Sunday, October 15, 2017
Don't give up the ghost entirely on Britain's productivity
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 biggest UK economic news this week came from an unusual source. When the Office for Budget Responsibility (OBR), reviews its own forecasts, as it does regularly, this is normally one for the nerds and pointy-heads.

But, without wishing to align myself too much with either group, the latest Forecast Evaluation Report from the government’s fiscal watchdog had bite as well as bark. One Treasury official described it as a “bloodbath” for the public finances.

The issue is a straightforward one, which has appeared on many occasions in this column. Productivity is the key to prosperity and living standards. Higher productivity – more output for every worker or hour worked – determines the growth of real wages and the economy’s ability to grow with a given size of workforce. It is, as the economist Paul Krugman once memorably put it, not everything, “but in the long run it is almost everything”.

It is also intimately linked to the state of the public finances; government debt and deficits. Productivity growth has a direct impact on tax revenues and establishes the economy’s “speed limit”. The lower that speed limit, the more difficult it is to grow your way out of a budget deficit. As the OBR puts it: “Other things being equal a downward revision to prospective productivity growth would weaken the medium-term outlook for the public finances.”

The significance of its latest assessment is that the OBR has been dutifully waiting for something to turn up on productivity for many years. Every year since 2010, when it came into being, it has assumed a recovery in productivity growth to its long-run average of around 2% a year. Every time it has been disappointed.

Even when all the ducks have been in a row for a rise in productivity, it has failed to happen. Instead of a 2% annual rise in productivity, the past five years have delivered just 0.2% a year. Productivity is no higher than it was a decade ago, when a normal performance would have delivered a 20% rise.

So, while the OBR has not said precisely what figures it will use to underpin the November 22nd Budget, it has said it will be “significantly reducing” its assumption for productivity, to bring it more into line with the recent disappointing experience.

The story of how it has got to this position reads a little bit like a Whodunnit. Post-crisis productivity weakness is not confined to Britain but the gap with other countries – German output per hour is 36% higher than British, France’s 29% - is embarrassing.

One of the first explanations for the weakness of productivity in Britain was that firms had hoarded labour during the 2008-9 recession, during which employment fell a lot less than feared. With a surplus of workers relative to output, productivity weakness was not surprising.

However, as the OBR notes, that explanation “became less appropriate once firms began hiring again”, so attention turned to other factors.

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Sunday, October 08, 2017
Clueless on Brexit - and it is taking its toll
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.

Give Us a Clue was a popular TV show featuring the entertainer Lionel Blair. It was also what Tony Blair, no relation I think, was reported to have said to Gordon Brown when the latter, as chancellor, was refusing to divulge his budget plans to his prime minister.

Give us a clue is back, though in a more important context. Sixteen months on from the EU referendum, and less than 18 months until Britain’s formal departure, business still does not have much of a clue about Britain’s future relationship with the EU.

It is, frankly, astonishing that so far into the process, the government does not have a Brexit blueprint that it can communicate. This is not, to be clear, to avoid showing our negotiating hand to the EU. There is no blueprint.

Leaving aside the difficulties she encountered during her Manchester speech, the furthest Theresa May could go in her more substantive Florence speech last month was to say that neither a Canada-style free trade agreement with the EU (which took seven years to negotiate), nor Norway-style European Economic Area membership – staying in the single market but not the customs union – would suit Britain. We thus know what the government is against, but not yet what it is for, a familiar Brexit position, and the frustration is growing.

“Businesses are clear that they want a comprehensive transition period, lasting at least three years, and pragmatic discussions on the future trading relationship between the UK and the EU firmed up by the end of 2017,” said the British Chambers of Commerce. “They will judge the government’s progress on Brexit by this yardstick and will take investment and hiring decisions accordingly.”

The Institute of Directors attacked “the big let-down” of the party conference season and the fact that “far too little time has been spent explaining the plan for how we leave the EU.”

This is not just a matter of the convenience of business. Those that have made contingency plans for a Brexit deal that falls well short of what they need to operate in the EU and have either pressed the button on those plans or are close to doing so. Sam Woods, a deputy governor of the Bank of England, warned a few days ago that if we get to Christmas and no agreement has bene reached on transition arrangements what he described as “diminishing marginal returns” will kick in. The City, in other words, will take action on the basis of no deal and no transition.

