Sunday, April 14, 2019
The trade deficit soars, in a terrible time to be an exporter
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.

Now that the Brexit process is guaranteed to stretch on for many more months, if not years, there is a limit, which may be close to being reached, on how much new there is to say. I shall bear that very much in mind in my choice of topics. We may be neither properly in, nor out, for a very long time, and most probably beyond October 31, the latest departure date.

Business is relieved that a no-deal Brexit has been avoided, and will continue to be avoided. But it is alarmed that the limbo could go on fo0r a very long time. Make UK, which represents Britain’s manufacturers, describes as a “heavy blow” the fact that firms will have to maintain “stockpiles of parts and materials at great cost” to cover all eventualities. Perhaps eventually, if this drags on long enough, firms will decide that Brexit is never going to happen and they can just carry on as before. But we are not there yet.

In the meantime, the false alarms and Brexit deadlines are having an impact on
the economic data, good and bad. The latest monthly gross domestic product (GDP) figures for February surprised on the upside, rising by 0.2% against expectations of no change on the month. These figures are still bedding in, as are analysts’ predictions for them. Nobody expected a sharp fall in GDP in December, initially reported as a 0.4% drop, although nobody thought either that it signalled that the economy was falling off a cliff.

The 0.2% rise, it seems, owed something to pre-Brexit stockpiling, with the Office for National Statistics (ONS) noting evidence that “some manufacturing businesses have changed the timing of their activity as we approached the original planned departure from the European Union”. There will be a degree of swings and roundabouts in this; there is only so much stockpiling that firms can do and this month’s production shutdowns in the motor industry, originally timed for Brexit, may drag down industrial output. But for now the GDP numbers have been helped.

A stockpiling effect can be observed when it comes to trade, and it is here in which the hope has to be that temporary factors are indeed at work. New figures show that in the latest the latest three months, December-February. The trade deficit in goods was £41.4bn, a record, and £6.5bn up on the previous three months.

Over the latest 12 months, Britain was in the red on trade in goods by a whopping £146.4bn, another record, and too close to £150bn for comfort. Even taking into account services, in which the UK runs a surplus, the deficit widened sharply in the latest three months and was just under £39bn over the latest three months.
That £146.4bn, by the way, compared with an annual goods trade deficit of £138bn for the whole of 2018 and £118bn in 2015. Until 2012, the deficit had never been above £100bn; 20 years ago it was comfortably below £30bn

How much of the latest deterioration was due to pre-Brexit stockpiling? Samuel Tombs of Pantheon Macroeconomics highlights a surge in trade with the EU; exports as well as imports were higher in February. But, given that we import more from the EU than we export, the net effect is to widen the deficit.

Beyond these temporary factors, however, there is an uncomfortable truth for a trading nation like ours. This is a terrible time to be an exporter. After a temporary fillip in 2017, thanks to a stronger global economy and sterling’s referendum fall, the volume of exports of goods fell last year and is falling now, with a sharper fall in non-EU than in EU exports. Both are down on a year ago, even with the stockpiling factor.

Sunday, April 07, 2019
Britain's minimum wage, 20 years old, is an unlikely success story
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, to take your mind off other things, which will do us all some good, let me talk about a British success story. It has helped prevent low-paid workers being exploited by the minority of unscrupulous employers, it has put a brake on rising inequality and it has not prevented a strong and sustained rise in employment.

It is also celebrating an important milestone; 20 years old this month. I refer to the national minimum wage, now the national living wage for those aged 25 and over. It has just risen, on April 1, to £8.21 an hour, with lower rates ranging from £3.90 for apprentices to £7.70 for 21-24 year olds.

When it was introduced, in April 1999, there were 27m people in employment in the UK, and the employment rate for the 16-64 age group was 71.3%. Twenty years on, nearly 6m more people are in work – the total is 32.7m – and the employment rate stands at a record 76.1%.

I am going to own up at this point to the fact that at two points in those 20 years, I worried that there would be a cost to jobs as a result of this policy. One was when the minimum wage was introduced by Tony Blair’s Labour government, when it risked introducing an unnecessary inflexibility into Britain’s flexible Labour market. The other was after the 2015 election, when George Osborne announced the national living wage for those aged 25 and over, and provided low-paid workers with a significant pay boost, one which had not had the benefit of the expert analysis of the Low Pay Commission.

