Sunday, November 23, 2014
Risks aplenty - but the world isn't about to go pop
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.

The Cassandras are out in force, from the prime minister down, predicting doom and gloom for the world economy and by extension a knock-on effect for Britain.

If China sneezes, Japan starts going backwards and Germany is forced to retire to bed with a warming glass of gluhwein, then surely the world will catch a cold. Britain’s plucky consumers, who in October bought 4.3% more than a year earlier, cannot after all keep us going on their own.

Is the world economy about to lurch downwards? Even more worrying, looking at some of the headlines generated by David Cameron’s “red warning lights … flashing on the dashboard of the global economy” are we about to have a re-run of the global financial crisis?

Nobody doubts that there are risks out there. The Russia-Ukraine crisis, unspeakable Islamic State murders in the Middle East and the Ebola epidemic in parts of Africa are all things we could do without.

Sunday, November 16, 2014
The Bank conjures up a sweet spot for Osborne
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.

The Bank of England’s latest quarterly inflation report has attracted a lot of comment, mainly because it confirmed the Bank’s “lower for longer” view on interest rates and because of an upbeat assessment of prospects for wage inflation.

What has received rather less attention is that, even apart from its views on wages, the Bank has set out an economic scenario which any chancellor would die for. If the Bank is right, the main risk of the sweet spot it sees for the economy in election year is that it will be too sugary.

Consider the evidence. The Bank’s forecast for growth next year is 2.9%, close enough to 3% to make no difference. Unemployment, now 6% of the workforce, will continue its fall, to 5.4%, on its way down to a near-normal 5% rate.

Inflation, after a period in which Labour has based its pitch to voters on the so-called cost of living crisis, will run at close to 1% over the next year, the Bank expects, with Mark Carney, the governor, saying it is “more likely than not” that he will have to write an open letter to George Osborne, explaining why it has dropped below 1%.

This will be a significant moment. There have been 14 open governor-chancellor letters, all of them from Mervyn (now Lord) King, during the 2007-2012 period. All of them were to explain why inflation was more than a percentage point away from the 2% target on the upside; an overshoot.

Wednesday, November 12, 2014
Bank trims growth and inflation forecasts as wages pick up
Posted by David Smith at 11:45 AM
Category: Thoughts and responses

The Bank of England has taken a slightly more downbeat view of growth and a very downbeat growth of inflation over the next few months, with Mark Carney, the governor, warning that consumer price inflation could drop below 1%. If so, this will trigger the first letter from a governor to explain why inflation has undrshot the inflation target by more than 1% - all previous letters have been to explain an overshoot.

Carney, in his opening remarks, was downbeat about the global picture, saying: "Since we last met, indicators across much of the advanced and emerging world have been moribund. A spectre is now haunting Europe – the spectre of economic stagnation, with growth disappointing again and confidence falling back."

But the Bank has only marginally revised down its growth forecast for next year, to 2.9%, though inflation will remain close to 1% over the next year with it "more likely than not" that it will dip below 1% at some stage. That has eased the pressure on the Bank to hike rates, with the first move now not expected until autumn of next year. Though this dovish tone was expected, sterling has slipped in response to the report. The inflation report is accessible here.

One positive factor cited by Carney was the prospect of real wage growth. The latest labour market statistics supported him. Official figures show that total pay in September was 1.4% up on a year earlier, with the numbers for the latest three months showing a rise of 1%. The figures for the private sector were 1.6% and 1.1% respectively, and for the public sector excluding financial services 1.6% and 1.4%.

Regular pay increases were 1.8% and 1.3% respectively, with the private sector up 2.3% and 1.6%. These figures were stronger than expected. The details are here.

Sunday, November 09, 2014
In many ways, business in Britain has never had it so good
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.

Is Britain a good place to do business? It is, in the end, the most fundamental question for the economy. If not, then we are condemned to a future of low growth and stagnant living standards.

We need a successful private sector to provide the tax revenues to get the budget deficit down and provide public services. We also need private sector businesses to generate jobs, as they have been doing pretty effectively recently.

On Tuesday, as part of the events marking 50 years of the Sunday Times Business section, I will be chairing a debate on precisely this subject. Organised in conjunction with the London Business School, it promises to be a very good one, featuring Lord (Terry) Burns, chairman of Santander, Carolyn McCall, Jim Ratcliffe and Sir Martin Sorrell, chief executives of easyJet, Ineos and WPP respectively.

They will have their own views, which I am keen to hear. As it happens the 50th anniversary is an interesting moment for me; I have been economics editor of this newspaper for exactly half that time, 25 years. I don’t think we marked the 25th anniversary of the section back in 1989, so I had no idea that I was joining at a historic moment.

