Money supply....

Welcome news from UK Money Supply growth

Posted on January 30, 2019

Today brings UK credit growth especially unsecured credit growth and the Bank of England into focus so let me open with the market view on interest-rate prospects.

Interest rate swap markets have cut expectations of a quarter-point rate hike from the Bank of England by the end of 2019 to 52 percent on Wednesday, compared to a previous 64 percent expectation.

The latest leg down in market expectations of a rate hike comes after overnight political developments that has sown fresh uncertainty for the British economy in the near term. ( Reuters)

Personally I find that rather odd as I think a cut is about as likely as a rise. Indeed with slowing world economic growth in ordinary circumstances people would be looking for a cut. I can understand those who think that in a disorderly Brexit the Bank of England might be forced to raise interest-rates to defend the value of the UK Pound £. But the catch is that when the Pound fell after the EU Leave vote Governor Carney and his colleagues decided to cut rather than raise Bank Rate. So it would require a collapse in the Pound for the Bank of England to raise rates.

Money Supply and Credit

These are hot topics on two counts. Firstly slowing money supply growth proved to be a reliable indicator of weak economic growth in 2018 and secondly soaring unsecured credit growth showed vulnerabilities in the UK economic structure.

So we first observe a welcome move.

The total amount of money held by the UK private sector (broad money or M4ex) increased by £11.5 billion in December. Within this, money held by households increased £5.5 billion, significantly above the £3.2 billion average over the past six months. This increase was driven by deposits in interest-bearing instant access savings accounts. Money held by UK private non-financial corporations (PNFCs) increased £1.5 billion, in line with the recent average.

This means that the annual rate of growth has risen from 2.2% to 2.5%. This is still weak but a more hopeful sign emerges if we look at the latest three months because they show an annualised rate of growth of 4.3%.

If we switch to a lending side style analysis we see this.

Households borrowed £4.1 billion secured against property in December, slightly above the average of the previous six-months……The amount businesses’ borrowed from UK banks………. Borrowing from banks remained robust in December at £2.3 billion.

If we add in unsecured credit and the other components we see that lending growth rose to 3.7% from the recent nadir of 3.1% in September.

Unsecured Credit

Here are the numbers.

The extra amount borrowed by consumers to buy goods and services fell to £0.7 billion in December . Within this, credit card borrowing was particularly weak at only £0.1 billion, compared to an average of £0.3 billion since July. The overall consumer credit monthly flow was slightly below the £0.9 billion monthly average since July, and significantly below the average between January 2016 and June 2018 of £1.5 billion.

We need to take care with phrases like “particularly weak” as credit card borrowing has been on something of a tear in the UK meaning that at £72.2 billion it is 7.1% higher than a year ago. Perhaps Deputy Governor Dave Ramsden wrote that but as he of course described 8.3% growth as “weak” not so long ago.

The annual growth rate of consumer credit has been slowing gradually since its peak of 10.9% in November 2016, falling further to 6.6% in December.

So we have a nuanced view here which is threefold. Firstly it is welcome to see a decline in the rate of growth. A catch though is that this rate of growth is on inflated levels and is still far higher than other numbers in the UK economy at around quadruple the rate of economic growth and double wage growth. Lastly the peak of November 2016 suggests it was puffed up by the “Sledgehammer QE” and Bank Rate cut of August 2016 a subject the Bank of England would rather not discuss.

Comment

There is a fair bit to consider here but let us start with a welcome improvement in the UK money supply trajectory.  I realise this is against the rhetoric we hear from elsewhere but the numbers are what they are. At a time when the world outlook is weak we need to grab every silver lining. The situation is more complex with unsecured credit because whilst the annual rate of growth is slowing some of that is due to it being on a larger amount ( £215.6 billion). Also some of it is due to a slowing of car loans as we see that sector slow due to technical reasons such as the diesel debacle. According to the UK Finance & Leasing Association car finance had 0% growth in November as falls in new car finance were offset by higher used car finance. This is at a time where we continue to pivot towards a rental/lease model as opposed to an outright purchase one.

The percentage of private new car sales financed by FLA members through the POS was 91.2% in the twelve months to November.

Let me end with some good news and a compliment for Governor Mark Carney. It comes from a disappointingly downbeat comment from Katie Martin of the Financial Times.