The economy, meanwhile, is prey to the uncertainty. The construction sector is struggling because of a lack of new projects and may be back in recession, while service sector growth has slowed. The economy is crawling along, with the third quarter of the year set to similarly weak growth as the first two quarters.

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Sunday, October 01, 2017
Lessons in how to wreck an economy
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.

This is the way economies descend into chaos and failure. A weak and divided government, out of energy and ideas, capitulates to the most left-wing Labour government in recent times. The difficulties of Brexit are compounded by an anti-business, anti-enterprise agenda.

Two years ago this would have been the stuff of fantasy, a “what if?” scenario that had no chance of becoming reality. Voters, we thought, would never support anything like this. Now, it is becoming a serious possibility.

There is clearly a direct link between Brexit, and the way in which in last year’s vote unfolded, and the fact that Labour could talk confidently at its Brighton conference about forming the next government without being laughed off stage.

Without Boris Johnson and Nigel Farage, we would not be talking about the prospect of Jeremy Corbyn and John McDonnell getting their hands on the levers of power, not so much Little England as Little Venezuela.

Fake news has a lot to answer for, as well as misuse of statistics. But so too do the warnings of an immediate and damaging economic fallout following the referendum and, indeed, a Donald Trump victory in last year’s presidential election. The negative economic impact of the Brexit vote is, of course, already apparent but the danger is that people will take with a pinch of salt warnings of the adverse consequences of a Labour victory.

This is despite the fact that McDonnell, the shadow chancellor, has rather cleverly said that Labour is “war-gaming” the run on the pound that would follow an election victory for his party. By doing so, he was following a Labour tradition. In 1964, George Brown and Harold Wilson, secretary of state for economic affairs and prime minister respectively in the 1964-70 Labour government, criticised the “gnomes of Zurich” who were selling the pound. By pitching himself against the speculators, the shadow chancellor has pitched himself into a battle in the court of public opinion which he can win.

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Sunday, September 24, 2017
It's been a woman's world in the job market
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.

It would have been easy this week to focus on the latest projections from the Organisation for Co-operation and Development (OECD), which are for a slowing British economy at a time when the global economy is speeding up, something which does not normally happen.

And, while some will say you should never believe forecasts, the OECD is merely extrapolating what is already happening. The global economy is growing more rapidly this year while Britain has cooled, and you do not need to be Miss Marple, or perhaps more appropriately Hercule Poirot, to work out what is happening.

Or I could have focused on Friday evening's downgrade of Britain's sovereign debt rating by Moody's, taking the country even further away from the old AAA rating.

But, while mention of Brexit is guaranteed to send some people frothing at the mouth, which can be entertaining, the OECD forecast has been well covered. I sensed some glee behind the decision to splash it all over the front page of George Osborne’s Evening Standard, the London free newspaper. And government bond yields have not risen, despite the post-referendum ratings downgrades.

It was another aspect of the OECD’s new interim economic outlook, however, I wanted to focus on and it relates to the job market. This is the interesting fact that, across the industrialised world, the post-crisis recovery in jobs has been led by women.

For OECD countries as a whole, the male employment rate is still lower than it was in 2008, when the economic downturn as a result of the global financial crisis began to hit. The female employment rate, by contrast, is up sharply compared with the pre-crisis peak. The OECD’s index of its members’ employment rates is up by around 5% for women, while down by 1% among men.

Male employment has been recovering from its post-crisis lows. But it was harder hit by the crisis and has not got back to where it was. Female employment, in contrast, suffered a smaller hit in the crisis and has enjoyed a stronger recovery.

The picture in Britain follows a similar pattern though with some differences. Both male and female employment rates are above pre-downturn peaks, though the rise in the female employment rate – up from 67.1% in March-May 2008 to 70.8% now, has been bigger than the rise in the male rate, which is up from 79% to 79.8%. As far as jobs are concerned it has been a woman’s world.

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Sunday, September 17, 2017
The Bank can't afford to cry wolf on rates again
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.

A Rip Van Winkle who went to sleep 20 years ago and woke up around midday last Thursday, when the Bank of England made its latest interest rate announcement, would be more than a little bemused. The level of official interest rates – 0.25% - the lowest in the Bank’s history would be a source of amazement; 20 years ago the rate was 7%.