Sunday, November 02, 2014
IEA's shadow MPC votes 5-4 for quarter-point rate hike
Posted by David Smith at 09:00 AM
Category: Independently-submitted research

At its meeting of Tuesday 14th October, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) recommended that Bank Rate should be raised by ¼% on Thursday 6th November.

Those urging a rate increase took the view that there was still a window of opportunity to raise rates, despite low inflation and the risk of a new Eurozone crisis. With GDP still growing rapidly and unemployment low, and with emerging evidence that salaries for those in work having been outstripping inflation for some time, the economy should be sufficiently robust for some modest normalisation in rates. Some felt that the risk of a downturn at or around the medium-term horizon strengthened the case for a rise now, as it would be a serious policy error to go into a new downturn with rates still effectively zero.

Those urging rates remained unchanged felt there was no inflationary imperative to raise rates and hence no reason not to explore to what extent there is still significant potential for output to expand significantly to replace growth lost during the recession. “Later” and “wait and see” remain the key mantras for this group.

Sunday, October 26, 2014
Eurozone starts to look a lot like Japan
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 worried should we be about the eurozone? Is the single currency area, the weakest link in the global economic chain since the crisis, about to enter its third recession in the space of little more than six years? Worse, are those fears of euro break-up, which paralysed business and consumer confidence, returning?

The Bank of England is clearly concerned. Though two members of the monetary policy committee (MPC), Martin Weale and Ian McCafferty, continued to vote for higher interest rates this month, most MPC members were concerned, among other things, about the impact of the eurozone on Britain’s economy.

“There was mounting evidence of a loss of momentum in the euro area, including in Germany, where growth appeared to have stalled and industrial production had fallen sharply,” the MPC’s October minutes said. And: “Further downside news in the euro area had increased the risks to the durability of the UK expansion in the medium term.”

Today is quite a big day for the eurozone. The results of the Asset Quality Review (AQR) for the eurozone’s banks will be published, ahead of the European Central Bank taking responsibility for euro area banking supervision on November 4.

Though these stress test exercises have been criticised in the past for being too soft, there have been reports that up to 10% of the 130 banks covered will fail. The aim of the exercise is to demonstrate that the eurozone’s banking system is secure. At the margin, however, some banks will have to raise additional capital and this will depress bank lending.

The big picture in the eurozone, which the Bank of England was responding to, is one of desperately weak growth and very low inflation. Eurozone gross domestic product was flat in the second quarter and up by just 0.7% on a year earlier. The best that can be hoped for in coming quarters is growth of 0.1% or 0.2%. The fear is that GDP will turn negative again, following the recessions of 2008-9 and 2011-13.

Sunday, October 19, 2014
Bank may eventually rue leaving rates low for too long
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.

Even before the stock market had an attack of the vapours, other factors — a sharp fall in Britain’s inflation rate, renewed weakness in the eurozone, and doubts about the strength of the job market — had led some in the City to push out their expectations of when the Bank of England will begin to lift interest rates.

Some, having thought the Bank would begin raising rates early next year, now think it will not happen until the second half of 2015, or possibly not even then.

Sure enough, on Friday morning Andy Haldane, the Bank’s new chief economist, offered plenty of succour to the “lower for longer” school on interest rates. Haldane, who said in June he marginally favoured being on the front foot on rates – raising them earlier – said he had now shifted to the back foot, mainly because he was on balance gloomier about the economic outlook.

Though his comments could be taken to mean that he thinks the peak for rates will be lower than he thought, they have been universally interpreted as signalling a delay in the first rate hike until later. And, while he is only one vote on the MPC, it is likely that his view is close to others in the Bank, including Mark Carney, the governor.

I shall return to the Bank in a moment. First, let me look at some of the other elements. The drop in inflation from 1.5% to 1.2% in September, its lowest for five years, was welcome. We should be wary, however, of concluding that Britain is about to join parts of the eurozone in experiencing deflation — falling prices.

Sunday, October 12, 2014
Time to join the dots on infrastructure spending
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 do we build the infrastructure the economy is crying out for and the new housing a growing population sorely needs?

Through the haze of the party conferences, I got that Labour and the Liberal Democrats want to borrow more to fund additional public investment in infrastructure – roads, railways, energy, schools, hospitals, flood prevention, etc - and social housing, with the LibDems rather bolder on this than Labour.

Superficially this makes sense. Government borrowing costs – gilt yields in Britain’s case - are very low, so why should the government not go directly to the markets to fund such spending?

The International Monetary Fund, concerned about the slowdown in the eurozone’s already anaemic growth, has called for debt-financed infrastructure spending – even in countries with debt and deficit problems – to generate activity.

Of course Britain’s government, like others, already directly funds infrastructure spending. Net capital spending will be around £28bn this year, just over 1.5% of gross domestic product (GDP). The trouble with adding to it significantly would be that borrowing for investment is not ringfenced; to the markets it would be indistinguishable from borrowing for everyday spending.