Friday 29 July 2016

Quelle Surprise! - The IMF

As an economist I have always been wary of our ability to forecast, believing we fall well short even of weather forecasters - perhaps not surprising given that economics is not really a science, although the subjects share one feature - they are both chaotic.  It is indeed not easy, and of course we all came under scrutiny following our collective failure to forecast the global financial crisis, Thus I do have sympathy when Michael Gove said in the leadership election that we have had enough of experts!

For me the IMF has always been at the forefront of my criticism. They have been consistently wrong on so many things, in contrast to others including myself on many subjects. Take the UK as one example. They heavily criticised the UK for a policy of fiscal austerity after the global financial crisis, forecasting a recession, based on their analysis of multipliers. In the end we had one of the best performing advanced economies and they had to admit they got it badly wrong. Then they forecast a recession if we voted Brexit. Yet now they are predicting faster growth for the UK than most countries in the eurozone in 2016 and 2017. Similarly the UK Treasury talked about another austerity budget. Talk of this has quite correctly miraculously vanished.

Apart from poor economic analysis,  the so blatantly wrong  IMF's forecasts are sometimes due to political pressures from governments in the West. Indeed this has just been revealed in a damning internal report on bailout strategy during the eurozone debt crisis.The report said that the IMF repeatedly came under pressure from eurozone governments during the crisis bending its rules to help them. It casts doubt over the fund's rescue strategy for the peripheral eurozone countries including Greece. It also reaffirms the view that the IMF treats advanced countries much more favourably than emerging markets.
Quelle surprise!

Thursday 28 July 2016

Policy stimulus not a panacea for driving up UK economic growth

There is much talk of the need for policy stimulus following the vote for Brexit and the inevitable uncertainty it has unleashed and the potential for recession. Certainly policy stimulus has a role to play. The Bank of England's role in pumping liquidity in the system has been useful, but scope for further cuts in interest rates are fairly limited, with a cut in base rate from 0.5% to 0% likely to have little impact on the pace of economic activity. And it is the same for further quantitative easing which is likely to suffer severely diminished marginal returns. I am much more positive regarding the stimulus from lower sterling. There is plenty of evidence that competitive devaluations still work for advanced economies and I think we can potentially  replicate the situation of 1992 when the UK left the European exchange rate mechanism (ERM) and growth boomed.

As regards fiscal stimulus, there is a strengthened case for it, given the risk of a sharp downturn in aggregate demand. And also with respect to increased investment spending given the plunge in government yields, meaning servicing any increased debt is now close to zero, minimising the risk of "crowding out" private sector investment. But the focus on infrastructure spending and hopes not only for boosting demand but also increasing much-needed productivity is weakened by previous government's (both in the UK and overseas such as most notably Japan) track record in picking projects with poor returns. The HS2 project is probably a good example of this given its escalating costs.Furthermore there is always the danger that any increased spending on projects may come at the wrong time in the economic cycle, given one cannot just start a project right away.

I believe there is a stronger case for cutting taxes to a modest degree (without threatening a big increase in the budget deficit given their supply benefits) such as lower corporate taxes, as part of a strategy to boost growth and to reduce uncertainty following the Brexit vote. Uncertainty could be reduced by outlining as quickly as is feasible, the UK's plans for Brexit including not only its relationship with the EU but also its trade strategy with the rest of the world.  We need to know what the trade-off between access to the single market and immigration controls will be, if the EU will not offer any special deals. We can clarify the position on existing EU migrants in the UK as well. We can trigger Article 50 in a matter of months. Within our growth strategy, we can follow a policy of lowering of  taxes; of unilateral free trade (which I do not think will weaken our bargaining position), loosening planning controls; securing cheaper energy and increasing airport capacity and so on.

Friday 22 July 2016

Caution required from latest PMI survey

The latest PMI survey of the UK economy clocked a figure consistent with recession. Many commentators are now indeed predicting an imminent downturn, with Q3 GDP set to fall they say.

I would urge great caution. This survey has regularly given false readings of recessions in the past because of the way it is compiled. We need also to see if this is not just reflecting some kind of kneejerk panic as we initially saw reflected in the financial markets. Moreover the Bank of England survey of agents report was much more sanguine. We do really need to see concrete data before making any conclusions.

Finally, the reading suggests nothing like that seen in 2009 after the global financing crisis.

Thursday 14 July 2016

UK economy to avoid recession post-brexit?