So, and only slightly less so, would be the excitement generated by the Bank’s broad hints that at some stage in the coming months interest rates might rise from this extremely low level. Veterans of monetary policy remember the days when rates went up, without warning, by large amounts.

Even leaving aside special episodes like Black Wednesday in September 1992, discussed here last week, I can remember months like January 1985, when we saw two rate rises of two percentage points each, within the space of a couple of weeks.

That was in response to a very weak pound. Our very weak pound now got a boost from the more hawkish talk from the Bank on Thursday and, in particular, the phrase in its minutes that “a majority of MPC (monetary policy committee) members” think that if the economy continues on its current path “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”.

It was given a further boost on Friday from hawkish comments by the MPC member Gertjan Vlieghe, previously thought to be the committee's arch dove.

Some withdrawal of monetary stimulus, to translate from Bankspeak, means in the first instance a rise in interest rates, and it has been a long time since that happened; more than 10 years.

Nor should this “hawkish” message been much of a surprise. It was implied by the Bank’s inflation report last month. It has been given added urgency by the jump in inflation to 2.9% last month, with Bank economists expecting it to exceed 3% in October.

The strength of the labour market, with the employment rate hitting a record high of 75.3% in May-July and the unemployment rate dropping to 4.3%, its lowest since 1975, has pushed the economy closer to capacity.


There are three other things to know about the Bank’s approach, and its “hawkish” hints of a rate rise on the short-term horizon. The first is that while it was prepared to used monetary policy – last August’s rate cut to 0.25%, the extension of quantitative easing and the launch of the term funding scheme to cushion the shock of the Brexit vote, it cannot prevent the long-term damage from Brexit.

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Sunday, September 10, 2017
Lessons from the first Brexit for Britain's EU departure
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 Brexit process is proving slower and more difficult than even I expected. Fifteen months after the vote, and with a failed election gamble in between, we have barely got to first base. David Davis, the Brexit secretary told the House of Commons last week that nobody said it would be easy, though he and plenty of other Brexiteers suggested it would be.

The process has made some yearn for what is sometimes called the first Brexit, Britain’s abrupt departure from the European exchange rate mechanism (ERM), 25 years ago this Saturday.

I shall provide a reminder about what the ERM was – and an introduction for younger readers – in a moment. But in that episode, Brexit occurred in a matter of hours, not years. It happened in spite of government policy, which was to stay in, rather than because of it. It marked, if not the start, then the impetus for the longest period of continuous economic growth in Britain’s history, and one of the strongest.

It also, according to a new book from OMFIF (the Official Monetary and Financial Institutions Forum), one in a series of “great British financial disasters”, set Britain on a course of greater Euroscepticism, for which the bigger Brexit we have now embarked upon was a natural consequence.

By the by, it destroyed the Conservative party’s reputation for economic competence, a blow from which the Tories took “nearly 20 years to recover”, according to John Nugee, former manager of reserves at the Bank of England, observes in an introduction.

The book, Six Days In September: Black Wednesday, Brexit and the Making of Europe, by William Keegan, David Marsh and Richard Roberts, has the virtue of having spoken to the main players, either now or at the time, and uses material released from the archives.

Before coming on to what that first Brexit might mean for this Brexit, and for the outlook for sterling and the economy, as promised a brief recap.

The ERM, an attempt to bring currency stability to Europe after the turbulence of the 1970s, was part of the European Monetary System, established in 1979. Member currencies were allowed to fluctuate in either narrow bands (2.25% either side of agreed central rates), or broad ones (6% either side). Exchange rates could and did adjust, in regular realignments, usually to allow the deutschmark to rise.

As was common in EU initiatives, Britain did not join at the outset, leaving it until October 1990, by which time much blood had been spilt in the Tory party. John Major, then chancellor, persuaded a sceptical Margaret Thatcher, not least by pointing to ERM membership as a way to get Britain’s sky-high interest rates, then at a 15% level which were destroying home owners and small businesses.

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Sunday, September 03, 2017
Taxes and uncertainty blight Britain's housing market
Posted by David Smith at 09:00 AM
Category:

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

Hope springs eternal in Britain’s housing market. Estate agents look forward to the next buying and selling season, in this case the autumn, with touching optimism, no matter how bad things are now.