But, and this is a mea culpa, both Ed Balls, who was instrumental in the introduction of the minimum wage and Osborne, who increased it with the living wage, judged it well.

I remember Balls explaining to me how the government, on the advice of the Low Pay Commission, had chosen the initial level of the minimum wage, £3.60 an hour for those aged 22 and over, by careful consideration of where it fell within the existing wage distribution, Setting it too high, in other words, could have had adverse consequences for jobs. For Labour, the minimum wage was also important as a backstop at a time when tax credits were being introduced. Without it, employers might have passed on too much of the responsibility for workers’ incomes to the state.

Osborne’s living wage, similarly, has not hit employment, far from it, though it has put some sectors under strain, of which more in a moment. But if its aim was to create “an economy that works for everybody” after five years of austerity it may have come a little late.

The success of the minimum wage is set out well in a new report from the Low Pay Commission, chaired by Bryan Sanderson. In the past, the pay of the lowest-paid workers has risen more slowly than those in the middle and at the top. The minimum wage has ensured the opposite, boosting the annual pay of those at the bottom of the wage scale by roughly £5,000 a year.

As Sanderson says of its introduction 20 years ago: “The conventional wisdom of the time was that minimum wages simply forced low-paid workers out of their jobs. But over the last 20 years, the national minimum wage has shown that this is not necessarily the case. It has raised pay for the lowest paid without damaging employment.”

Sunday, March 31, 2019
A customs union beckons - and it won't stop trade deals
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.

Another week on in the Brexit process and I am worried. I may have used up all my best adjectives too soon. This thing could get even madder. And, in a few weeks’ time, the short rein of Theresa May as prime minister will soon be over; the only former Bank of England official, as far as I know, to have made it to the top job. She lost heavily again on Friday.

For all her faults, there was always an element of “cling on to nurse for fear of something worse” about Theresa May. Who knows who the 100,000 members of the Tory party, one of the least representative electorates in the world, could inflict on us? And then there’s Jeremy Corbyn waiting in the wings.

But let me be positive. Last week saw the House of Commons seize control of the order paper for a series of indicative votes on the way forward. They have been criticised for failing to agree on any option but that rather misses the point. They do point to a way forward if MPs are prepared to remove their party blinkers.

So, for example, a perfectly sensible proposal from George Eustice, the Tory Eurosceptic former agriculture minister who resigned in protest over May’s withdrawal agreement, was the pure “Norway option” of Britain rejoining the European Free Trade Association (EFTA) and thus staying in the single market and European Economic Area (EEA). It was heavily defeated by 377 votes to 65. Only a minority of Tory MPs and a tiny handful of Labour MPs supported it. It suffered from its authorship.

EFTA countries have profited from their relationship with the EU, whether by being in the single market, as with Norway, Iceland and Liechenstein, or by mirroring it closely, as with Switzerland’s large range of bilateral deals with the EU. All have a higher proportion of trade with the EU than Britain does.

On the other hand, the “Norway-plus” Common Market 2.0 proposal, combining EFTA-EEA with a comprehensive customs arrangement, attracted a lot of Labour support but very lukewarm Tory backing. Combine the two and Norway – staying in the single market - favoured by me since immediately after the referendum, could yet still be a runner. I fear, however, that like Monty Python’s Norwegian blue it is now a dead parrot.

The two indicative votes which came closest last week, and around which a consensus could build this week, were for a permanent customs union with the EU, as proposed by Kenneth Clarke, the former chancellor, which lost by just 272 votes to 264, and a second or “confirmatory” referendum, defeated by 295 to 264.

Let me say at the outset that anything with Clarke’s name attached to it deserves to be taken very seriously. As chancellor from 1993 to 1997, not only was he a delight to deal with but he presided over a strong recovery in the economy that in normal circumstances would have seen the Tories romp home in the 1997 election.

But then, as now, the party was riven with disagreements over Europe – maybe it would have been better if it had split irrevocably back then – and also tarnished by the biggest government humiliation since the current one; Britain’s involuntary and embarrassing exit from the European exchange rate mechanism in September 1992.

Sunday, March 24, 2019
Britain shouldn't be too glad to be grey
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.