There’s more trade in the renminbi in London than there is in the euro vs sterling, which is weird/interesting.

Actually that is good news and confirms a conversation I had a while back with one of the managers of the Chinese state body in the City. It is an area of strength for the UK economy and I believe the Bank of England has supported this. Not all areas of banking are bad just some

Let's take a quick look at EU economic data again

When will the ECB ease monetary policy again?

Posted on January 24, 2019

Sometimes life catches up with you really fast and we have seen another example of this in the last 24 hours, so let;s get straight to it.

Analysts at Deutsche Bank say European Central Bank’s Mario Draghi indicated the possibility of a one-off interest rate hike at his last press conference. With his next appearance due on Thursday, the president may choose to feed or quell that speculation. ( Bloomberg)

I found this so extraordinary that I suggested on social media that Deutsche Bank may have a bad interest-rate position it wants to get rid of [ask me if you want to know what this means - JB]. After all at the last press conference we were told this and the emphasis is mine.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

Now Forward Guidance by central banks is regularly wrong but it is invariably due to a cut in interest-rates after promising a rise rather than an actual rise. The latter seems restricted to currency collapses. So let us move onto the economic situation which has been heading south for a while now as the declining money supply data we have been tracking has been followed by a weakening economic situation.

France

This morning brought more worrying news from the economy of France from the Markit PMI business survey. It started well with the manufacturing PMI rising to 51.2 but then there was this.

Flash France Services Activity Index at 47.5 in January (49.0 in December), 59-month low.

So firmly in contraction territory as we look for more detail.

Private sector firms in France reported a further
contraction in output during the opening month of
2019. The latest decline was the fastest for over four
years, even quicker than the fall in protest-hit
December. The strong service sector that had
supported a weak manufacturing sector in the
second half 2018 declined at a faster rate in January.
Meanwhile, manufacturers recovered to register
broadly-unchanged production.

These numbers added to the official survey released only yesterday.

In January 2019, the balances of industrialists’ opinion on overall and foreign demand in the last three months have recovered above their long-term average – they had significantly dropped over the past year.

They record a manufacturing bounce too, but the general direction of travel is the same as the number for foreign demand has fallen from 21.8 at the opening of 2018 to 3.6 now and the number for global demand has fallen from 21.7 to 1.0 over the same timescale.

Perhaps we get an idea of a possible drop from wholesale trade.

The composite indicator has fallen back by five points compared to November 2018. At 99, it has fallen below its long-term average (100) for the first time since January 2017.

But in spite of a small nudge higher in services the total picture for France looks rather poor as we note that it looks as though it saw a contraction in December and that may well have got worse this month.

Germany

There was little solace to be found in the Euro area’s largest economy.

“The Germany PMI broke its recent run of
successive falls in January thanks to a stronger
increase in service sector business activity, but the
growth performance signalled by the index was still
one of the worst over the past four years.
“Worryingly for the outlook, the recent soft patch in
demand continued into the New Year.”

So some growth but not very much and I note Markit are nervous about this as they do not offer a suggestion of what level of GDP ( Gross Domestic Product) grow is likely from this. This of course adds to the flatlining we seem to have seen for the second half of 2018 as around 0.2% growth in the fourth quarter merely offset the 0.2% contraction seen in the third quarter.

Also the recovery promised by some for the manufacturing sector does not seem to have materialised.

Manufacturing fell into contraction in January as
the sector’s order book situation continued to
worsen, showing the steepest decline in incoming
new work since 2012.

The driving force was this.

Weakness in the auto industry was once again widely reported, as was a slowdown in demand from China.

Euro area

The central message here followed that of the two biggest Euro area economies we have already looked at. The decline in the composite PMI suggests on ongoing quarterly GDP growth rate of 0.1%. Added to it was the suggestion that the future is a lot less than bright.

New orders for goods fell for a fourth successive
month, declining at a rate not seen since April
2013, while inflows of new business in the service
sector slipped into decline for the first time since
July 2013

Inflation

The target is just below 2% as an annual rate so we note this.