When Bank of England figures a few days ago showed slightly stronger mortgage approvals than expected in July, some seized on it as a sign of revival. The reality, however, is rather different.

Estate agents themselves, via their representative body the National Association of Estate Agents (NAEA), reported on Thursday that the supply of homes available to buy recorded its lowest level for any July since 2002. Demand for properties also fell, with the number of house hunters on estate agents’ books down 10% on the previous month. The old joke, that estate agents do not look out of the window in the morning because it would give them nothing to do in the afternoons, has more than a ring of truth about it.

The NAEA survey chimed with that earlier last month from Rics, the Royal Institution of Chartered Surveyors. Its latest residential survey showed record low stocks of homes for sale, falling sales, and weak vendor instructions and new buyer enquiries.

There is a Mexican stand-off in the housing market – buyers and sellers are playing a lengthy waiting game – and the tumbleweed is blowing down Acacia Avenue.

The stand-off has had the effect of taming house-price inflation. A shortage of sellers and buyers has given us what I call a low-activity equilibrium, in which prices are not rising by very much, if at all. Both the Nationwide (2%) and the Halifax (2.1%) house price indexes have annual house-price inflation down sharply on last year.

For a time people’s reluctance to sell, and the consequent shortage of houses on the market, kept prices rising at a reasonable pace. Now there has been a change.

The NAEA found that only 3% of properties sold above their asking price in July, while 80% sold for below asking price. Rics, in its survey, suggested that the biggest percentage cuts relative to asking prices were for £1m-plus properties, but across the market significant numbers of properties were selling below asking price.

Nobody should mind much that house price inflation is down and is, according to the Nationwide and Halifax. unusually is below general inflation in the economy for the first time in a long time.

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Sunday, August 13, 2017
Job done: How we got down to work after the crisis
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.

It is time to give credit where it is deservedly due. I am referring to something that, without which, recent years would have been infinitely more difficult than they have been. The old adage, that it is a recession when your neighbour loses their job, a depression when you lose yours, has not been played out anywhere near as much as was feared. Britain’s job market has changed, and not always for the better, but it has done what it does best, which is to generate employment.

A few days ago the Recruitment and Employment Confederation (REC) reported that permanent staff placements had reached their highest level for 27 months, with overall staff demand at its strongest for nearly two years. Its survey, based on responses from recruitment agencies, pointed to continued buoyancy in employment.

That chimes with official figures showing that in the March-May period of this year total employment rose above 32m for the first time, with the proportion of 16-64 year-olds in work reaching 74.9%. This was the highest since comparable records began in 1971.

Before looking in a little more detail at what is happening now, let me first track back to the time when we first realised that the job market was behaving differently. When the financial crisis hit a decade ago, it took a while before the economy succumbed to recession.

The last hurrah for the great expansion that began in the very early 1990s was the first quarter of 2008, after which the economy dived into its deepest recession in the post-war era. Current data how that by the time the economy troughed in mid-2009, it had shrunk by 6.3%.

Previous experience might have suggested that employment would have fallen by at least as much. It did not. From an employment peak of 29.75m in March-May 2008, it dropped to a low point of 29.01m in January-March 2010.

The fall in employment in that deep recession, of 2.5%, was remarkable for how small it was. The experience of the great recession of 2008-9 stood in sharp contrast to its much milder predecessor in the early 1990s. In the 1990-1 recession, the economy contracted by just 2%, though it seemed worse at the time. It certainly was worse in terms of employment, which dropped by a hefty 6.2%. In this tale of two recessions, the later one was a mirror image of the earlier downturn.

So it has continued. After the great recession, it was widely expected that, having hoarded workers during the downturn, employers would be slow to hire during the upturn. Critics of coalition policy, including the Labour party, said that austerity cuts in public sector employment would not be replaced by an increase in private sector jobs.


Both views were wrong. Though employment growth was initially subdued, with a significant concentration of part-time work, it picked up and shifted decisively towards full-time jobs.

As for replacing those lost government jobs, public sector employment has fallen by just over 1m since 2009, with the bulk of the drop concentrated in local government. Overall employment, meanwhile, has risen by 3m. The private sector has not only replaced those lost public sector jobs but it has done so four times over.

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