In recent days we have had another stunning demonstration of the potency of the job-creating machine that is the British economy. While surveys have suggested that employers are beginning to cut back on recruitment, there was no evidence of this in the official figures.

Overall employment rose by 222,000 in the latest three months for which data are available, November-January, and the employment rate for the 16-64 age group rose to 76.1%, a new record. The unemployment rate dropped to 3.9%, its lowest since November-January 1974-5. And, while only a minority of the net new jobs created over the latest three months were traditional full-time employee jobs, 93,000 out of 222,000, weaker than recently, the others being part-time employment and full and part-time self-employment, these were still strong figures.

And so we have the usual trade-offs. We have strong employment but weak business investment; the weakest of any major economy over the past 2-3 years. Are firms recruiting as an alternative to investing? For some that is not a choice, but for others it is, and it is being made.

There is also strong employment versus weak productivity, which has stagnated for a decade and has weakened again recently. These latest employment figures, alongside weak gross domestic product figures, guarantee further productivity weakness.

Then there is the pay puzzle. Average earnings growth is currently 3.4%, which in the case of total pay (including bonuses) is marginally lower than it was. Real wages are rising, but not by much. And, while you would not expect the kind of pay growth we had when unemployment was last as low as it is now, 44 years ago, when wage increases were well above 20%, you might expect it to be stronger than it is.

All these things; falling business investment, stagnant productivity and weak growth in wages are, of course, intimately linked. A return to the pay norms, not of the 1970s but the pre-crisis era, in which you would expect earnings to be rising by 4.5% to 5% rather than by less than 3.5%, requires a sustained revival in productivity.

There may, however, by another factor which helps to explain the current combination of circumstances, certainly weak pay and productivity, and it is the greying of the labour market. The average age of British workers is increasing and that may have important consequences.

More than half of the increase in employment over the past year has been concentrated in the 50-64 age group. And, if we look a little longer term than that, the concentration of employment growth in older age groups is striking.

Thus, in the past 10 years, there have been 3.175m net new jobs created in Britain, a great achievement. Of these, 591,000 have been among people aged 65-plus and 1.868m have been for those in the 50-64 age group. Thus, 77% of the rise in employment over the past 10 years has been among workers aged 50 and over. This is quite a figure.

Sunday, March 17, 2019
Views from the brink: how slow growth and uncertainty leave firms on the edge
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, amid the Brexit chaos – which grows ever more chaotic by the week – have we learned about the economy? Alongside Philp Hammond’s spring statement, the Office for Budget Responsibility (OBR), revised down its growth forecast to 1.2% for this year, the weakest since the crisis, and predicted that the economy will expand by an average of about 1.5% over the following four years.

That assumes a smooth Brexit, a brave but necessary assumption (the OBR is required to forecast on the basis of government policy) and reaffirms that, even if we get over the short-term hurdle, the challenge of lifting Britain’s growth rate to something like past norms will remain considerable.

The OBR is gloomier about business investment than it was, expecting a fall of 1% this year, similar to last year’s drop, and growth averaging only just over 2% a year from 2020 onwards. This is no strong revival of pent-up investment some talk about and will leave productivity growth languishing at just over 1% a year in the medium-term.

The official forecaster is more comforting about future earnings growth, which it sees rising by just over 3% a year, and rising employment, which it thinks will continue, though at a significantly slower pace than over the past few years.

That combination is good for the public finances as, oddly, is weak business investment; when firms are investing, which can be offset against tax, it is bad for corporate tax revenues. Rising inequality is also good for the public finances. The top 0.1% in Britain are doing very well and generating a lot of income tax receipts. That, without dwelling on it today, could be a golden goose that gets cooked if there is a change of government.

So we have the strange situation in which growth disappoints but the chancellor’s room for manoeuvre has increased. It was thought he would have £15.4bn of room for manoeuvre for this year’s spending review, and possibly some tax cuts; now the OBR thinks it is £26.6bn, though half of that could disappear as a result of the new treatment by official statisticians of student loans.

Those are the headlines but what I wanted to do today is try to get under the bonnet of the figures and tap into what the Institute of Chartered Accountants in England and Wales (ICAEW) describes as “the economic instability resulting from the current uncertainty”. The ICAEW on Friday also revised down its growth forecast to just over 1%, an outlook it described as “frail”.