The euro area annual inflation rate was 1.6% in December 2018, down from 1.9% in November

Of course being central bankers they apparently need neither food nor energy so they like to focus on the inflation number without them which is either 1.1% or 1% depending exactly which bits you omit, But as you can see this is hardly the bedrock for an interest-rate rise which is reinforced by this from @fwred of Bank Pictet.

More bad news for the ECB. Our PMI price pressure gauge fell by the largest amount since mid-2011, to levels consistent with monetary easing along with activity indicators.

Comment

The situation has become increasingly awkward for Mario Draghi and the ECB as a slowing economy and lower inflation have been described by them as follows.

When you look at the economy, well, you still see the drivers of this recovery are still in place. Consumption continues to grow, basically supported by the increase in real disposable income, which, if I am not mistaken, is at the historical high since six years or something, and households’ wealth. Business investments continue to grow, residential investment, as I said in the IS [introductory statement] is robust. External demand has gone down but still grows.

Yet as we can see the reality is that economic growth looks like it has dropped from the around 0.7% of 2017 to more like 0.1% now. If we were not where we are with a deposit rate of -0.4% and monthly QE having only just ended they would be openly looking at an interest-rate cut or more QE.

Whilst we have been observing the slow down in the M1 money supply from just under 10% to 6.7% the ECB has lost itself in a world of “ongoing broad-based expansion”. It is not impossible we will see some liquidity easing today via a new TLTRO which would also help the Italian banks but we will have to see.

As to why there has been talk about an interest-rate rise well it is not for savers it is for the precious and the emphasis is mine.

As a result, reductions in
rates can end up having a similar effect as a flattening of the yield curve, as banks interest
revenue drops along with rates, but interest costs only adjust partially because of the zero
lower bound on retail deposits. In this situation, lowering rates below zero can pose a threat to banks’ profitability. ( ECB November 2018)

More about money supply (theoreticals)

Still going on about money supply...

Few worries about debt 

 Newly elected left-winger Alexandria Ocasio-Cortez is proposing a new 70% tax rate on income above $10m to help pay for a so-called Green New Deal in the USA, says Noah Smith. That has got people worried about how to pay for such largesse and the size of the government’s debt. But what if none of that matters? 

A new theory of money 

That is the provocative thesis of an unorthodox if not entirely new economic theory that has gained traction on the left – “modern monetary theory”, or MMT. The central argument is that the US government doesn’t really have a budget constraint and thus that taxes are never really needed to pay for federal spending. Why? Because it can just print all the dollars it needs. 

Suppose the government piles up an infinite amount of debt. What bad thing could happen? Debt-service costs rise. But instead of raising taxes to cover that, the government could just borrow more. The Federal Reserve, the US central bank, could lower interest rates to zero, thus eliminating interest costs. This is basically what has happened in Japan. 

What if rising debt levels also cause investors to pull back on lending to American companies? No problem: by lowering interest rates, the Fed can ensure that the cost of capital doesn’t get too high. At a pinch, it could buy corporate and mortgage debt. 

This would muscle out private sector activity, which might reduce productivity, but MMT advocates aren’t too worried about that – indeed, a federal job guarantee, which could do the same, is a centrepiece of their plans. What could possibly go wrong? 

Hyperinflation takes off 

Hyperinflation, perhaps? If the funding for federal debt dries up, the Treasury’s borrowing will be funded by printed money from the Fed. This is the MMT endgame – the government pays for as much as it wants with the endless supply of money it creates. But a real constraint surely remains – the limitation of real resources. Eventually, if the government keeps paying for more and more things, whether unemployed workers or natural resources, we’ll run out of them. What happens if the government keeps trying to buy things then? Hyperinflation is one common theory. See Venezuela to see how disastrous that will be. Many MMTers scoff at the idea that hyperinflation would result. It didn’t, despite warnings it would, when the Fed embarked on quantitative easing (QE). But just because inflation remains subdued doesn’t mean it couldn’t rise suddenly. Inflation might have remained low despite QE and big deficits because businesses believed that it would eventually end. A wholehearted embrace of MMT would signal that this is no longer the case. That would be a huge gamble on the idea that hyperinflation could not happen in the US. 

Article that identifies different attempts to help the UK's poorer regions

Clare Foges in The Times; starts on Brexit, but stick with it - some very useful material on problems with helping the regions.

