Monday, 18 October 2021

Important analysis of current monetary policy stance

Bank of England steps closer to a rate hike

Next month’s vote pits the Bank’s doves against its hawks, whose calls for higher rates to tackle inflation are gaining ground

While Covid cases remain stubbornly high, the Bank of England's emergency stimulus – brought in to counter the effects of the pandemic – could start to be reversed in as little as three weeks.

Officials at Threadneedle Street are looking at raising interest rates. Financial markets think there is a 50-50 chance this will happen on November 4.

Sterling leapt to €1.185 on Friday, its highest level against the euro since Covid first erupted on the global stage, as the prospect of higher rates attracts international financiers.

This would represent something of a handbrake turn for an institution which had taken a leading role setting out steady policy and reassuring markets, businesses and households.

Next month’s vote between the nine members of the Monetary Policy Committee (MPC) is finely balanced as hawks come out of hiding to make the case for higher rates to control inflation, while doves – in the ascendency until the past few weeks – defend ultra-low rates as a key prop to the economy.

A move in the coming weeks would mark an end to the emergency policy introduced in March 2020, taking the base rate from its current level of 0.1pc, a record low, back to 0.25pc.

More hikes could follow.

City traders are fully pricing in this first hike for December, with repeated tightening over the next year taking rates as high as 1pc by the end of 2022, a level not seen since 2009.

Bank officials have already indicated that once the base rate rises to 0.5pc, the door could be open to consider running down the stock of bonds bought under quantitative easing (QE), at first by simply not replacing those bonds which mature over time.

Robert Wood, economist at Bank of America, anticipates “quick fire” hikes, raising rates to 0.25pc in December then 0.5pc in February, and beginning to let the total stock of QE bonds shrink from March.

Until this week, he had forecast one hike in February then a second a year later, so his new predictions underline the extent of the U-turn.

This represents a remarkably rapid change of tack for a central bank which had appeared to be on a steady trajectory: end QE on schedule in December at a total of £895bn, very gradually raise rates in 2021 or later, eventually stop maintaining the stock of bonds to reverse the emergency policy.

Until recent weeks, hawks were in such short supply on the MPC that they risked going extinct as a species.

In May and June, only Andy Haldane, the chief economist, voted to curtail QE early, and he has since left the Bank.

His mantle was taken up by Michael Saunders, an external member of the committee, and Sir Dave Ramsden, a deputy Governor.

Even then, their two votes to stop QE were a small minority against the other seven members.

It looked as if any plan to tighten policy was dead.

Then came the supply crises, the petrol panic and inflation surging above 3pc – firmly beyond the Bank’s 2pc target. Price rises are set to rise above 4pc and stay there for some time.

In September’s MPC meeting, policymakers included a highly unusual statement which initially was so confusing to markets and analysts that it received little attention.

It indicated that the seven policymakers who voted to hold policy “agreed that any future initial tightening of monetary policy should be implemented by an increase in Bank Rate, even if that tightening became appropriate before the end of the existing UK government bond asset purchase programme.”

This raised the prospect of the unconventional combination of interest rates going up even as the Bank continues quantitative easing – tightening policy at the same time as the loosening voted for last year is still being implemented.

George Buckley, economist at Nomura, says this points to a chance of a hike very soon: “With the [QE] programme due to end close to the time of the December meeting, we think the MPC’s comments could only be referring to a possible November move.”

Financial markets have taken this possibility to heart, but economists are concerned it could show petrol-panicking drivers are not the only ones overreacting to events.

Kallum Pickering, economist at Berenberg Bank, says the economy has recovered strongly with many current supply problems a function of booming demand, meaning it is right for the Bank of England to look at “normalising” policy.

But he advises against any moves which are too sudden.

“A November or December rate hike would look a bit panicked,” he says, adding that Bank communications have appeared “muddled”.

“November will be an opportunity for the Bank to clarify its guidance and signify whether a rate hike is due in December or February, so that the market will not be surprised.”

Who has said what?

In the hawks’ corner are Saunders, Ramsden and the new chief economist Huw Pill.

“I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously,” Saunders told the Telegraph. He was speaking when markets expected a February rate rise, and had half priced in a December tightening, but investors reacted by anticipating an even quicker hike.

Meanwhile Ramsden last month said he was particularly focused on the risk of higher inflation. Pill last week said “the current strength of inflation looks set to prove more long lasting than originally anticipated” – comments which indicate they are both leaning towards tighter policy.

Most prominent among the doves are Silvana Tenreyro, Jonathan Haskel and newcomer Catherine Mann, all external members of the committee.

Tenreyro expects inflation to be short-lived, suggesting there is little need for a rate rise and warning that acting now risks being “self-defeating”.

Mann said that market expectations have already had the effect of tightening financial conditions, removing the need for the Bank to act.

Up for grabs are the votes of Ben Broadbent and Sir Jon Cunliffe – both Deputy Governors – and Andrew Bailey, the Governor himself.

The first two have remained quiet on the topic.

But Bailey has given succour to those anticipating higher borrowing costs by warning that rising inflation could become embedded, rather than fading as policymakers had previously anticipated.

