Does anyone properly understand what’s happening in the UK economy anymore? (Editor's comment: If you don't understand then why are you still in your job?)
Can it really be true that an economy
which has created more than a million private sector jobs over the past
two and a half years is showing no growth at all? Photo: Reuters
7:44PM GMT 11 Feb 2013
I’m sure I don’t, though I spend longer than most attempting to read the tea leaves, and I’m ever more convinced the policy makers don’t either.
There are two related problems here. One is with the data, which are ever more contradictory. Some of them point to a flatlining, or even still declining, economy, with badly impaired levels of productivity, but there are also quite a lot of alternative data to suggest something better – most notably in near record levels of private sector job creation. The other problem is with what fiscal and monetary policy are trying to achieve, which seems to grow more confused by the day.
Both intellectually and practically, monetary policy has become something of a mess. Before the crisis, the Bank of England was guided by a simple and absolute inflation target, which it was relatively successful at meeting and was easy to understand. But since the credit crunch, it has taken on another purpose – that of bringing about a return to sustainable growth. This has brought the Bank into conflict with its primary objective. Since the crisis began, inflation has consistently been well above target, but for a brief dip in 2009, and it has twice been above 5pc.
This week’s quarterly inflation report will bring further discomfort, with the Bank forced to concede both that growth is failing to respond as hoped and that inflation is now likely to remain elevated for the next two years.
Unfortunately, there appears to have been no trade-off between inflation and growth. Inflation has stayed high but growth has been non-existent. The Bank excuses its evident failure on inflation by stressing the apparently higher purpose of preventing a collapse in output, and with justification, it further insists that domestically generated wage inflation has remained tame. This is all very well but, with wages lagging prices by some distance, disposable incomes have been quite severely squeezed and this is plainly bad for domestic demand and growth.
With the Bank’s admission that inflation may remain above target for the next
two years, the squeeze on disposable incomes is likely to persist. So, in
this regard, the Bank’s policy of tolerating elevated inflation in pursuit
of higher growth has been quite harmful to both objectives.
Sticking to the inflation remit has become something of a charade but, ridiculously, the Bank still pretends that this is what it is trying to do. It is to be hoped that the new Governor, Mark Carney, can bring more clarity and openness to the Bank’s endeavours. Don’t expect miracles.
Fiscal policy has been equally badly wrong-footed. Lack of growth has derailed the Government’s deficit reduction plan, threatening certain fiscal crisis down the line in the absence of evasive action.
What’s more, the unwritten compact between Government and Bank of England, under which the Bank is supposed to compensate for tight fiscal policy with monetary activism, seems to be breaking down. At last week’s meeting, the Monetary Policy Committee decided to do nothing even though it judges risks still to be on the downside. To the chagrin of George Osborne, the Chancellor, Sir Mervyn seems to be saying there is little more that monetary policy can throw at the problem.
Mind you, the data as they stand would be enough to paralyse even the most sure-footed of policymakers into inaction. Can it really be true that an economy which has created more than a million private sector jobs over the past two and a half years is showing no growth at all?
Equally hard to understand is why the UK’s export performance continues to look so lamentable. The eurozone crisis provides only part of the explanation, since even Spain and Greece have done better on exports than Britain, and that’s without the “benefit” of a sharp devaluation in the currency.
Britain’s exceptionally large services sector, and its fast-growing digital economy, may provide partial answers to all these puzzles. Once you strip out disruptions to, and structural decline in, North Sea oil revenues, then there has been some underlying GDP growth.
Moreover, if you think of much of the growth that took place in the pre-crisis bubble years as essentially just the “candyfloss” of an out of control financial and property sector, then today’s stagnation looks much easier to understand. Service industries in general, and financial services in particular, are notoriously difficult to measure, both in terms of their output and contribution to exports.
Part of Britain’s problem with the European Union is that there is still no properly functioning internal market across key service sectors. The EU exploits the UK’s weaknesses in traded goods while denying it the opportunity to play to its strengths in services. Until these deficiencies are rectified, the EU will struggle to be a net positive to the UK economy.
But that’s by the by. Looking at business investment, it was on a declining trend from long before the crisis and, to the extent that it was happening at all, there was a disproportionate emphasis on commercial property, great swathes of which now lie empty. Bulldozing this unwanted surplus would perhaps be the best solution, or at least converting it into housing.
So there’s another big chunk of past growth that has turned out to be of little or no long-term value. Strip these things out and it is by no means clear that the rest of the economy is suffering the crippling decline in productivity widely assumed. To the contrary, much of the anecdotal evidence points to significant advances, especially in the digital economy, which is growing faster in Britain than almost anywhere else.
According to a report by the Boston Consulting Group, the UK is now home to the largest per capita ecommerce market and the second largest online advertising market anywhere in the world.