Repetition is the mother of conviction. Repeat something often enough and we believe it to be unquestionably true. So it is with the narrative that Brexit is down, in large part, to a high-handed and callous establishment’s neglect of the “left behind”. Those in poor northern constituencies and bleak coastal towns were left trailing in the gold-flecked dust thrown up by the golden chariots that bore the wealthy, the Londoners, the elite onwards — throwing back their heads to laugh heartily and pour some more Bolly down their gullets while failing to give a monkey’s about those in their wake.

This theory unites Remainers and Leavers, those on the left and right, politicians and commentators. Last week Brexit was described in these pages as “a protest against an elite that had for too long ignored ordinary people”. On the same day a left-leaning paper described the vote as evidence of a split between “a rapacious elite that has plunged Britain into economic and social crisis on one hand, and a majority that suffers the consequences on the other”.

Different notes struck, but they belong to the same tune: an out-of-touch, negligent establishment is to blame. John Mann, the pro-Leave Labour MP, was playing it in the Commons last week when he roared that his “left-behind” constituents had voted to leave the EU because “we’ve not had our fair share”.

And so it goes on. We are told endlessly that Brexit was the establishment’s comeuppance for ignoring the poorest. We are told that it is a wake-up call to Westminster finally to take seriously the concerns of those in Wakefield and Wigan. Those peddling these lines may feel that they are being progressive for empathising with the grievances and anger of the “left behind”, but they are doing our fractured country no favours by inflaming grievance and amplifying anger. What is irresponsible is the blithe assertion, made over and over again, that the poorest have suffered and the deindustrialised towns have been shuttered not because of globalisation or automation but because those in government sat on their hands.

Of course there is serious poverty and inequality in our country, but over the past 20 years in particular governments have tried a thousand different policies to reduce them. There was New Labour’s plethora of social programmes, from the national minimum wage to Sure Start. These were followed by the Conservatives’ national living wage, the pupil premium for schools in deprived areas and the triple lock on pensions.

When George Osborne was the Chancellor he got more tax out of the rich than any of his predecessors, with the wealthiest 1 per cent paying 27 per cent of all income tax. Overall, the tax burden on the wealthy has trebled since the Seventies — all while the establishment has supposedly been rigging the system against the poorest.

“Left-behind” areas have been targeted by myriad regeneration schemes. Labour’s Regional Development Agencies were created to decentralise economic decision-making. The coalition government’s Regional Growth Fund granted billions to create jobs outside the southeast. There have been countless initiatives like the current Coastal Communities Fund, which gives dollops of money to struggling seaside towns. Say what you like about the northern powerhouse, but it showed serious intent to counterbalance London’s power.

Working in No 10, I saw that the desire to rebalance the economy is the obsession of policy wonks and politicians. They are not sitting in meetings glorying in the capital’s hegemony but wondering how to attract investment to the Midlands and the north.

The point is that governments of all colours have tried hard to bring economic life to the “left-behind” towns, but often they are pushing water uphill. The age of heavy industry is over. The jobs have gone overseas. The places are hollowed out. Internet shopping and out-of-town supermarkets have killed their high streets. Ambition is dead. Foreign investment is not flooding in. No sensible government wants simply to pump public money into these places to create Potemkin villages where most people are dependants on the state and no real wealth is created. They want regeneration that is real and sustainable. Achieving that is hard and sometimes, sadly, impossible.

I don’t deny that the Brexit vote may have been driven in part by resentment. When you know that you are on the lower rungs of a socio-economic ladder that reaches, at its heights, into the realm of millionaires and sports cars and Maldivian holidays, you may well feel resentful. It must be profoundly demoralising to see swathes of your countrymen and women enjoying seemingly easy success while you struggle. Yet here is the crucial point: just because people have felt cruelly neglected by the powers that be, it doesn’t mean that they actually were.

By perpetuating this narrative of a high-handed establishment, otherwise thoughtful politicians and commentators are not only stoking public anger — of the kind we have seen so hatefully displayed outside parliament — they are implying something dangerous. They are suggesting that in the right hands, and with enough political will, there would be no more left-behind people or places.