“We have got to, in a sense, prevent the thing becoming permanently embedded because that would obviously be very damaging,” he said in an interview with the Yorkshire Post last weekend.

A good snapshot of labour markets round the world

Some good insights for both macro and micro:

By Ishaan Tharoor
with Claire Parker

The ‘Great Resignation’ goes global

A shopper passes a hiring sign while entering a retail store in Morton Grove, Ill., on July 21. (Nam Y. Huh/AP)

In the United States, the phenomenon dubbed as the “Great Resignation” seems to be picking up speed. A record 4.3 million U.S. workers quit their jobs in August, according to new data from the Labor Department — a figure that expands to 20 million if measured back to April. Many of these resignations took place in the retail and hospitality sectors, with employees opting out of difficult, low-wage jobs. But the quitting spans a broad spectrum of the American workforce, as the toll of the pandemic — and the tortuous path to recovery — keeps fueling what Atlantic writer Derek Thompson has described as “a centrifugal moment in American economic history.”

Wages are up and businesses face staffing shortages, while the experience of a sustained public health emergency has prompted myriad Americans to reevaluate their work options.

“This [pandemic] has been going on for so long, it’s affecting people mentally, physically,” Danny Nelms, president of the Work Institute, a consulting firm, told the Wall Street Journal. “All those things are continuing to make people be reflective of their life and career and their jobs. Add to that over 10 million openings, and if I want to go do something different, it’s not terribly hard to do.”

The “Great Resignation” in the United States was preceded by a far greater — decades-long, arguably — stagnation in worker wages and benefits. In lower-end jobs, earnings have not matched the pace of inflation, while work grew more informal and precarious. Workers’ rights activists now see a vital moment for a course correction. October has been a banner month for American organized labor, with major strikes across various industries sweeping the country.

“Workers are harder to replace and many companies are scrambling to manage hobbled supply chains and meet pandemic-fueled demand for their products. That has given unions new leverage, and made striking less risky,” my colleagues reported.

For the average worker in a developed Western economy, there are reasons for encouragement. “The truth is people in the 1960s and ’70s quit their jobs more often than they have in the past 20 years, and the economy was better off for it,” wrote Thompson in the Atlantic. “Since the 1980s, Americans have quit less, and many have clung to crappy jobs for fear that the safety net wouldn’t support them while they looked for a new one. But Americans seem to be done with sticking it out. And they’re being rewarded for their lack of patience: Wages for low-income workers are rising at their fastest rate since the Great Recession.”

In social democratic Western Europe, a stronger safety net has led to somewhat less disruption in the workforce. But similar trends are at play: “Data collated by the OECD, which groups most of the advanced industrial democracies, shows that in its 38 member countries, about 20 million fewer people are in work than before the coronavirus struck,” noted Politico Europe. “Of these, 14 million have exited the labor market and are classified as ‘not working’ and ‘not looking for work.’ Compared to 2019, 3 million more young people are not in employment, education or training.”

A survey published in August found that a third of all Germany companies were reporting a dearth in skilled workers. That month, Detlef Scheele, head of the German Federal Employment Agency, told Süddeutsche Zeitung newspaper that the country would need to import 400,000 skilled workers a year to make up for shortfalls in a host of industries, from nursing care to green tech companies. Pandemic-era border closures and rising wages in Central and Eastern European countries have led to shortages of meatpackers and hospitality workers in countries like Germany and Denmark.

“Frankly, this is a pay issue,” said Andrew Watt, head of the European economics unit at the Macroeconomic Policy Institute at the German trade unions’ Hans Böckler Foundation, to Politico. “Wages will have to increase in these sectors to get people back into tough, low-paid jobs. That’s no bad thing.”

But the story gets a bit more uneven, and certainly more grim, in the developing world. In Latin America and the Caribbean, 26 million people lost their jobs last year amid pandemic-era shutdowns, according to the U.N.'s International Labour Organization. The vast majority of jobs that have returned are in the informal sector, an outcome that often means even lower pay and greater precarity in a region already defined by profound economic inequality.

“These are jobs that are generally unstable, with low wages, without social protection or rights,” said Vinícius Pinheiro, regional director for the ILO, at a briefing last month. He also noted the disproportionate impact of the pandemic on the region’s youth. According to one study earlier this year, 1 in 6 people aged between 18 and 29 in Latin America and the Caribbean had left work since the pandemic began.

In Asia’s diverse economies, other pains are being felt. China is seeing its own version of the “Great Resignation,” with a younger generation of workers more disenchanted by their prospects and turned off by the relatively low wages in the manufacturing centers that powered China’s economic rise. Authorities in Beijing warn of a growing shortage of skilled workers in its crucial tech industry, a challenge for China’s leadership as it tries to steer the national economy toward more skilled sectors. And as global demand picks up after the fallow months of the pandemic, China’s factories are feeling the pinch of labor shortages.

Another labor-related pandemic phenomenon is crystallizing in neighboring Vietnam: Many migrant workers who left for their rural homes when jobs in big cities dried up amid lockdowns are not coming back.

