Sunday, February 07, 2016
Britain should never join this negative interest rate club
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.

Negative interest rates are in vogue. The Bank of Japan a few days ago joined a club which includes Switzerland, Denmark, Sweden and the European Central Bank (for one of its key rates) in pushing the interest rate dial below zero. Three of the world’s biggest central banks have negative rates. I shall come on to the Bank of England in a moment.

After a long period in which interest rates have been close to zero and central banks have engaged – and in some cases are still engaging – in large-scale quantitative easing, it appears that it is still not enough. At least five central banks think negative interest rates are now necessary. Could they ever become the norm?

Negative interest rates are still a strange phenomenon. The idea that anybody should pay for the privilege of depositing funds runs counter to the normal rule of “time preference”, that any rational person, or business, would rather spend now than later. The usual way of dissuading them from doing so, in other words encouraging them to save rather than spend, is an interest rate incentive. We will defer consumption if it is worth our while. That is how it works.

Central banks are different. The interest rate they typically set is on the reserves commercial banks hold with them. In most cases, commercial banks have to hold at least some of those reserves, for prudential and other reasons. They are, in that sense, a captive audience – up to a point.

As Paul Sheard, chief economist at Standard & Poor’s puts it: "Central banks can do this because they get to determine the total amount of liabilities they issue, giving them the unique ability to set both quantity and price. In the real economy, borrowers can't usually force lenders to lend to them.”

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Sunday, January 31, 2016
Confidence and a brighter eurozone argue against a Brexit vote
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.

We do not yet have a date, and we do not yet have much of a campaign, but the referendum on Britain’s membership of the European Union is slowly looming into view. Moreover, it is already starting to affect the markets.

An opinion poll a few days ago which appeared to offer a greater probability of “Brexit” weighed on the pound. City economists, responding to requests from clients, are busy penning notes both on the effects of referendum uncertainty on the economy and the consequences of a vote to leave if it were to happen.

There will be time to consider these things in the coming weeks. Today, however, to continue my planned programme of pre-referendum pieces, let me address another aspect to the European question.

The euro is the pinnacle, so far, of European integration, and it is the fault-line on which many of the continent’s problems rest. Badly designed, open to too many countries too soon, it brought Europe to the brink of a crisis a few years ago that could have been at least as big in its impact as the banking crisis of 2008-9.

That should have been a wake-up call for Europe’s leaders. So far, however, they have been content mainly to kick the can down the road rather than pick it up and redesign it. The fundamental problem of the eurozone remains. It is not what economists call an optimal currency area. There is no central Treasury, or properly co-ordinated fiscal policy, to offset the power of the European Central Bank. Eurozone labour markets, and wages, are inflexible. And, contrary to what you might think from your TV screens, there is not enough mobility of labour within Europe.

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Sunday, January 24, 2016
The dangers of leaving rates too low for too long
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.

Mark Carney has spoken, in a speech to celebrate 50 years as a professor of economics at London’s Queen Mary University of Lord Peston (Robert’s dad). I don’t think he will have the gall to pop up again this summer and warn us be on the alert for a hike in interest rates at the end of this year.

For the Bank of England governor, who has the ability to generate headlines, being twice-bitten (he gave such warnings in both 2014 and 2015) should mean that this year he will choose to be a little shy.

He could, of course, generate plenty of headlines by starting to drop hints of interest-rate cuts. The Bank’s chief economist, Andy Haldane, appears to be genuinely agnostic about whether the next move in interest rates should be up or down. The Bank has said there are no technical barriers to cutting even from a record low 0.5% rate. Haldane has even talked about the possibility of a negative interest rate.

Carney and most of the other members of the Bank’s monetary policy committee (MPC) continue to insist that they fully expect the next move in rates to be up. Looked at logically and in the context of the governor’s speech, however, it is clear that there are circumstances in which a rate cut could occur.

His three conditions for raising rates were: growth being above its long-run trend, which in practice means quarterly growth of at least 0.5%-0.6%; evidence of a firming of cost (particularly wage) pressures, and a rise in core inflation consistent with getting back to the 2% target.

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Sunday, January 17, 2016
When world trade struggles. so do Britain's manufacturers
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.

Another year is now in full swing. Alongside all the other things sent to try us, including weak and volatile stock markets, a plunging oil price and worries about global growth, manufacturing is in the doldrums.

Official figures last week confirmed the gloomy message of industry surveys. Manufacturing output fell by 0.4% in November and was down by 1.2% on a year earlier. Whatever things happened last year, a rise in factory output was not amongst them. And there is, sadly, nothing very new in this.

In the past four years there have been up years like 2014, when manufacturing output rose by a healthy 2.7%, and there have been down years like 2012 and 2013, when it fell by 1.4% and 1.1% respectively.

Broadly speaking, however, and allowing for the fact that there have been winners and losers within the overall numbers, Britain’s manufacturers are now producing what they were in 2011.

That was the year, of course, when George Osborne, in his March budget, talked about “A Britain carried aloft by the march of the makers”, for which he has been much lampooned, the latest in a series of politicians to see a bright future in manufacturing, only to see a grimmer reality kick in.