With a more benign and interventionist establishment at the helm, the taxes of rich people could be spread thickly all over the country with no fear that wealth will flee; billions could be borrowed for major infrastructure projects with no damage to our economy; the streets of Grimsby and Oldham would be paved with gold. By giving this impression, we are inviting people to vote for Jeremy Corbyn and his fantasy economics.

This column is not a suggestion to throw our hands up and admit defeat at the damaging chasm between the haves and have-nots. More should be done: mass house building, improving the road and rail network the length of the country, pumping money into famished local government coffers, renewing the drive to give every child in the country a first-class education. But let us not mistake a failure to revive left-behind areas with wilful neglect. For the most part the much-traduced “establishment” has been well-meaning and hardworking in pursuit of a fairer country — but alas, it holds no magic wands.

@clarefoges

Lots of meat in this article on EU & Brexit stance

Bang up to date with so many elements you need to be on top of; in addition, it identifies areas of weakness in the European position - these can be used as "potential issues ahead" as they won't [probably] have arisen by the time of the exam. This really useful stuff- if you can't assimilate it all, come and speak to me. Very interesting times indeed...

Europe is in no fit state to handle the risks of its own Brexit brinkmanship

The EU's Michel Barnier said in Strasbourg that the risk of a no-deal has never been so high. Yet the Commission says not a word of the Withdrawal Agreement can be changed

 Ambrose Evans-Pritchard

16 JANUARY 2019 • 9:43PM

Half the eurozone is either in recession or close. The currency bloc has again mismanaged cyclical policy at a crucial turning point, allowing a downturn in global trade to metastasize into something worse. While Europe’s leaders have been distracted imposing their economic settlement on Britain, the world has been imposing its economic settlement on them. A crisis has crept up on the EU. 

Whether or not they fully understand the financial forces at work - and they did not in 2008 or 2011 - some must be wondering whether the eurozone can endure the shock of a ‘no-deal’ Brexit in these circumstances - at least of the kind that entails a rupture in trade flows, and if it entails no such rupture then Project Fear is shown to be an empty threat.

Michel Barnier said the “risk of a no-deal has never seemed so high”. For the first time since the Brexit saga began the EU side faces the consequences of its own maximalist strategy.

It misread British democracy, thinking it enough to stitch up a weak Prime Minister. Few ever imagined that the Meaningful Vote would be turned against them.

With the exception of the Dutch, perhaps, the EU is not remotely prepared for a cliff-edge divorce in 10 weeks. The Commission’s contingency plan for a no-deal scenario is mostly political theatre, an instrument of negotiation pressure.

Brussels, Berlin, and Paris suddenly confront an economic threat that they never took seriously and could all too easily spin out of control. A no-deal scenario is “scary for everybody”, said France’s Emmanuel Macron on Tuesday. Well, that is progress. Until this week he has been dismissing it as a British nuisance.

This showdown comes at a hazardous moment for Europe. Germany escaped a technical recession in late 2018 by the skin of its teeth. It is now in a soft slump,  a casualty of China’s deepening slowdown and the Asian credit crunch.

French industrial output is contracting and business confidence has crashed to levels last seen in the eurozone crisis. Barclays has pencilled in GDP growth of 0.1pc in the fourth quarter.

Fading growth and the gilets jaunes have between them derailed the Macron presidency. It is taking all his energy and policy arsenal to contain an 1848 insurrection entering its tenth week. Little remains of his reform drive, and even less of his grand bargain with Germany to fortify the eurozone.

Italy is in full recession. Oxford Economics has pencilled in growth of just 0.3pc for the whole of this year. This sort of lingering malaise plays havoc with the country’s knife-edge debt trajectory. Investors know that a seemingly stable ratio of 131pc of GDP can spiral up towards very quickly 140pc once the denominator effect kicks in, and from there it is a parabolic rise into insolvency.

Rome must refinance debt worth 17pc of GDP this year without the shield of quantitative easing by the European Central Bank, that is to say without a marginal buyer or lender-of-last resort standing behind the Italian debt market. It will take no more than a spark to set off this powder keg. 

What is extraordinary is that the ECB persisted last year with its pre-announced plan of bond tapering even though real non-financial M1 money for the whole eurozone had dropped to recession levels. It then continued to dial down stimulus as the real economy buckled. 