Two weeks ago I launched a bit of informal “crowdsourcing” to try to take the pulse of what was happening to small and medium-sized firms in Britain amid the uncertainty, following one reader’s claim that a “meltdown” was under way. The results, as I stressed then and stress again now, were never going to be scientific but do provide an insight.

In particular, they have enabled me to identify four categories of business in Britain. First on the list are those for whom the phone stopped ringing even before the current heightened uncertainty, and which are hanging on and hoping that something will turn up.

Typical descriptions of current business activity from those in this category were “sales slump”, “dramatic decline”, a warning that a mild decline now would turn into bankruptcy in the event of a no-deal Brexit, and “a disaster with a 60% drop in revenues”.

One business said turnover “fell off a cliff” last autumn, had stabilised this year, but was still well below normal. Another said that the current “plunge” in orders was worse than anything during the financial crisis a decade ago, which others also drew comparisons with for the “suddenness” of the downturn. Yet another said that this year had been “a complete blank” for new orders. One feared that the current sales downturn would be followed by “years and years of misery”. Quite a few thought we were on the brink of recession. Worrying.

Sunday, March 10, 2019
Quantitative easing worked, just don't make a habit of 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.

How time flies. It is hard to believe that it is 10 years since the Bank of England brought an entirely new type of monetary policy, for Britain at least, blinking into the sunlight. Quantitative easing (QE), a complicated name for something that many people do indeed find complicated, was launched then and is still with us.

The misunderstandings then were considerable. When the policy was launched in March 2009 Mervyn King, now Lord King, did a television interview with the then BBC economics editor Stephanie Flanders, to try to explain it.

His mission to explain was not helped by some hysterical comment. Though the worst offenders have often got the economy wrong, some predicted that the Bank’s initial tranche would lead to doom, disaster and hyperinflation, which was wrong on all three counts.

This is, however, a good time to look at QE, and not just because of the anniversary. The experiment, and experiment it was, may be coming to an end.

Theresa May, herself a former Bank official, said in her now notorious first party conference speech as prime minister in October 2016, the “citizen of nowhere” one, that QE had had “some bad side effects”. It had enriched people with assets and made those without them suffer, she said. Those in debt had benefited while those with savings had suffered. A flabbergasted Mark Carney was ready to hop on to the next plane to Canada.

The prime minister, not for the first time, got it wrong. QE was launched, with an initial £200bn in 2009, followed by a further £175bn in 2011-12 and a final (so far) £60bn in August 2016. It was done because, at the time, Bank rate had been cut to what was then the rock bottom of 0.5%, and that was deemed to be not enough to steer the economy away from deflation, falling prices, and towards a sustained recovery.

It worked, then as more recently, by ensuring that the drop in short-term interest rates – Bank rate – to a record low, was accompanied by a fall in long-term rates. Large-scale purchases of government bonds raised their prices and lowered their yields; the yield on government bonds, gilts, feeding through to lower long term interest rates throughout the economy.

There was no deflation, which was the great worry in 2009, and the recovery, while by no means strong in its early years, took hold and lasted. It did not lead to hyperinflation or, indeed, to very much inflation at all. There was no double-dip recession. As a policy which contributed to getting the economy off the sick bed, QE has to be seen as a success.

Nor is the criticism of QE, that it benefited the wealthy “haves” at the expense of the have-nots, valid. Bank researchers looked in detail at this last year, using official data for the distribution of wealth. It found that percentage gains from the policy were “broadly similar” across households and that, while those at retirement age saw the biggest increases in wealth, younger people benefited from stronger incomes. Andy Haldane, the Bank’s chief economist, said that the policy “did not have significant adverse distributional consequences”. The adverse distributional consequences were, as the research shows, more imagined than real.

Sunday, March 03, 2019
This sterling rally was built on shaky foundations
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 those of you who like a fact to kick off the day, how did sterling, as in pound sterling, get its name? The answer, which is shrouded in the mysteries of Middle English, is that it could have come from starling, as in bird, which featured on early coinage, or “sterre”, Middle English for star, which was on some Norman coins in circulation in Britain.

I mention this because sterling has been in the news. Though it slipped a little towards the weekend, It has had a good week. Currency dealers have been watching the parliamentary shenanigans very closely, and decided that they merit marking the pound higher. As in the period since the June 2016 referendum, sterling has been acting as Brexit barometer.

