th birthday looming, time is of the essence. The government is in the happy position of knowing what the NHS wants. Three health think tanks, the King’s Fund, the Health Foundation and the Nuffield Trust, have written to the prime minister calling for a long-term settlement for the NHS which would provide a 4% a year increase in real terms. This, they say, “is the minimum required to keep pace with rising demand for services, provide some investment in key priorities such as mental health, cancer and general practice and continue the transformation of services set out in the NHS five-year forward view”.

Sunday, June 03, 2018
A nation that no longer values its shopkeepers
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.

Whatever else 2018 brings it is already on course to be a year to forget for Britain’s retailers, closely followed by casual-dining restaurant chains. It may not yet be retail Armageddon but a year that has already seen the disappearance of Toys R Us and Maplins and a string of profit warnings and store closures – including the announcement of a programme of more than 100 closures from Marks & Spencer – is gaining notoriety for all the wrong reasons.

As someone who has patronised Marks & Spencer since the days of St Michael – the label not the saint himself – it grieves me to see this British icon retrenching. A town centre is never quite the same again after it loses its M & S, as the people of Stockton and Darlington, those famous railway towns, as well as Northampton, Newmarket and Walsall, will soon discover.

The Centre for Retail Research lists 16 medium to large retail business failures in April this year alone, with more jobs potentially affected, over 13,000, than in the whole of last year, and twice the number of stores and employees affected as in the whole of 2015. In recent months the curtain has come down on established furniture retailers such as Multiyork and Warren Evans. Carpetright is struggling, as are Mothercare and House of Fraser.

Behind the big name difficulties, of course, lie very many thousands of smaller failures of family-owned retailers, restaurants, wine bars and the rest, each one a story of broken dreams. Every empty high street property is somebody’s minor tragedy.

The CBI, in a survey, described “a tale of two service sectors”, with business and professional services doing fine but consumer-facing firms struggling against a backdrop of falling sales volumes over the latest three months.

In that respect, the current struggles are not hard to explain. Growth in retail sales, unexpectedly strong even 18 months ago, has petered out. Latest figures show no growth in retail sales over the latest three months. The annual rate of growth of retail sales volumes has come down from a high of 6%-7%, and a typical rate of 3%-4%, to less than 1.5%.

Consumer confidence perked up slightly last month but is lower than it was in 2015, which was the best year since GfK-NOP began surveying it in the 1970s, and reflects deep pessimism among households over the outlook for the economy.

Anybody in the furniture or carpets business, meanwhile, is suffering from what appears to be a permanently lower level of housing transactions. The Bank of England reported that mortgage approvals in April were at their lowest level this year and their second lowest since August 2016, though unsecured borrowing picked up, while the Nationwide building society said house prices fell again last month for the third time in four months.

What the numbers do not full explain, however, is why now? Why is it that we are now seeing what the independent retail analyst Nick Bubb describes as a “perfect storm” affecting Britain’s high streets and shopping malls.

After all, while retail sales are weak, they have been weak before; very obviously in the recession of 2008-9 but also again from 2010 to the early part of 2013, under the impact of falling real wages and George Osborne’s 2011 hike in VAT to 20%. Consumer confidence is weaker than it was a couple of years ago but higher than in that earlier period. The housing market has never got back to pre-crisis levels of activity.

Sunday, May 27, 2018
Italy will work hard to avoid crashing out of the euro
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 comforting when normal service is resumed, by which I mean that Italy has taken its rightful place as the number one worry for the eurozone. The formation of a wacky coalition of the anti-establishment Five Star Movement and the right-wing, anti-immigration League, under an unknown and untested prime minister, Giuseppe Conte, is a little extreme even by Italian standards. But the fact of a populist Italian challenge to living under the eurozone yoke should not be a surprise.

Indeed, when I used to write and talk about the eurozone in the distant days before the financial crisis, I used to say that while the euro would survive it was unlikely to do with all its constituent parts intact and the country I picked as the most likely drop-out was Italy. Traditionally inflationary and fiscally-undisciplined Italy made a strange bedfellow for Germany, which was the opposite of those things.

Then, however, the global financial crisis led on to the eurozone crisis and, rather than Italy, other countries hovered near the euro exit door. Ireland was substituted for Italy in the original “pigs”, Portugal and Spain had their very nervous moments. Greece came within a whisker of crashing out in 2915. Italy was not immune from the crisis’s effects, far from it, but had a background role.

Now Italy is once again firmly in the foreground. Its new government wants to increase public spending and cut taxes, cocking a snook at the eurozone’s deficit rules. Even an Italian president of the European Central Bank, Mario Draghi, is outraged by suggestions that the Italian debt bought by the ECB under quantitative easing be written off. Italy, “too big to fail but too big to bail”, is in the spotlight.

Italy’s economic woes are not new; the peak of Italian post-war economic optimism was probably half a century ago in the 1960s. Its performance since the lira was shoehorned into the euro at its birth in 1999 has, however, been strikingly poor.

Based on full-year figures, in 2017 Italy’s gross domestic product (GDP), in real terms, was just 6.3% above its 1999 level, which averages out at growth of 0.3% a year, equivalent to prolonged stagnation; almost two “lost” decades.

By comparison, German GDP over the same period has risen by 27.4%, more than four times as much, underlining the difference between the eurozone’s haves and have-nots. Britain, which sensibly decided to stay out of the euro, puts both of them to shame, having recorded a 38.9% rise in GDP over the same period.

If Italy’s GDP performance looks terrible, bear in mind that it is smaller than the rise in population – 6.5% between 1999 and 2017 – over the same period. GDP per capita has therefore done even worse.

The unemployment rate, which averaged 10.9% in 1999, at the dawn of the euro, was 11.2% last year and 11% in March this year. The unemployment rate among under-25s is a staggering 31.7%, which is only exceeded by Greece and Spain. Italy’s legendary black economy may mop up some of the people officially measured as unemployed but not enough to seriously diminish what is a huge problem.

So why does not Italy just leave the euro, which has clearly been bad for growth, living standards and has done nothing to alleviate a chronic unemployment problem? Why does it not go the whole hog and follow Britain out of the EU, an Italexit? Italy has a justifiable gripe with the EU because it has had to carry the burden of refugees from North Africa and the Middle East, very large-scale immigration, without much help or even sympathy from the rest of the EU.

EU exit remains a very long shot, but what about an exit from the euro? After all, if I thought Italy was the most likely single currency faller a few years ago, before others intervened, it must surely be a very strong candidate to leave now.