Bond purchases have dropped from a peak of €80bn a month to zero. This is equal to a string of rate rises under the Wu-Xia model. The ECB has been tightening pro-cyclically into a slowdown, repeating the policy errors of 2008 and 2011. 

Mario Draghi must know that this is a mistake but his hands are tied. Germany is no longer willing to tolerate QE, deemed a backdoor transfer to the South. The result is to entrench deflationary forces and undermine the debt solvency of weaker EMU states. The eurozone is now in a Japanese trap. 

The Stability Pact and the Fiscal Compact, married to the ‘rules culture’ of the Commission, inhibit any form of counter-cyclical fiscal stimulus. If it comes at all, it will be too little, too late.

There is still no banking union beyond punishment and surveillance, leaving the sovereign/bank doom-loop of 2012 ever menacing. Nor is there any fiscal union or sharing of debt liabilities. The eurozone is defenceless.

By miraculous twist, the UK has somehow eked out higher growth over the last nine months, which is not to pretend that the British economy is in glorious condition.

We are a long way from the peak EU hubris of December 2017 when Europe’s leaders mistook a catch-up recovery for self-sustaining cycle of growth, and thought they had Britain’s back against the wall. That is when they sprung the trap of the Irish backstop.

In my view, the EU is playing with economic and financial fire even to contemplate a no-deal outcome at this juncture, with all it implies for broken supply chains, severed transport links, lower exports, and lost access to their banker in the City of London.

The EU has a £95bn trade surplus in goods with the UK. This is 4.5pc of British GDP. To the extent that tariff and customs barriers cause this precious demand to be diverted from European exporters to UK producers - or to the rest of the world -  it is a pure net loss to the European economy. Britain gets some degree of net stimulus, ceteris paribus.

The Treasury and academic critics of Brexit like use to ‘dynamic modeling’ to ratchet up the putative losses in British GDP from a no-deal. I have yet to see analysis under such modeling of what it would mean for a European economy that never cleaned up its banking system and is on the cusp of its third recession in a decade. Debt levels are 30pc to 50pc of GDP higher across France and the Latin bloc than on the cusp of the Lehman crisis.

Europe’s leaders have been lining up to say that there can be no renegotiation of the Withdrawal Agreement and no change to the Irish backstop. It is up to the UK to “clarify its intentions,” said the Commission’s Jean-Claude Juncker.

You might equally say that it is up to the EU to clarify its intentions. Is it going to persist in demanding a permanent veto over whether Britain can leave the backstop, and therefore whether it can leave the customs territory and the EU legal orbit.  

Will it demand an arrangement that strips Britain of sovereignty - or would “downgrade Britain to the status of a trade colony” in the words of the German IFO Institute this morning? Will it continue to threaten trade rupture to force submission after having heard the thunderous riposte of Parliament on Tuesday?

Mr Barnier took a fateful step in weaponizing the Irish border, exploiting a neuralgic inter-community issue to push an ulterior agenda, and invoking the Good Friday Agreement even as it ignored one party to that accord.

The perverse logic of this gamble is that in a bid to save Ireland the EU may instead end up injuring Ireland very badly, and do more damage to Anglo-Irish relations than a friendly Brexit would ever have done.

If there is no deal, the EU will face an Irish crisis of its own. The weapon will recoil. Either Brussels tries to force Dublin to erect a hard border - a maniacal proposition - or it accepts ‘British’ border solutions based on technology and trusted traders. This is to admit that the Backstop was a charade all along.   

Perhaps Mr Barnier does not believe his own words about the rising risk of a no-deal. Perhaps the Commission aims to sit back and wait for the Remain majority in Parliament to impose a softer settlement: Norway Plus or revocation.

I leave it to colleagues closer to Parliament to judge how likely this is, and what the odds of a no-deal may be. My guess is that Brussels will get its way.

Yet it is an existential gamble. If the EU refuses to change a single word of its withdrawal ultimatum and by misjudgment causes Britain to walk away, my prediction is that Europe itself will be engulfed in the maelstrom.

It will again expose the fundamental deformities of monetary union. It will trigger the Italian denouement, set off a German banking crisis, and shatter the euro. Could the European Union survive such a chain of events? Possibly.

