Friday, 24 May 2019

A bit over the top, but interesting:

Britain shoots for the top spot

Debbie Alli © Getty Images — Football triumph points to a bigger trend

England dominates European football. It looks as if it will take home the trophy for economic success, too, says Matthew Lynn.

Dramatic last-minute comebacks, nail-biting penalty shoot-outs, spirit, determination and the occasional flash of sublime skill. It’s a been a great month for English football. Both the Champions and Europa League finals will be played between English teams, the first time any single country has so dominated the continent’s most popular sporting spectacle. Three of the four finalists are from London. European football is turning into an extension of English sporting rivalries.

Money isn’t everything, but it helps

Across Europe, the leading clubs have feared for some time that English clubs would come to dominate. Why? Simply because they have so much more money, and because that wealth is relatively evenly spread around the league. Six of the ten richest clubs in the world are English, and nine of the top 20, with even a relatively middle-ranking team such as West Ham close to AC Milan in annual revenues. Real Madrid might remain the richest team overall, but it is the Premier League that has the greatest overall wealth. Money doesn’t automatically buy success – just ask increasingly long-suffering Manchester United supporters – but it certainly raises the chances of it. And over the medium-term, the richest clubs are going to have the best players and the best results.

That is just an early signal of a bigger trend that will become increasingly apparent as the 2020s unfold: the UK is becoming the dominant economic power in Europe, too. Just take a look at the figures. The British population is rising steadily, while other countries are about to go into steep demographic decline. Eurostat predicts the UK population will hit 77 million by 2050, up from 67 million now. By the same year, Germany will have shrunk to 74 million from its current 80 million. France will be roughly the same. No other country will be even close to matching our growth.

How will that translate into total GDP? It is hard to say, but a few points are clear. The UK is growing faster than both Germany and France, and has been for some time now. Right now, Germany still has a slightly higher GDP per capita than the UK – $44,000 against $39,000 – but that may well close. France’s GDP per capita is already slightly lower than the UK’s. And with ageing populations, both will have far fewer working people. On current trends, the UK should become the largest economy in Europe sometime in the 2030s.

There are other signs of growing British dominance. London is by far the largest city in Europe, with nine million people. Berlin is the next closest with only three million. London is much the richest, too. Inner London has a GDP per capita of six times the EU average; Luxembourg is in second place on just 2.5 times the average. The largest national stock exchange in Europe is London’s, with more than 3,000 listed companies with a combined value of £3.7trn. Of the top ten universities in the world, three are British (Oxford, Cambridge and Imperial). The rest are all in the US – there are none in the rest of Europe. London has produced 17 tech unicorns, compared with seven for its closest rival, Berlin, while a third of all tech start-ups worth more than a billion dollars are UK-based.

It’s not just football that’s coming home

We have become used to a European economy dominated by Germany, with the UK as a middling player ranking roughly alongside France and Italy. That is starting to change. Driven by demographics, as well as an incredibly high employment ratio, the UK is on course to become Europe’s dominant economy, and London its dominant city. British companies, ideas, science, technology, entrepreneurs, think-tanks and sports teams will become increasingly influential simply because they have a much larger domestic market. Meanwhile talent will increasingly migrate toward UK cities, universities and financial centres simply because that is where the money and the prestige are. Football may be coming home. Global economic dominance may well be too, Brexit or no Brexit.

Thursday, 23 May 2019

Have low income workers gained from Brexit uncertainty?

BREXIT BRIEFING | OLIVER HARVEY

may 23 2019, 12:00pm, the times

Brexit has delivered very nicely so far for many of the ‘left behind’

oliver harvey

Despite dysfunction in Westminster, public support for Brexit has held up remarkably well over the past three years. Polls suggest that at this week’s European parliament elections Nigel Farage’s Brexit Party, which advocates leaving the European Union with no deal, will overtake both the Conservatives and Labour. And when voters are asked about their opinion on remaining versus leaving the EU, the country seems just as evenly divided as in 2016.

At least part of the reason is economic. Taken as a whole, the economy has performed averagely since the Brexit referendum. Growth has slowed, although not to the extent some thought after June 2016.

But viewed from a distributional perspective — that is to say, which parts of the country have done well and which have lost out — a very different picture emerges.