Before the uncertainty surrounding the EU referendum vote and then shock related to a leave vote, the UK economy was already slowing. Growth, though solid, was unbalanced and largely concentrated on consumer spending, which in turn was dependent on growth of real wages. Household debt remained high, productivity and business investment low, and the public finances continued to be squeezed. Furthermore external factors were continuing to depress the economy and above all exports.

The reaction in the financial markets has been relatively modest compared with the expectations of the doomsters. The most obvious one has been the depreciation of sterling, but its fall to below US$1.30 at one point is likely to be a net benefit for the economy: Growth and above all the balance of growth will improve, though the prices of petrol and certain foods will inevitably rise. Nevertheless, I see this as like 1992, when the economy did very well from the plunge in sterling after we exited the exchange rate mechanism.

Also market rates have fallen, partly due to the expectation that base rates will be cut but also because of safe-haven effects. That 5-year gilt yields are around 0.3% is great news for reducing the cost of servicing the ever rising government debt burden (although this is having an adverse impact on already large pension deficits). The FTSE 100 is already back in positive territory, while the more domestically-oriented FTSE 250 has recovered the majority of its losses. However bank and construction shares remain sharply down indicating where the potential pain could be concentrated. Nevertheless, financial stability seems reasonably assured in the short-term at least aided by Bank of England action including pumping liquidity into the system and cutting bank's requirements for counter-cyclical capital buffers.

Regarding real data, the evidence of a slowdown comes mainly from confidence, sectoral and internet data. There have been a number of business and consumer confidence surveys released and they do suggest there has been an adverse impact. But so far this appears insufficient to imply a prospective recession. Moreover, these surveys often do give false readings of downturns or do not have an established track record of prediction.  High frequency indicators tend to suggest that retail spending is holding up such as John Lewis' sales data. But there is evidence of   delays in investment decisions and a reluctance to take on new staff at the moment. There are also clear signs of a slowdown in the housing market, with London house prices in particular no longer rising and sales taking time to time. The commercial property market is going through bad times, and banks have sharply cut lending to this sector.

But in reality there is a lack of hard macro data available so far to judge the impact. Monthly data will only be available for July from mid-August and the key GDP Q3 data is not out until late October. This indeed was a key reason (along with the monetary easing from the plunge in sterling and preference to keep limited ammunition in reserve) I believe for the Bank's monetary policy committee to leave base rates unchanged at 0.5% yesterday. Nevertheless expect a cut to 0.25% in August unless there are signs of things turning for the better perhaps because of the improvement in the political situation following the acceleration of the anointing of a new PM.

While many economists are predicting a recession in 2017, I believe that we should just be able to avoid such a situation with GDP still growing by some 1% next year after may be 1.75% this year. This will be aided by a slowdown in fiscal austerity, further monetary easing and reasonable progress in the Brexit negotiations. The German finance minister has already given a hint that there is plenty of room for negotiation in the trade-off between control of labour movement and access to the single market. Further out my positive vision regarding Brexit means I think we can see the return of 2% plus growth potentially as soon as 2018. The UK economy finds itself in a difficult situation but it is not one, for example,to compare with the global financial crisis of 2009.

Tuesday 12 July 2016

Mrs May planning her new cabinet

Before the new PM gets down to business and faces all the issues concerning Brexit and more specifically the Trident vote scheduled for Monday, she will have to pick her cabinet.

Mrs May will need to weigh up the need for continuity (and finding room for big-hitters) with the need for unity in the party, so promoting a number of the leading Brexiteers. There will also be the secondary issues of gender balance, ethnicity and even social background.

Her first decision will be what to do with George Osborne. Clearly he would only accept one of the big offices of government. He is likely to covet the foreign office, but Brexiteers would be deeply unhappy with this. And I don't believe that Theresa May would like him still as Chancellor given his highly political performances. There is not a great relationship there either, so I would not be surprised to see him omitted from the cabinet. She may well go with the relatively underwhelming but another safe pair of hands in Phillip Hammond who she could trust to stay at the Foreign Office.

A possible contender for Chancellor is Michael Gove, although he may be retained in his existing role as Justice Secretary, or even axed given his poor relationship with May and her stress on trust. Sajid Javid may stay as business secretary, although Andrea Leadsom is a possibility, though she may perhaps be offered Education. Stephen Crabb may stay as work and pensions secretary. Chris Grayling or James Brokenshire could become the new Home Secretary. Boris Johnson could come in as culture secretary or communities secretary. Expect roles for other prominent Brexiteers including David Davis, Liam Fox, Pritti Patel and Theresa Villiers. Davis and Fox for example could be put in the new department in charge of leaving the EU. Both Justine Greening and Amber Rudd, prominent supporters of Theresa May can expect important roles too.