While it would be an exaggeration to say that currency markets now think that it is all over, and that a no-deal Brexit has been definitely avoided and an extension of the Article 50 process beyond March 29 is a near certainty, the fact that things have been moving in that direction propelled sterling to the giddy heights of $1.33 and €1.17.

Simon Derrick, the veteran currency strategist at BNY Mellon in London, said the pound’s rise was overwhelmingly explained by the prospect of a delay of some weeks to Brexit, and that markets had not yet thought through the implications of other developments, such as the Labour party’s apparent shift to supporting a second referendum. He also noted that at $1.33, sterling was not much above its post-referendum average of $1.3050.

This, by the way, compares with a $1.58 average for sterling against the dollar for the three years before 2016. Currency markets effectively downgraded the economy, and the pound, after the Brexit vote.

In the low $1.30s, then, the pound is still in what dealers would see as a neutral range. But it is above its post-referendum closing lows of just over $1.20 and €1.08. What might push it higher still?

Adam Cole, currency strategist at RBC (Royal Bank of Canada) Capital Markets, has in response to client requests updated his subjective Brexit probabilities. They are now 5% for a no-deal Brexit, down from 15%; 35% on exiting on March 29 with a deal, 40% on exiting later, also with a deal, and 20% on Brexit not happening at all, possibly as a result of a second referendum. A second vote, he suggests, would be 60% likely to overturn the result of the 2016 referendum.

Of these various outcomes, he argues, there would be scope for a small 2%-3% rise in the pound on exit with a deal now, or after a short delay. The most sterling-friendly outcome, as its performance since the referendum implies, would be for Brexit not to happen.

Sunday, February 24, 2019
Housing is creaking - and not just because of Brexit
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.

Every month these days a little battle is played out. Downbeat data is released on the housing market, to be immediately followed by comments from estate agents and others in the property industry. Their general take can be summed up in the opening lines from that song in the musical Annie: “The sun’ll come out tomorrow, bet your bottom dollar that tomorrow, there’ll be sun!”

I do not begrudge them for trying to look on the bright side. If you are in a business which relies on housing turnover going up, and benefits from rising house prices, this is a testing time. The housing market has, in some key respects, never got over the global financial crisis of a decade ago – transactions remain well below pre-crisis levels – and it is suffering a renewed downturn now.

Annual house price inflation has, according to the Nationwide building society, petered out almost completely. Prices last month were just 0.1% up on a year earlier, having come down from more normal 5%-6% growth three years ago.

The Halifax reported a rather alarming 2.9% slump in prices last month, bringing strong echoes of the crisis years, though it reported almost as big a rise in December. It too thinks annual house-price inflation has all but petered out. Asking prices, to take another measure, have had their weakest year for a decade.

I know, at this point, what some people will be thinking, that house prices are too high and any softening, to the point where they are now rising by a few percentage points less than wages, has to be a good thing.

But there is good and bad house weakness. Good house price weakness is when extra homes tilt the balance and make houses more affordable. Bad house price weakness is a reflection purely and simply of weak demand.

It is the bad version that we are seeing at the moment. According to Rics, the Royal Institution of Chartered Surveyors, new buyer enquiries for home purchases have weakened for the sixth month in a row and are now at their weakest since the crisis. It is become commonplace to see this as a problem mainly affecting London and the south-east but it is now widespread; the weakest readings in the latest survey were the east and west midlands.

If prices were determined by demand alone, they would be even weaker than now. But, in the market for existing homes, as opposed to new build properties, supply is also very weak. The Rics survey reports that, apart from a brief downward spike immediately after the referendum in 2016, instructions to sell are also at their lowest since the crisis.

The supply pipeline is also weak according to surveyors, with surveys and appraisals lower than they were a year ago. Potential sellers do not want to sell into a soggy market. If they can do so they would prefer to stay put. High transaction costs, notably stamp duty, are a powerful disincentive to move.

It is tempting to blame most of this on Brexit. Consumer confidence is down and so is the willingness of households to commit to major purchases. That is reflected in a weak market for new cars and, in the absence of Help to Buy incentives, people’s appetite to take the plunge in the market for existing homes.