Take April’s UK labour market report. Average weekly earnings, the headline indicator of pay in the country, have been rising recently — good news for the consumer. But in a less analysed part of the ONS’s report, the data shows that most of the recent gains have accrued to lower income workers.

Indeed, since the second quarter of 2016, wages for both the 10 per cent and 25 per cent lowest paid workers have risen at their fastest rate in a decade and a half. By contrast, wage growth for the 10 per cent highest paid has been much more disappointing – failing to surpass recent highs in 2015.

One reason is, paradoxically, that firms have stopped investing. Business investment shrunk by £48 billion in 2018, with uncertainty about Brexit playing a major role. Since firms still needed to meet demand, they hired workers to plug the gap. The number of jobs increased by 500,000 in the same period.

Crucially, a large body of academic evidence suggests that the substitution of labour for capital (in other words, workers being replaced by machines) is a prime cause of income inequality. Higher-skilled workers tend to benefit from the introduction of new technologies, while the less nimble miss out. The reverse is also true. A weak investment environment but strong labour market — in economic parlance, “capital widening” — has helped to bid up wages for lower skilled workers relative to higher skilled ones.

A second reason for the lower paid doing better has been falling immigration. Last year, employment of EU workers fell by 75,000, the largest drop on record. While the relationship between immigration and pay growth is hotly contested, a labour market supply shock like this should, at least in the in the short term, raise domestic workers’ bargaining power.

Finally, another key factor behind distributional outcomes in the economy — fiscal policy — has U-turned abruptly since the referendum. In last year’s Budget, the government committed to the largest discretionary loosening of fiscal policy since 2010, according to the OBR, with the lion’s share of new spending going to the NHS. Austerity, which according to many studies contributed to widening inequality from 2010 to 2016, is in reverse.

These trends are reflected in economic sentiment. The European Commission’s Ecofin survey tracks consumers’ economic expectations based on their level of educational attainment. A consistent theme since 2016 has been graduates feeling very pessimistic about their economic future, while the less skilled have felt much more bullish. While it is important not to generalise, educational qualifications were one of the best predictors of Brexit voting intentions.

Put all the above together and the fact is that, economically speaking, Brexit has so far delivered very nicely for many of the so-called “left behind” who voted for it.

Can these trends continue? The short answer is no. The UK’s current growth mix of a strong labour market and weak investment is a short-term positive for those at the lower end of the income distribution. But in the long term it is nearly impossible for real incomes to decouple from productivity.

And here, the UK’s performance since Brexit remains dire. Output per hour has shrunk by 0.1 per cent in the past 12 months. Unless productivity picks up, firms will simply start to transfer the cost of more expensive workers into prices. Weak business investment is, of course, one of the primary reasons for weak productivity in the UK.

The welfare boost enjoyed by lower income workers since Brexit will thus start to wane as inflation eats into earnings. But by then the Brexit dividend may have lasted just long enough to maintain the political momentum to take the UK out of the EU.

Oliver Harvey is head of UK macro and Brexit research at Deutsche Bank. These are the personal views of the author and do not necessarily reflect the views of Deutsche Bank

If you want to know how an economist looks at an issue...

Read this scathing attack on the UN report on poverty in the UK. The first part of the article pulls apart the politics in the report, but the second part looks at the issue of poverty, and why this report does nothing to alleviate it:

Amber Rudd is right to complain about the UN’s shrill, partisan report

By John Ashmore @smashmore86

The UN's Special Rapporteur on Extreme Poverty, Philip Alston Photo: Wang Zhao / Getty Images

It might seem to some observers that the department of work and pensions has been tasked with designing a digital and sanitised version of the 19th-century workhouse.

So reads the final report on the UK from the UN special rapporteur on extreme poverty, Philip Alston.

The Australian human rights lawyer spent fully 11 days in this country before writing a damning indictment on government welfare policy since 2010.

So incensed is HM government by his findings that Amber Rudd, the Work and Pensions Secretary, has decided to file a complaint to the UN. Equally predictably, a chorus of Labour MPs and lefty keyboard warriors aver that this is yet more evidence of the Evil Tories’ anti-poor agenda.