Very short article on productivity and the public sector

Take the core point for essays, possibly for a conclusion. From The Times:

Public sector is most to blame as British productivity lags

robert colvile

I always try to be optimistic. But it’s time to face up to it. Britain is a global embarrassment. A shambling, sorry disgrace. No, I’m not talking about Brexit. I’m talking about productivity.

If your eyes just started to glaze over, I don’t blame you. The only person in whom the word sparks joy is Philip Hammond. But productivity is what makes the economic world go round and Britain’s is lagging woefully behind. For every hour the average worker sits at their desk, they contribute 20 per cent less to the economy than workers in other G7 countries. Since the financial crisis, the figures have essentially flatlined.

Yet there is one part of the economy in which the situation is even worse. In the third quarter of last year, productivity in the private sector rose by 0.7 per cent. But in the “non-market sector” (ie charities and the public sector), it fell by 1.9 per cent. Average productivity growth in government over the past 20 years is just 0.2 per cent and in social care, to give a particularly hideous example, the figure is now 20 per cent lower than back in 2000.

If you ever wondered why we pay so much in taxes and seem to get so little in return, well, this is a pretty good reason. The NHS, for example, is the world’s biggest user of fax machines and spends hundreds of millions to print and post outpatient letters that could go via email.

If the health service can match its best years for productivity in the next decade, it will be the equivalent of hiring 159,000 extra staff and carrying out 5.5 million extra treatments a year. Match its worst performance, and the government’s £20 billion investment will be largely wasted.

Across swathes of the public services, it is too hard to reward staff for good work, incentivise them to meet targets or fire the worst performers. Since 2000, the private sector has cut admin staff (because of these new-fangled things called computers) at seven times the rate of the public sector.

This productivity gap means that we are paying more taxes for worse services. It is also why Jeremy Corbyn’s renationalisation plans are so wrong-headed. The privatised industries have become dramatically more productive. His bright idea is to add at least £176 billion to the national debt to make them axiomatically less efficient.

Rather than thinking about what we can move from private sector to public, we need to think about how the public sector can match, or even vaguely approach, the productivity of the private. Otherwise, whether Brexit is conker hard or marshmallow soft, we are doomed to pay more than we can afford for public services that are worse than we deserve.

Robert Colvile is director of the Centre for Policy Studies think tank

Analysing UK inflation

Stick with this; it has some gems, and reiterates some things you know but may have filed at the back of your memory. The last section is quite hard to read, but give it a go:

Lower UK inflation provides some welcome good news for real wages

Posted on January 16, 2019

This morning allows us to take a deep breath and move from last night’s excitement which rapidly turned to apparent stalemate to a whole raft of UK inflation data. As we stand the UK Pound has rallied a bit to US $1.288 and 1.129 versus the Euro but in inflation terms that represents a drop as it was around 7% higher versus the US Dollar a year ago. So that is what is around the corner as today the influence will be a bit more than that as the UK Pound was weaker in December versus the Dollar which is the currency in which commodities are priced.

Moving to the price of crude oil there will be a downwards influence on today’s numbers from it as we note a March futures price which peaked at US $84.58 and was more like US $56 around the time the UK numbers are collected. If we look at the weekly fuel prices we see that petrol prices dropped from being around 12 pence per litre dearer than a year before to more like 2 pence. However this gain has been offset to some extent by the way that diesel has become much more expensive than petrol with the gap between the two being around 4 pence in December 2017 but more like 10 pence in December 2018. Does anybody have a good reason for this?

Inflation Targeting

Bank of England Governor Mark Carney answered some online questions on the 9th of this month at what is called the Future Forum. Let me open with a point of agreement.

On your question about the level of the inflation target, long and varied experience has shown that price stability is the best contribution monetary policy can make to the public good.

The problem is that whilst I mean price stability he is being somewhat disingenuous as that is not what he means. Let me highlight with this.

There are good reasons why central banks around the world, including the Bank of England, target a low, positive rate of inflation not no inflation.

As you can see he talks the talk but does not walk the walk and here is his explanation.