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Sunday, January 10, 2016
Don't drink too deeply of Osborne's dangerous cocktail
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.

Such is George Osborne’s reputation for political cunning, the natural reaction to anything he does is to look for the true meaning behind the message. Prince Metternich’s observation on the death of Talleyrand – “What did he mean by that?” – springs to mind.

The chancellor is in good health but his warning three days ago, that Britain’s recovery faces “a dangerous cocktail of new threats”, provoked similar thoughts.

When, in November 2014, David Cameron talked of the “red warning lights … flashing on the dashboard of the global economy”, and was quickly backed up by Osborne, it was pretty obvious what they were up to. With the election less than six months away, they wanted to remind people not to risk handing over the economy back to Labour.

As I put it back then, the world was not about to go pop but they wanted voters to think it might, and that only they could be trusted to shield voters from the damage.

This time, some of the chancellor’s motivations are fairly clear. The government has faced criticism over cuts to flood defence spending, as Osborne did last year over his planned – and eventually abandoned – cuts to tax credits. Hence his emphasis on the work still to be done on the budget deficit.

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Sunday, January 03, 2016
EU referendum is the biggest cloud on the horizon
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 easiest thing to do when looking ahead is to assume more of the same. That, to let you into a dirty little secret, is how economic forecasting generally works and it is why economists are not bad at identifying trends but not good at predicting turning points.

It also keeps forecasts within realistic limits. Having ended the year at close to zero, you would put a very low probability on inflation rebounding to 10% over the next 12 months. Britain’s twin deficits – the red ink on the budget and current account – are not going to turn to surplus between now and the end of 2016.

The Bank of England’s monetary policy committee (MPC), similarly, will continue to adopt an ultra- cautious approach. After nearly seven years pondering whether the time was right for a quarter-point rise in interest rates, it will not suddenly start jacking them up as if there was no tomorrow.

Things do change in unexpected ways, however, even when they are flagged in advance. Britain’s continued membership, or not, of the European Union will come into focus this year. Even that, of course, is subject to some uncertainty.

We do not know for sure whether the EU referendum will be held in 2016, even though a summer vote appears to be David Cameron’s clear preference.

Assuming the referendum is held this year, we do not know whether it will be an economic non-event or the biggest challenge for Britain’s economy since the global financial crisis. Swap opportunity for challenge and you have both sides of the debate encapsulated. More on that in a moment.

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Sunday, December 27, 2015
A year in which China slowed, Greece survived and Britain soldiered on
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, as is the forecasting league table which accompanies the piece This is an excerpt.

So that was that. A year in which plenty happened, and plenty more might have happened. A year in which Greece did not leave the euro but came close to doing so. I predicted Greece would stay in, including to some people worried about their holiday bookings, but it was touch and go for a while.

The Greek crisis quickly gave way to deep worries about China; one of the factors behind the collapse in oil and commodity prices and this year’s exceptionally low inflation. People got a bit too bearish about China, and indeed about the global economy, which has shown tentative signs of strengthening in the final weeks of the year.

Most of what we saw in respect s of China was the necessary slowdown and rebalancing of an economy that had grown for almost 10% a year for three and a half decades. The China story, including its continued emergence as a global player in the international financial system, will continue to fascinate us in 2016.

At home by now, had things gone differently, we could have had a Labour government, perhaps with the support and veto of the Scottish Nationalist Party, with both a budget and a spending review from this strange alliance. But voters decided differently, particularly cruelly in the case of Ed Balls, who went from being chancellor in waiting to ex-MP in the space of a few hours.

The Tories’ electoral position was stronger than it seemed. Indeed, David Cameron secured the support of a higher proportion of overall electorate than Tony Blair in 2001 and 2005. So the euro survived an d the Tories survived, and indeed strengthened their position, with the first Conservative outright majority in a general election since Sir John Major in 1992.

In 1992, as this year, voter doubts about Labour’s economic credibility swung the result. Labour’s further loss of credibility since the election makes the party’s uphill task all the steeper.

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Sunday, December 20, 2015
Britain heads for another pay rise in 2016
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.

Pay, the final frontier, or am I getting my Star Trek and my Star Wars mixed up? Anyway, what happens to pay over the next 12 months is important, in many respects.

At its most basic there is the question of whether most people can expect a pay rise, by which I mean the increase in their wages and salaries outstripping inflation, in 2016. There is the issue of how fast pay needs to rise to persuade the Bank of England to follow the Federal Reserve in raising interest rates.

There is also the question of whether Britain is a higher pay country than we often assume, even at the national minimum wage, which has important implications for David Cameron’s efforts to limit immigration from the rest of the European Union.

By happy coincidence, I took part in a Resolution Foundation (RF) discussion on the pay outlook a few days ago, chaired by Linda Yueh, featuring the RF’s Laura Gardiner, George Magnus and Michael Saunders.

We all took the view that there would be a real-terms rise in pay in 2016, which was encouraging, the differences of opinion being mainly whether it would be larger or smaller than in 2015.

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