What’s most striking about the report is not the findings themselves, but the shrill, partisan tone adopted by Alston throughout. That Alston’s intention is to launch a political attack looks clear when he ventures off piste to attack policies such as privatisation of the utilities, which have at best a tangential connection to the welfare system.

Alston is entitled to make points about spending priorities and their effects, but his penchant for glib moralising wears thin very quickly, even in a report that numbers only 21 pages.

For example, he accuses the government of a “punitive, mean-spirited and often callous approach” and an “uncaring ethos”. He claims cuts to welfare spending were born out of a “commitment to achieving radical social re-engineering”.

There is scarcely a mention of the massive financial crisis and recession which preceded the Coalition government coming to power, or any kind of analysis of the fiscal backdrop ministers have operated in since.

What, too, are we to make of his contention that ministers have been stripping back the welfare state despite a “booming” economy? Employment may have held up remarkably well, but pretty much everyone agrees that both GDP and wage growth have been anaemic at best for many years.

The rationale behind policies is not really on Alston’s agenda though. In his analysis it’s not just that they are misguided or poorly implemented, but that the people in charge are morally defective. Is he really all that surprised when the same ministers he excoriates are not all that inclined to engage with him?

By far the biggest issue though, and one which is barely mentioned in the report, is the way social security spending is tilted towards older people. The regular debate over whether pensioners should get free TV licences or bus passes obscures the much more costly policy of retaining the triple-lock on the state pension (which Alston calls ‘commendable’). Over-65s in work, some on very high salaries, are also helped out by not having to pay national insurance, which is manifestly unfair given it is now just another form of income tax, rather than a proper contributory system.

Sadly in Alston’s report this kind of policy discussion too often plays second fiddle to coming up with sassy comments about what blackguards the government are. The ‘workhouse’ comment is a case in point – the welfare debate’s equivalent of Godwin’s Law. In much the same way as many people feel compelled to needlessly mention the Nazis in any discussion, some on the left feel an argument about poverty is incomplete without claiming we’ve somehow gone back to the 19th century.

Never mind, though, as it’s a pitch perfect soundbite for the one-line news generation, and the line many news outlets have understandably chosen to lead on.

More problematic than this kind of hyperbolic guff, though, is Alston’s approach to statistics. For instance, we hear that 14 million Britons are living in poverty, with little discussion of the metric used to arrive at that figure.

As we’ve discussed before on CapX, the most frequently used method at the moment puts a household in ‘relative poverty’ if its income is 60 per cent of the median national income. At the moment, that gives you a figure of about £16,000.

Whether or not that puts a household into poverty clearly depends on a range of factors, not least the hugely variable cost of housing in different parts of the country. Equally, for those pensioners who have already paid off their mortgage, £16,000 a year may not be an extravagant amount, but nor does it necessarily mean they are on the breadline. The same amount in Wigan will obviously go a lot further than in inner London.

There is a much more basic problem though. The “relative poverty” figure Alston cites is not a measure of poverty, but of inequality – an important metric with serious consequences, but by no means the same thing as poverty. After all, there’s a gigantic degree of inequality between pretty much everyone on earth and Bill Gates, that doesn’t make all the rest of us poor.

What makes it a particularly bad metric is that relative poverty declines if the better off get poorer, even if the poor have seen no improvement in their own living standards. That’s often the case during a recession when everyone’s incomes take a hit – inequality might fall, but no one is doing any better as a result.

Raising such quibbles inevitably leaves one open to being insensitive to the problems facing those at the bottom of the income ladder. However, asking for precision in statistics is not the same thing as airily dismissing the fact that many people face grave difficulties. If anything, it is demanding a more accurate appraisal so that the very neediest can get the support they need.

In fairness, as well as the overblown ’14 million in poverty’ number, Alston does offer a separate figure of 1.5 million people who have “experienced destitution”, which is defined as going without basic needs such as food, clothing, toiletries or fuel. This too might have its pitfalls, but is clearly closer to what most of us would think of as poverty than the relative measure discussed above.

It’s a far smaller number of people than the 14 million supposedly in poverty, and It also points to a far more severe level of hardship. The Joseph Rowntree Foundation, for instance, has a definition of destitution that includes a single person having under £70 a week in income, less than a quarter of the household rate in the ‘relative poverty’ measure.