 A little inflation ‘greases the wheels’ of the economy, for example by helping inflation-adjusted wages adjust more smoothly to changes in companies’ demand for labour and facilitating shifts in resources between sectors in response to changes in supply and demand. Moreover, a positive inflation rate gives monetary policy space to deliver better outcomes for jobs and growth

So it helps him to look like a master of the universe and helps wages adjust. Seeing as wages have adjusted downwards I hope he was challenged on that point. But there is more.

From a more technical point of view, the official rate of inflation might also over-estimate the true rate at which prices are rising because it is hard to strip out increases that reflect improvements in the quality of goods and services on offer. Aiming for a 0% inflation target would risk forcing the economy into deflation in the medium term.

That is really rather breathtaking! Let me explain why by comparing his “might” by the reality that UK consumer inflation has since the change to CPI as the inflation target in 2003 consistently under recorded inflation via the way that owner occupied housing is ignored completely. They always meant to get around to it but somehow forget until they managed to find a way ( imputed rent) of having one of the fastest areas of inflation recorded as one of the slowest in the new “comprehensive” CPIH measure.

At least he has dropped the effort to claim that relative prices could not move with a 0% inflation target. This is because I kept pointing out that when we had around 0% around 3 years ago there was a big relative price shift via the much lower price of crude oil which had driven it. So it is good that this particular fantasy had its bubble burst but not so good that the Ivory Towers responsible carry on regardless.

Also if we return to the quality issue a powerful point was made by the statistician Simon Briscoe who stood up and stated that each time he bought a new I-Pad it cost him more than a thousand pounds. But whilst he realised each one was better how does that work if he neither needs nor uses the additions or only uses a few of them?

Inflation

As we had been expecting the consumer inflation numbers provided some good news this morning.

The all items CPI annual rate is 2.1%, down from 2.3% in November……..The all items RPI annual rate is 2.7%, down from 3.2% last month.

The main driver here was transport costs as we expected because if we throw in the whole sector then annual inflation was cut by a bit more than 0.2% due to it. Actually slightly more for the RPI as it has a higher weight for air fares. Also the RPI was affected by something a little embarrassing for a Bank of England which had raised Bank Rate in November by 0.25%.

Mortgage interest payments, which decreased the RPI 12-month rate by 0.09 percentage points between November and December 2018 but are excluded from the CPIH.

Of course they are excluded from the woeful CPIH which essentially only includes things which do not exist in its calculations about owner occupied housing and ignores things which are paid. Here is its major player.

Private rental prices paid by tenants in the UK rose by 1.0% in the 12 months to December 2018, up from 0.9% in November 2018.

As you can see even at the new overall lower trend for house price growth (which was previously around 5% per annum ) it way undershoots the number.

Average house prices in the UK increased by 2.8% in the year to November 2018, up slightly from 2.7% in October 2018 (Figure 1). Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 0.7% over the year to November 2018, unchanged from October 2018.

Comment

There are two entwined elements of good news here as we note first the fact that the annual rate of inflation has fallen and done so quite sharply if we look at RPI. The next is that it has helped UK real wage growth into positive territory on a little more clear-cut basis. Should total pay growth continue to exceed 3% ( it was last 3.3%) then it is hardly a boom but hopefully we will see a sustained rise. At a time when the economic outlook has plenty of dark clouds this is welcome especially as the outlook seems set fair.

The headline rate of output inflation for goods leaving the factory gate was 2.5% on the year to December 2018, down from 3.0% in November 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 3.7% on the year to December 2018, down from 5.3% in November 2018.

Inflationary pressure in the system has slowed.

Moving to measurement I have some hopes for this from the House of Lords Economic Affairs Committee.

Next Thursday 17 January we will publish “Measuring Inflation”, our report on the use of RPI.

It did appear that something of a stitch-up was underway but efforts were made to provide an alternative view as for example I invited them to a debate at the Royal Statistical Society on the subject. They then became quite critical of the way that our official statistician have refused to update the RPI even for changes which would be simple. So fingers crossed! Although of course the establishment is a many-headed hydra.

Sticking with the RPI I referred yesterday to an article in the Financial Times about index-linked Gilts and here is the most relevant sentence.

 This implies inflation of about 3.2 per cent — well above current levels and the Bank of England’s 2 per cent target.

So it implies inflation of 3.2% which was well above the 3.2% the RPI was at the time the piece was written?!