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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Sunday, August 06, 2017
A spanner in the works for Britain's growth potential
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 has been like one of those moments when you get somebody to look under the bonnet of your car because it has been making a strange noise and seems incapable of maintaining any sort of speed.

The mechanic takes a look and emerges with a shake of the head. Some serious damage has been done and it is going to be hard to fix. Better find some alternative arrangements.

In the case of the economy, the man with the oily rag is Mark Carney, the Bank of England governor, assisted by his colleagues on the monetary policy committee (MPC), and the bad news he delivered was in the Bank’s latest inflation report.

Let me make clear what I mean by the bad news. It was not the downgrading of the Bank’s growth forecast for this year than next, which recent weak data made inevitable. It was not the fact that Brexit uncertainty is undermining investment by making businesses unwilling to commit. Anybody with half an eye on the economy knew that too.

They also know, to take one of the Bank’s other points, that the Brexit fall in the pound is the main mechanism for the current squeeze on household real incomes, which is hitting consumer spending and thus the growth in demand.

No, the really bad news in the Bank’s report was its assessment of what is known as potential, or trend, growth in the economy. Last week I addressed the question of weak growth from the demand side: can stronger exports and investment compensate for weaker growth in consumer spending?

The Bank’s point was a related but different one. The economy’s potential growth derives from the supply side. How fast is the economy capable of growing before its speed limit is reached, before inflationary pressures return?

The answer, according to the Bank, is a lot slower than it used to be. Even very modest growth of 1.7% or 1.8% a year will be above the economy’s “reduced potential rate”, it says. The crunch will not come immediately, but it will happen in a year or so.

Hence the Bank’s St Augustine message on interest rates; “Lord make me pure but not yet”. Two members of the MPC . Michael Saunders and Ian McCafferty, think the purity should start now, and rates should be going up. The others will give it a little while longer but were still happy to sign up to the Bank’s message to the markets, that in time rates will rise by more than they think.

Let me focus on that gloomy view of potential growth. The Bank thinks the economy is capable of perhaps only about 1.5% a year. I can remember a time when we snootily used that kind of number as representing all that the sclerotic eurozone, which now has a bit of a spring in its step, was capable of.

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Sunday, July 30, 2017
Britain's big challenge is getting out of the slow lane
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.

So it has come to pass that Britain’s economy has experienced its weakest first half for five years, having undergone what the Office for National Statistics describes as a ~notable~ slowdown in growth this year.

Notable, and predictable. Slower growth has been staring us in the face since sterling’s referendum plunge guaranteed a squeeze on household real incomes and a cloud of renewed uncertainty descended on business.

Gross domestic product growth of 0.2% in the first quarter and 0.3% in the second represents a halving of the post-crisis trend, and averages barely a third of what was being achieved in the years leading up the crisis. GDP per head, which showed no growth in the first quarter and 0.1% in the second, is now stagnating.

The economy defied gravity for a while, thanks to the willingness of consumers to borrow and to run down their savings. There are still elements of that unsustainability even in the slower growth that Britain is now experiencing; the economy’s weak growth was bolstered by a rebound in retail sales in the second quarter.

Consumer confidence is falling. The latest closely-watched GfK consumer confidence barometer shows a further fall for this month to -12, taking it back to levels last seen in the immediate aftermath of last year’s referendum. Households are gloomy about the economic outlook. The brightest spot for consumers remains the strength of employment.

Despite this, the appetite for consumer credit remains very strong, according to the latest financial activity barometer from John Gilbert Financial Research, which will worry the Bank of England. This barometer, based on additional questions in the GfK survey, suggests falling savings and increased borrowings have become the norms for British households. The CBI’s distributive trades survey, suggesting warm weather kept sales strong into the first half of this month, also suggested that consumers are not quite dead yet.

But, by definition, something that is unsustainable cannot continue for long. Oxford Economics’ spending power index points to a “very subdued” outlook for consumer spending this year and next. Colin Ellis of Moody’s Investors Service predicts a “prolonged moderation” of consumer spending.

We come back to some basic questions for Britain’s economy. Where will the growth come from? And can we avoid getting stuck in the slow lane?

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Sunday, July 23, 2017
Inequality is down - but people don't notice when real wages are falling
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.

After a week in which we have been offered a joyous glimpse into what some of the BBC’s highest paid on-air presenters and stars earn – and I know all the arguments about whether or not they could earn more in the commercial sector – it is a good time to look again at inequality.