Monday 11 July 2016

One step towards better political stability

Congratulations to Theresa May who is the new Tory Party leader, and set to be the new PM by Wednesday evening. The withdrawing of Andrea Leadsom from the Tory party leadership contest has spared us one problem. Namely we now have in place probably the strongest candidate available to lead this country in difficult times two months earlier than originally planned. She can get on now with the negotiations over Brexit, to governing this country more generally - offering a positive vision for the future, and also trying to unite the country at a time when the sharp divisions have been exposed.

But there are still issues for the Tory party. There is resentment among a significant core on the Tory right about how they feel Leadsom was forced to withdraw and also that they will be led by a leader who actually voted Remain, even if it was a reluctant one and she has said Brexit means Brexit! She also has not entered a contest among Tory party members, who are naturally more Eurosceptic and Thatcherite. Remember also the government only has a small majority of 12 in parliament. So expect Mrs May to offer Leadsom a senior position in Cabinet to placate the Tory right. But even then the Tory right will be worried that Mrs May will follow a centrist path continuing the agenda of David Cameron. So watch out for splits continuing.

 Mrs May has dropped a hint that there will be no general election until the scheduled date of 2020. This will certainly aid stability but it will cause an outcry among all other political parties who will say she does not have a mandate from her party members let alone the voters. But surely the referendum vote for Brexit is enough of a mandate particularly when we really need stability and action?

But probably the biggest concern is the continuing crisis in the Labour Party as Corbyn refuses to go continuing to talk disingenuously about a new type of politics. When 80% of his party has no confidence in him given his lamentable performances not least with respect to the Remain campaign, how can he stay? Power is achieved through parliament. His own mandate comes mainly from people who are not real Labour supporters, but are mostly Marxists and disaffected. Corbyn and his supporters would genuinely like to split the party and realign the left and have little interest in power. This is very sad above all for the country. A weak political opposition (the SNP, Lib Dems and Greens can do only so much particularly in the face of a Tory dominated press) usually means poor government.

I would contend the Conservative government has performed poorly since being re-elected. Much worse than the previous coalition, where the Tories were kept in check by the Lib Dems. But there are plenty of examples worldwide. Take South Africa. Since the end of apartheid the African National Congress has ruled with very little opposition not just in parliament but elsewhere. This has resulted in corruption and poor government effectiveness. Similarly the Liberal Democratic Party in Japan has ruled for most of the post-war period and the country's well known poor governance has been a major factor in the the country's economic performance since the asset bubble burst in the early 1990s.

 So please Jeremy Corbyn. Do the honourable thing. This country needs an effective opposition.

Sunday 10 July 2016

UK leads soft power rankings

As most people know, the UK is the fifth largest economy in the World. But another reason to be optimistic in the future is our lead in the UK soft power rankings. From below I give the definition lifted from Wikipedia "Soft power is a concept developed by Joseph Nye of Harvard University to describe the ability to attract and co-opt rather than by coercion (hard power), using force or giving money as a means of persuasion. Soft power is the ability to shape the preferences of others through appeal and attraction. A defining feature of soft power is that it is non-coercive; the currency of soft power is culture, political values, and foreign policies" In the rankings from 2015, we came first followed by Germany, US, Canada, France and Australia. So why first? Again let me quote Wiki. "Since the period of Pax Britannica the United Kingdom has held significant soft power. Today it remains one of the most influential countries in the world, coming first in the 2015 Portland Group, Comres, Facebook report. The UK also came first in the Monocle survey of global soft power in 2012. The UK has strong diplomatic relations with countries around the world, particularly countries in the Commonwealth of Nations and many others in Europe, Asia, the Middle-east, Africa and the United States. Diplomatic missions between Commonwealth countries are known as High Commissions rather than Embassies to indicate the closeness of the relationship. As a member of the European Union, the UK exerts influence both on countries within the Union, and on other countries around the world. The United Kingdom has one of the largest global networks of diplomatic missions. Many countries around the world use the British form of democracy and government known as the Westminster system. The influence of British culture and sports are widespread, particularly notable during the British Invasion, Cool Britannia, and more recently the Diamond Jubilee and 2012 Summer Olympics. The opening and closing ceremonies celebrated British culture and achievements with the world. London is the only city to have hosted the modern Olympics three times. British media is broadcast internationally, notably the BBC World Service, BBC World News and The Economist magazine. British film and literature have international appeal, and British theatre helps make London one of the most visited cities in the world. Schools and universities in Britain are popular destinations for students of other nations. Alongside the English language, English contract law is the most important and most used contract law in international business. London is the headquarters for four of the world's six largest law firms. The UK and more specifically London is a centre of international finance where foreign participants in financial markets come to deal with one another. It is headquarters for major international corporations, many of which choose to be listed on the London Stock Exchange." So lets not run ourselves down. Because pessimism can become self-fulfilling.