The fact people are living in such penury in a wealthy country should prick all of our consciences. At the same time, it’s not unreasonable to point out the difference between inequality and outright poverty.

That kind of precise, clear-sighted view of what’s really going on in the UK is what ministers ought to be debating and acting on. Strident, biased and obviously partisan rhetorical attacks, such as those offered by Philip Alston, are altogether less useful.

Wednesday, 22 May 2019

A look at the UN Poverty Report on the UK

Although this chap is sometimes hard to follow, there are at least two standout items in here: first, data can be manipulated merely by using different standards (e.g. RPI vs CPI); second, is the GDP data capturing real economic growth?

The UK poverty problem is more than a story about austerity

Pos

ted

on May 22, 2019

Timing can sometimes be if not everything very important and so the release of the UN report on UK poverty by Phillip Alston on the day we get the latest data on the public finances is unlikely to be a coincidence. So let us get straight to it.

Although the United Kingdom is the world’s fifth largest economy, one fifth of its population (14 million people) live in poverty, and 1.5 million of them experienced destitution in 2017.

That is certainly eye-catching especially the use of the word destitution. However it was only on Monday that Andrew Baldwin reminded us that using purchasing power parity or PPP the UK is in fact the ninth largest economy rather than the fifth. So we note immediately that many of these concepts are more elusive than you might think. That issue particularly relates to the issue of poverty which is basic terms can be absolute or relative. With the relative definition we find that people can be better off but poverty gets worse. especially if the definitions are changed. I note that the Social Metrics Commission has done exactly that.

This new metric accounts for the negative impact on people’s weekly income of inescapable costs such as childcare and the impact that disability has on people’s needs……. The Commission’s metric also takes the first steps to including groups of people previously omitted from poverty statistics, like those living on the streets and those in overcrowded housing.

The issue is complex and on a personal level my eyes went to one of the supporters of this which is the same Oliver Wyman which assured us that Anglo Irish Bank was the best bank in the world in 2006. It was not too long before it was nationalised and made the largest loss in Irish corporate history.

The Detail

Be that as it may the report tells us this.

Four million of those are more than 50 per cent below the poverty line and 1.5 million experienced destitution in 2017, unable to afford basic essentials. Following drastic changes in government economic policy beginning in 2010, the two preceding decades of progress in tackling child and pensioner poverty have begun to unravel and poverty is again on the rise. Relative child poverty rates are expected to increase by 7 per cent between 2015 and 2021 and overall child poverty rates to reach close to 40 per cent.

On the other hand if we go to the absolute poverty measure then we are told this.

“There are 1 million fewer people in absolute poverty today – a record low; 300,000 fewer children in absolute poverty – a record low; and 637,000 fewer children living in workless households – a record low.” ( Prime Minister May)

As you can see there is an extraordinary difference between the two approaches.

UK Public Finances

We can look at the situation from this perspective so here we go.

Borrowing (public sector net borrowing excluding public sector banks) in April 2019 was £5.8 billion, £0.03 billion less than in April 2018; the lowest April borrowing since 2007.

So the monthly numbers were better albeit by the thinnest of margins so let us delve more deeply.

Borrowing in the latest full financial year (April 2018 to March 2019) was £23.5 billion, £18.3 billion less than in the previous financial year; the lowest full financial year borrowing for 17 years (April 2001 to March 2002).

As you can see we are now approaching a possible budget balance because the same rate of improvement this year would pretty much wipe the deficit out. This raises a wry smile because when the government was supposedly trying to do this it remained a mirage and was always around three years away on the forecasts. Except three years later it was three years away again! Yet the current government has regularly promised to end austerity and has in fact made quite a lot of progress towards a balance budget. Make of that what you will. In fact the situation has levels of complexity as the spending numbers make clear.

Over the same period, central government spent £740.7 billion, an increase of 2.5%.

Those are the numbers for the full financial year to March and they open the austerity debate again. It depends which inflation measure you use as to whether that is a cut in real terms (RPI) or a rise ( CPI). It also depends on how you define austerity as that too varies. Monthly numbers vary but the latest month suggests a minor reduction in it.

while total central government expenditure increased by £1.8 billion (or 2.7%) to £66.5 billion.