Much of the growth in these markets, the productivity gains they drive, and the intangible benefits they deliver, are not caught by official GDP figures, which only attempt to measure the market value of the economy. In a paper just published, Jonathan Haskel of Imperial College Business School and others find that measured real value added has been understated by 1.1pc since the end of 2010 because of failure to capture intangible investment. Take this into account and there has in fact been no fall in productivity since then.
These musings lead to three conclusions. First and foremost, the Chancellor needs to act swiftly to recalibrate fiscal consolidation so as to give growth a supply-side, tax-cutting shot in the arm. Second, he should answer calls from both Sir Mervyn King and Mark Carney for a review of the Bank’s monetary remit. Finally, something has to be done about the GDP data, which beyond their capacity for political knock-about, have become about as useful as a chocolate teapot. (Editor's comments - The analysis is fine but the problem is with the conclusions - This maybe a ruse to cut taxes for the rich! Secondly the author now admits the problems with using GDP data as an apt indicator of economic performance - wheras all this while the UK and the USA have been telling the whole world that GDP performance is the best measure of economic performance. Alas! - the naysayers were saying it all along!)
Sticking to the inflation remit has become something of a charade but, ridiculously, the Bank still pretends that this is what it is trying to do. It is to be hoped that the new Governor, Mark Carney, can bring more clarity and openness to the Bank’s endeavours. Don’t expect miracles.
Fiscal policy has been equally badly wrong-footed. Lack of growth has derailed the Government’s deficit reduction plan, threatening certain fiscal crisis down the line in the absence of evasive action.
What’s more, the unwritten compact between Government and Bank of England, under which the Bank is supposed to compensate for tight fiscal policy with monetary activism, seems to be breaking down. At last week’s meeting, the Monetary Policy Committee decided to do nothing even though it judges risks still to be on the downside. To the chagrin of George Osborne, the Chancellor, Sir Mervyn seems to be saying there is little more that monetary policy can throw at the problem.
Mind you, the data as they stand would be enough to paralyse even the most sure-footed of policymakers into inaction. Can it really be true that an economy which has created more than a million private sector jobs over the past two and a half years is showing no growth at all?
Equally hard to understand is why the UK’s export performance continues to look so lamentable. The eurozone crisis provides only part of the explanation, since even Spain and Greece have done better on exports than Britain, and that’s without the “benefit” of a sharp devaluation in the currency.
Britain’s exceptionally large services sector, and its fast-growing digital economy, may provide partial answers to all these puzzles. Once you strip out disruptions to, and structural decline in, North Sea oil revenues, then there has been some underlying GDP growth.
Moreover, if you think of much of the growth that took place in the pre-crisis bubble years as essentially just the “candyfloss” of an out of control financial and property sector, then today’s stagnation looks much easier to understand. Service industries in general, and financial services in particular, are notoriously difficult to measure, both in terms of their output and contribution to exports.
Part of Britain’s problem with the European Union is that there is still no properly functioning internal market across key service sectors. The EU exploits the UK’s weaknesses in traded goods while denying it the opportunity to play to its strengths in services. Until these deficiencies are rectified, the EU will struggle to be a net positive to the UK economy.
But that’s by the by. Looking at business investment, it was on a declining trend from long before the crisis and, to the extent that it was happening at all, there was a disproportionate emphasis on commercial property, great swathes of which now lie empty. Bulldozing this unwanted surplus would perhaps be the best solution, or at least converting it into housing.
So there’s another big chunk of past growth that has turned out to be of little or no long-term value. Strip these things out and it is by no means clear that the rest of the economy is suffering the crippling decline in productivity widely assumed. To the contrary, much of the anecdotal evidence points to significant advances, especially in the digital economy, which is growing faster in Britain than almost anywhere else.
According to a report by the Boston Consulting Group, the UK is now home to the largest per capita ecommerce market and the second largest online advertising market anywhere in the world.
Much of the growth in these markets, the productivity gains they drive, and the intangible benefits they deliver, are not caught by official GDP figures, which only attempt to measure the market value of the economy. In a paper just published, Jonathan Haskel of Imperial College Business School and others find that measured real value added has been understated by 1.1pc since the end of 2010 because of failure to capture intangible investment. Take this into account and there has in fact been no fall in productivity since then.
These musings lead to three conclusions. First and foremost, the Chancellor needs to act swiftly to recalibrate fiscal consolidation so as to give growth a supply-side, tax-cutting shot in the arm. Second, he should answer calls from both Sir Mervyn King and Mark Carney for a review of the Bank’s monetary remit. Finally, something has to be done about the GDP data, which beyond their capacity for political knock-about, have become about as useful as a chocolate teapot. (Editor's comments - The analysis is fine but the problem is with the conclusions - This maybe a ruse to cut taxes for the rich! Secondly the author now admits the problems with using GDP data as an apt indicator of economic performance - wheras all this while the UK and the USA have been telling the whole world that GDP performance is the best measure of economic performance. Alas! - the naysayers were saying it all along!)