Sporting success a boost to the UK economy

Today was a very good today for British sport. Lewis Hamilton won the F1 Grand Prix and looks on course for a fourth world championship. Then Andy Murray secured his second Wimbledon title and third grand slam to continue his journey to secure his place among the best of all time.

This builds on success of recent performances this year for the England cricket and England rugby union sides, with further success coming and likely to be forthcoming at the Tour de France with Chris Froome and Mark Cavendish. Sadly success is not matched in international football for the English, but Wales and Northern Ireland did do well.

In August will come the Olympics and the British will hope to match the phenomenal successes of 2012 when London saw so much excitement and comradery.

The UK governments in common with other advanced countries pump in lots of money into elite sport. We do in particular into Olympic sports. Why? Well there is much evidence to show that success in elite sport leads to rising international prestige for a nation, an increased participation among the masses ( which aids a healthier and more productive population), and above all creates a feelgood factor. At a time when economic confidence has fallen back markedly, particularly following the Brexit vote (and in turn partly because of the unjustified scaremongering by politicians, Bank of England officials and so-called experts like the IMF), I believe this can only help to restore confidence in the economy and ourselves.

Lets be far more positive for the future!

Keynesian stimulus required

One subject that I will return to regularly and in some depth will  be the appropriate macro policy for the UK economy. During the global financial crisis I broadly favoured the government's policy of austerity. Now I think the pendulum has swung. The chancellor took the opportunity to fix the public finances when the economy was not doing too bad. The budget deficit fell from some 11% of GDP in 2010 to around 3.8% of GDP now. As a result we have fiscal space to ease I believe in these uncertain and potentially difficult times, so supplementing monetary easing, both the unplanned devaluation of the sterling pound as well as cutting short-term interest rates to zero (probably very soon) and some further quantitative easing. The cost of borrowing has shrunk. Key 10-year bond yields have fallen to 0.69% (with 1-year bonds at a ridiculously low 0.04%), meaning it costs virtually nothing to service the debt. So this is the time to allow the automatic stabilisers operate, to cut taxes and raise government investment.

What precisely should the government do? Well to boost productivity (a persistent UK weakness) and boost long-term growth prospects, we should spend on better infrastructure including roads, rail and airports, making final decisions on expanding Heathrow, on HS2 and CrossRail 2, and looking at  many other lower profile projects. Increasing housebuilding is necessary too, even if eventually there is better control of migration into the country. More vocational training schemes are important too. We must look also at how we can help to heal the wounds of a divided society, clearly exposed by the  Brexit vote. The cut in corporation tax to 15% from 20% would seem a good move too as we boost the attractiveness of this country, though one concern remains that doing this may annoy the EU, at a time we are negotiating with them.


Who should be Tory Leader?

Well I think out of the original five candidates the two best remain. Andrea Ledsom was very impressive in the Brexit debates. But since then she has shown some inexperience, not least with her comments re the advantages of being a mother. Then evidence has come from a number of sources, namely people she worked with that her cv has been embellished to exaggerate her importance in two separate jobs. Who knows, she might have the potential to be another Mrs Thatcher and a great reformer. But these are times to not take risks. Mrs May is by all accounts a solid performer, and will likely be a tough negotiator in what will be difficult and protracted talks with the EU. It is time for experience which she clearly has in spades, given her record time at the Home Office - the graveyard of all Cabinet posts. My vote goes to Theresa May.  Plus she was born in Sussex, Eastbourne precisely, my home county!

But why do we have to wait until September 9 to have a new Prime Minister? Surely as a matter of urgency, the vote of 150K members can take place in a few weeks? May be something to do with allowing David Cameron to enjoy a final G20 meeting?