Moving onto what has changed the deficit numbers ( what used to be called the PSBR) the most has been this development.

In the latest full financial year (April 2018 to March 2019), central government received £739.7 billion in income, including £559.0 billion in taxes. This was 4.9% more than in the previous financial year.

As you can see revenue has been strong and that gives us a hint that maybe the economy has been stronger than the GDP data has picked up and perhaps more in line with the employment and real wages numbers. One way of looking at the situation is to compare revenue with the national debt and if we do so using the international standard ( Maastricht) then it is 40%.

Whilst we are looking at revenue I am often critical of Royal Bank of Scotland so let me also post the other side of it.

On 14 February 2019, The Royal Bank of Scotland Group plc (RBS)announced the dividend price to be paid to shareholders on 30 April 2019. As a shareholder, the government received £0.8 billion

Comment

The report from the UN’s special rapporteur does remind us of problems as well as teaching me that the word rapporteur exists. Those familiar with my work will know that the fact that real wages are still nowhere near the previous peak is an issue. Added to this comes the enormous effort to keep house prices out of the inflation index and then the way that the costs of home ownership are represented by fantasy rents which are never paid. You might reasonably argue that home ownership is the distance of Jupiter away for the poor but the mess made of this area has affected even them as via problems with the balance between new and old rents it seems likely to me that the official rental data has recorded the wrong numbers as in too low.

Whilst the good professor has sadly resorted to a bit of politicking I thing he is on form ground pointing out issues like this.

Children are showing up at school with empty stomachs, and schools are collecting food and sending it home because teachers know their students will otherwise go hungry…….In England, homelessness rose 60 per cent between 2011 and 2017 and rough sleeping rose 165 per cent from 2010 to 2018……. Food bank use increased almost fourfold between 2012–2013 and 2017–2018,29 and there are now over 2,000 food banks in the United Kingdom, up from just 29 at the height of the financial crisis.

The rough sleeping issue has increased in the area I live ( Battersea). I also agree that Universal Credit was a good idea that has been implemented incompetently.

African Continental Free Trade Agreement

Be aware of the basic elements of this world-changing agreement. It can provide a stellar conclusion, or very good context at a minimum. First a short video, then some background reading, then more videos:

The African Continental Free Trade Agreement, signed by 44 African countries in Kigali, Rwanda, in March 2018, promises to be a game changer for future trade and development on the continent.

Although the agreement has the potential to become the precursor of a unifying economic vision for Africa, challenges remain, and effective implementation will be crucial for success.

The agreement is meant to create a tariff-free continent that can grow local businesses, boost intra-African trade, encourage industrialisation and create jobs, while creating a single continental market for goods and services. Countries joining the agreement must commit to removing tariffs on at least 90% of the goods they produce as well as establishing a customs union with free movement of capital and business travellers.

Read: Botswana pushes for SA investment

Implications for African trade

Ronak Gopaldas, director at Signal Risk told a Gordon Institute of Business Science forum that the agreement is significant because of its potential size and scale: If all 55 African countries join the free trade area, it will be the world’s largest by number of countries, covering more than 1.2 billion people with a combined GDP of $2.5 trillion (about R36 trillion).

“It is an African solution to an African problem and would dramatically lower the cost of doing business in Africa and improve the ease of doing business on the continent. The agreement is also significant because it comes at a time when the benefits of global trade are being contested,” he added.

Researcher at the South African Institute of International Affairs, Asmita Parshotam, said the agreement was a “massive show of political will, the extent of which has not been seen previously”.

The African Continental Free Trade Agreement would bring African countries together to create a framework for an agreement, and a support structure for business.

“It is important to see the implementation of the agreement against measures of international protectionism and continued uncertainty for global trade. African countries can compete globally, integrate into value chains and participate,” she said.

Challenges

Head of coverage for Africa at Rand Merchant Bank, Tshepidi Moremong, took a more cynical view of the agreement: “As a continent, we always have grandiose plans, whereas the regional trading blocs have been more successful than we give them credit for.”

Moremong said the continental free trade agreement was an “aspirational plan, agreed to by technocrats and policy makers. Doing business in Africa is difficult because basic infrastructure such as roads are often still lacking in many countries. It takes more than creating agreements,” she added.