Inequality has raced up the political agenda even though for the past quarter of a century or so it has either been falling or at worst flat, as a useful new report form the Institute for Fiscal Studies pointed out a few days ago.

The IFS report, Living standards, poverty and inequality in the UK: 2017, noted that income inequality fell significantly during the crisis and recession, particularly between 2007-8 and 2011-12, and has not increased since.

Incomes for people at the 10th percentile – in other words those at the top of the poorest 10% of the population – are up 7.7% since 2007-8, while those in the middle (the 50th percentile) are up 3.7%, and those at the 90th percentile, people better off than 90% of the population, have fallen by 0.6%.

As a result, and depending how it is measured, income inequality is either quite a lot lower than it was in the late 1980s, or is roughly the same as it was 25 years ago. The 90:10 ratio shows a distinct fall in inequality, while another widely-used measure, the Gini coefficient, shows the flatter picture. Neither show rising inequality.

The difference between the two is that the Gini, a traditional measure of inequality, takes into account the top 1%’s rising share of income. Though the figures for earnings in this group are open to dispute, in the 1960s and 1970s, the top 1% accounted for between 3% and 5% of income, rising to 8% by 2000 and nearly 9% on the eve of the crisis, before dropping back to 7% as the crisis hit, and then subsequently recovering some of its lost ground.

The 90:10 ratio, meanwhile, has fallen particularly sharply in London since the financial crisis. The capital’s streets are no longer as paved with gold as they were.

So why, if inequality is flat or falling, is it such a hot button issue? And how do you prevent public concerns over inequality from creating the climate for economically-damaging, incentive-destroying tax changes, such as those proposed by Labour in the recent election?

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Sunday, July 16, 2017
We need more globalisation, not less
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.

One of the great disadvantages of being a member of the Bank of England’s monetary policy committee (MPC) is that unless you say something about interest rates, people do not take much notice of your speeches.

That was the fate that befell Ben Broadbent, the Bank’s deputy governor for monetary policy, a few days ago. His interesting and welcome speech on globalisation steered clear of any mention of interest rates, though he offered his views on rates in a subsequent interview (he is not an early hiker).

On globalisation, which it is fair to say has had a terrible press in recent years, and is blamed for the rise of populism in many countries including Britain, he pointed out a simple truth. Yes, there will be losers from globalisation, and before her political implosion Theresa May seemed overly concerned with compensating them, but they are greatly outweighed by the winners. And the gains from globalisation are spread among the population, not confined to a small elite.

This is a frustrating time for economists. It is, as Broadbent point out, nearly 250 years since Adam Smith demolished mercantilism; the idea that trade is a zero-sum game and one country’s gains are another’s losses. It is exactly 200 years since David Ricardo gave us the law of comparative advantage, which explained why countries specialise, or should specialise, in the products and services they are relatively better at doing.

And yet, centuries later, we have an American president whose protectionism is based on a mercantilist view of the world. And globalisation, far from being seen as a route to improved living standards, is blamed for their weakness.

To illustrate his theme, Broadbent used the apparently unhelpful example of textiles and clothing. Since the mid-1970s, when import penetration began to rise sharply under the impact of lower tariffs, employment in the sector has fallen significantly; by around 90%. Then It used to count for one in 30 jobs;, now it is one in 370. So people who were employed in this sector were losers from globalisation.

British consumers were, however, significant winners as a result of falling clothing prices. Household incomes are 3% higher in real terms than they would have been in the absence of the fact that, both in absolute terms and relative to other prices in the economy, clothing is a lot cheaper than it was.

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Sunday, July 09, 2017
Businesses are hungry for certainty, not thin gruel
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.

Businesses are troubled, and so are consumers. The election a month ago delivered the worst possible outcome in terms of the stability and certainty that the economy needs. The combination of a minority government and a Brexit negotiation that the minister responsible has described as more complicated than the first Moon landing, is undermining confidence.

This is not surprising. I wrote on June 11 that the hung vote would hang over the economy, and so it is, and we have the evidence. All three of the purchasing managers’ surveys, for the manufacturing, construction and service sectors, showed declines in June compared with May.

Their relative strength in the pre-election period will probably mean a slight uptick in quarterly gross domestic product growth in the second quarter compared with the very weak first. But the omens are not encouraging. May official figures for manufacturing and construction were weak.

Services are the dominant part of Britain’s economy and, according to its June purchasing managers’ survey, has seen both a drop in activity and a bigger fall in business optimism.