“It’s clear that there was extreme hardship faced by both businesses and workers during the prolonged lockdown,” said Mary Tarnowka, executive director of AmCham Vietnam in Ho Chi Minh City, to the Financial Times. “And there was particular pain and hardship for people at lower income levels who didn’t have money for rent or food.”

In their villages, many of Asia’s working poor can at least count on roofs over their head and food to eat. It’s another form of resignation. Those who clung to what jobs they could keep were often coping with more dire conditions. When the pandemic snarled fast-fashion supply chains, millions of garment workers in South Asia, as a recent study by the Asia Floor Wage Alliance documented, had to swallow wage losses and endure work arrangements marked by widespread human rights abuses.

In a survey interviewing 1,140 garment workers in Myanmar, Honduras, Ethiopia and India, researchers from Britain’s University of Sheffield and the U.S.-based Worker Rights Consortium found that a majority had been forced to borrow money and many incurred greater debt over the course of the pandemic. About a third of workers who changed jobs reported worse working conditions, including lower pay and more risk.

“Workers were already not being paid fair wages and had little savings at the beginning of the pandemic,” said Zameer Awan, field worker with the Pakistan Institute of Labour Education and Research, to Reuters. “Now most are deep in debt and those who have found jobs again find themselves in more abusive conditions but without a voice anymore.”

Thursday, 7 October 2021

Lovely bit of microeconomics covering HGV problems

From CapX, a great source of information:

As driver shortages dominate the news, it is curious that few people have picked up one of the main reasons why these shortages have become a problem. While Remainers call for the restoration of freedom of movement, Brexiteers call for more UK drivers to be trained, both sides are missing the point.

In the 1970s, trucking was seen as a cool job – Driving a powerful vehicle on the open road, radio blasting, traversing the country, picking up and dropping off goods, until you head home. Paid by delivery, the crucial thing was just to avoid driving without a load.

But times have changed and long-distance trucking is no longer seen as an attractive profession. The Covid pandemic has created a boom in short-distance delivery driving, so enticing people back into long-distance haulage will not be easy. There are driver shortages everywhere (Poland has over 100,000 vacancies). Shortages are also not a new problem, but date back a decade.

So the question really is why are these shortages such a problem now? The answer is surprisingly simple.

Empty Lorries

Both the EU and the UK have over-regulated the haulage sector with ill-conceived policies that protect jobs from competition that clearly does not exist.

To be precise, they limit the number of ‘cabotage’ journeys a foreign business is allowed to make in their territories.

The consequence of this is that there are many more empty lorries on the roads now than before Brexit.

According to Michael Clover of Transport Intelligence, prior to Brexit an average of 30% lorries were empty for their return journey, but this has now doubled to 60%.

Driving with no load is not commercially attractive. As the driver shortage allows operators to pick and choose which jobs to do, cross-border journeys between the EU and UK have little appeal.

Why do Cabotage rules exist?

‘Cabotage’ refers to the transport of goods (or passengers) between two places in the same country by a foreign operator.

While you may occasionally hear spurious arguments about national security, the reason that cabotage restrictions exist is to protect domestic industry from foreign competition.

Cabotage laws date back to the 1650s when, under Cromwell, the English parliament passed a series of acts, collectively know as the Acts of Navigation and Transport that banned foreign vessels from transporting goods to England or its colonies. Only ships with an English owner, master and a majority English crew were permitted to engage in such trade. They also placed other restrictions on international trade, such as prohibiting British colonies from importing goods from outside the Empire.

Unsurprisingly, these restrictions were very much resented by the colonies themselves, notably North America, where it became a key factor for the ’Sons of Liberty’ movement that led to the American revolution. Somewhat ironically, the ‘Land of the Free’ adopted the policy wholesale after independence, and has retained it in one form another to this day (Jones Act), while the UK changed course.

In 1849, British parliament abolished the Acts of Navigation and Transport.

Mercantilism gave way to the golden era of free trade.

The reason for this was not just fear of a tit-for-tat ban on British vessels in other countries, but because they could see the benefits of free trade in lowering costs for consumers and inputs for business.

However, a century later this had changed. The Great Depression led to the decline of British industry and a resurgence of protectionism. Transport became seen as a public good rather than an industry. Debating amendments to transport legislation in 1947 the Lord Chancellor, Baron Jowitt, went so far as to claim that ‘carriers are in a sense public utility companies rather than industrial or commercial concerns.’

When the UK left the European Free Trade Association and signed the European Communities Act in 1972, it passed the Road Traffic (Foreign Vehicles) Act, regulating international haulage in line with European law.

This permits three cabotage operations for hauliers from other member states in another without being required to register their business in that state.

While Brexit has presented the UK with the opportunity to set its own policy and return to free market principles, this has not happened yet.

Under the terms of the UK-EU Trade and Cooperation Agreement of 24 December 2020, the EU restricted UK hauliers to only two cabotage jobs within the Single Market – and the UK responded by imposing the same conditions .

As a result, the number of empty lorry journeys has doubled. Aside from hurting businesses and consumers, this obviously increases carbon emissions.

Given the government’s commitment to net zero, they should ask themselves how they can reconcile protecting an industry that does not need protection with their environmental agenda. Perhaps Greta Thunberg can give them a push towards free trade?

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