Parshotam conceded the agreement was an incomplete vision, which had the potential for good, but that “not everyone is going to be a winner”.

Issues that required resolution before the agreement could reach the implementation phase included labour consensus, including the free movement of people, and rules of product origin, which need to be finalised.

President of Olam International, Ramesh Moochikal, said African entrepreneurs and small and medium enterprises with ambition could use the agreement to their advantage: “There is no need to think Pan African all the time. Small businesses will be able to step across the border of one or two countries and expand their markets.”

Moremong said the main beneficiaries of the agreement in its current form would be Africa’s more diversified economies, especially those that are manufacturing based.

Land-locked countries would also benefit, as would those driving technology, because it was easier to move across borders.

Moochikal pointed out that Nigeria, the only country to have engaged in consultation with its business sector, had chosen not to sign up to the agreement. The panel was in agreement that the African Continental Free Trade Agreement was unlikely to be credible without Nigeria’s involvement, but Parshotam said this presented an opportunity for a second tier of political leadership to emerge. The opinions of the regional economic powerhouses of South Africa, Kenya and Nigeria usually dominated trade discussions, she explained, and there was an opportunity for countries such as Rwanda, Egypt, Ethiopia and Ghana to come to the fore.

Towards a unifying economic vision for Africa

Partner at Brunswick Group South Africa, Itumeleng Mahabane said the number of African countries ratifying the agreement is encouraging, but that there is a lot of work remaining. He argued that a unifying economic narrative or shared vision of Africa’s future is needed to “bring people on board and encourage them to remain on board when things get difficult.”

“We see the low trade numbers and we see the opportunities. However, we don’t have a vision of shared imperatives which will continue the momentum,” he added.

Africa had to create 30 million jobs every year for the next 30 years if the continent was to avoid a youth crisis, Mahabane said.

“Our demographic opportunity is more of a threat and special interests will stand in the way if we haven’t identified shared imperatives which can in turn be transformed into narratives for people to see the benefits of cooperation.”

Mahabane explained that the driver of successful regional agreements such as the European Union and the Asia-Pacific Trade Agreement had often been regional peace and security, which had then promoted economic integration through trade.

“It is important to remember that these agreements have evolved over years and even decades into harmonised consensus. We mustn’t be unrealistic but must begin by creating a framework to start negotiations.”

Africa was full of entrepreneurial energy and success stories, Moochikal concluded.

“A shared vision that leadership must believe in and sell will determine whether the agreement succeeds or not,” he said.

Mark Carney agrees with Brian on Fintech:

Or was it James M? Anyway, Carney thinks you are right and I'm wrong:

Fintech will unlock funding, says Carney

Philip Aldrick Economics Editor

April 30 2019, 12:01am, The Times

Mark Carney has hailed the contribution of the Bank of England in being at the forefront of efforts to modernise business lendingJONATHAN BRADY/PA

Artificial intelligence can help to unlock the potential of Britain’s small and medium-sized businesses by making it easier for them to access credit, Mark Carney has said.

Digital innovations in financial services will improve bank supervision and create better services for consumers and businesses, helping to deliver “more sustainable and inclusive growth”, the Bank of England governor told the Innovate Finance global summit in London yesterday.

Among the greatest benefits of the financial technology revolution was the potential it offered “to unlock finance for smaller enterprises whose assets are increasingly intangible”, he said.

Finance for small business has become a problem in recent years. The British Chambers of Commerce has spoken of a “shift from credit crisis to credit apathy” because smaller businesses no longer want to take out a loan. Only 38 per cent used external finance in 2017, down from 44 per cent in 2012. A Treasury select committee report last year claimed that such apathy had been caused by a lack of trust in high street banks, a perception that applications would be rejected and over-complicated procedures.

Digital bank start-ups and other financial companies are “opening up new opportunities for more competitive, platform-based finance of [small companies]”, Mr Carney said. He added that the Bank was at the forefront of efforts to encourage a digital transformation. It was the first to open up its payment services to non-bank payment service providers and it is “responding to demands from fintech providers”, he said.

[Note Philip Aldrick had an article on 23rd May suggesting fintech ain't up to much...]