As Chris Williamson, chief business economist at IHS Markit, which complies the survey, put it: “It is clear that the economy heads into the third quarter losing momentum. With business optimism having been hit by the intensification of political uncertainty following the general election and commencement of Brexit negotiations, at the same time that households are battling against rising inflation, the indications are that the economy’s resilience is being tested.”

The latest GfK consumer confidence barometer, meanwhile, shows households too regard the political situation with concern. The barometer dropped by five points in the wake of the election to -10, a similar bow to confidence as the one that followed last summer’s referendum.

Households have become gloomier about their personal financial situation over the next 12 months, which showed a four-point drop between May and June. They are downbeat about the economy, with a balance of 23% of households expecting it to deteriorate over the next 12 months. People’s willingness to splash out, known in the jargon as the major purchase index, slumped by eight points.

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Sunday, July 02, 2017
When the cap doesn't fit, worry about the deficit
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.

What do you need for a successful policy of deficit reduction, of eliminating the government’s annual borrowing and beginning the process of reducing public sector debt?

Well, you certainly need a strong government which is willing and able to take unpopular decisions. You also need a belief in the policy across government. And you need political leaders looking to the long-term.

You do not have to be Sherlock Holmes to spot that, as a result of Theresa May’s election cock-up, all those ingredients are now missing. The signs of slippage are there to see. Austerity fatigue has set in, and not just among some voters. Many ministers are also baulking at the last push to eliminate a budget deficit officially projected to be £58bn this year, even a last push that was intended to take all of eight years.

A further rise in public sector net debt, currently £1.74 trillion or 86.5% of gross domestic product, is inevitable, and the weaker the economy the more it will go up.

What are the signs of slippage? The first was the cost of the prime minister’s agreement with the Democratic Unionist Party (DUP), a £1bn “bung” which old Treasury hands say will merely be a downpayment, and will lead to increased demand for extra spending from other parts of the UK. That election gets more expensive by the day.

Then there were the hints from Downing Street of a softer approach to public sector pay, as foreshadowed here a couple of weeks ago, followed by an insistence that it remains in place. The 1% pay cap may not survive the autumn, many Tories having decided that it cost them a lot of votes in the election.


Public sector pay has been falling in real terms since the cap was introduced, as a useful analysis by the Resolution Foundation pointed out. But then private sector pay has also been falling in real terms too.

It remains the case, moreover, that public sector pay levels exceed those on average in the private sector, either in absolute terms or, when adjusted for the different mix of skills and qualifications in the public sector. To head off responses from readers, I should also point out that most public sector workers enjoy more generous pensions.

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Sunday, June 25, 2017
Britain's Brexit journey could yet end up in Norway
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.

One year on from the vote, and a couple of weeks on from an election that threw an almighty spanner into the works, the formal negotiations to take Britain out of the European Union have begun.

There will be plenty of ups and downs over the next 21 months, though the “row of the summer” promised by David Davis, the Brexit secretary, never transpired because the government agreed to the EU’s negotiating timetable of divorce bill and citizens’ rights first, a new deal and new trading arrangements later.

There is, however, a puzzling absence from the negotiating stance of both sides, and even of the politicians pushing for a softer Brexit. Philip Hammond did not mention it in his Mansion House speech, and neither did the 50 Labour MPs, or the London mayor Sadiq Khan, who are pushing for Britain to remain in the EU single market.

I am referring to continued British membership of the European Economic Area (EEA) after Brexit, the so-called Norway option. EEA membership would provide for continued membership of the single market but not the customs union, so freeing Britain to negotiate its own trade deals with the rest of the world.

The idea of post-EU EEA membership used to be very popular, particularly among Brexiteers in the run-up to the referendum. Many argued that Britain would be mad to leave the single market, and would not need to do so, and that the be like Norway – “rich”, “happy” and “self-governing” to quote one – was the thing to aim for. One plus for them, apart from the freedom to conduct trade deals, was that EEA membership does not include agriculture and fisheries, thus sparing us the hated common agricultural and fisheries’ policies. The big minus was that EEA membership meant accepting, with one or two wrinkles, free movement of people.

People like me argued that EEA membership would be inferior to being in the EU. We would be subject to single market rules (most of the “laws” imposed by Brussels), but not be able to influence them. We would still pay the equivalent of an EU budget contribution. There were questions about whether the rest of the EU, while happy to accept the smaller economies of Norway, Liechtenstein and Iceland into the family, would be prepared to do so for Britain, or see us as a cuckoo in the nest. Switzerland like these three is a member of the European Free Trade Association (EFTA), the body Britain helped found in 1960, but its people rejected EEA membership in a referendum in the early 1990s.

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