Beer Money - October 2013

Stephen Beer is an investment manager for the Methodist Church and political communications officer for Christians on the Left. All views here are his own.

The UK recovery to date

The UK recovery continues, with much of the mood music positive. However there is little sign of 'rebalancing' and whether recent growth can be sustained is a key question. Moreover, the longer term problems are not being addressed.

Lending has increased. The Bank of England's latest Credit Conditions survey showed that the supply of and demand for mortgages increased significantly in the third quarter (Q3). Demand for unsecured lending products, such as personal loans, also increased signifcantly and the supply increased.  Moreover, the Bank reported that demand for lending from SMEs picked up in Q3 too.  Generally, the cost of loans fell, relative to Bank rate or the relevant swap rate. We appear to be seeing the boost to liquidity of the past few months being joined by an increase in household and business confidence.

There are some reasons for caution.  The Purchasing Manager Indices (surveys of businesses) continue to point to expansion but last month came off their August peaks.  In the chart below, the black line represents Manufacturing, the blue line Services (which makes up about 3/4 of GDP) and the red line represents Construction. We can see that a downturn was flagged in 2007 and all three sectors were hit at the same time following the Lehman Brothers collapse in 2008. In recent months conditions have improved across the economy.

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Industrial production figures for August were also released this week.  They showed a surprising 1.1% fall in production in August, with manufacturing falling by 1.2%,  This was the same month that saw the Manufacturing PMI at its highest level since the beginning of 2011. Indices can be volatile and subject to revision, so, whether the latest move is up or down, we need to consider the overall trend. So far, that continues to point to growth.

Forecasts of UK GDP growth are being revised up, with the IMF the latest to upgrade its UK GDP estimate (but it believes World GDP growth will be limited by negative growth in developing economies). The IMF now believes UK GDP will rise 1.4% in 2013, up from its July forecast of 1.1%. Its 2014 forecast is up 0.4% to 1.9%. Expect the Office for Budget Responsibility to revise its forecasts up too. That may change tax revenue forecasts, which in turn will lead to changes in its predictions for borrowing. That could mean the Chancellor may not 'need' to cut so much spending - or he may decide to accelerate deficit reduction or consider future tax cuts.

Fiscal policy in 2010 - debating Rogoff in the Financial Times

Whatever the growth rate now, we have lost three years due to unnecessarily tight fiscal policy following the 2010 General Election. This view is contested of course, most recently by Professor Kenneth Rogoff in a Financial Times article last week.  This week the FT published my response. I argued that in 2010 it was in fact credible to believe that fiscal policy was too tight "without being complacent that things 'would calm down'".

Conference season and economic policy

The Labour conference witnessed an uplifting speech from Ed Balls, with a warning and safeguards on spending.  I reviewed his speech for Progress.

George Osborne continued to blame Labour for high deficits, spending cuts, and even for inequality.  Yet surveys continue to suggest that the public blames Labour more than the Coalition for the spending cuts, which it considers necessary even if unfairly implemented (see the YouGov polling).  These perceptions may not be fair, but they are held nevertheless. I assess Osborne's conference speech in an article for Progress here.

Labour needs to mount a resolute campaign to increase economic credibility over the next few weeks and months. The focus on living standards is right but there are two challenges.

  • The first is that the marginal voter with a mortgage, who drives to work, may begin to feel better off for a while.  Mortgage rates are at lows, house prices are beginning to rise, and food and fuel inflation is much lower than in previous years (though energy companies may raise prices this autumn).  While inflation is around 3% and wages are rising 1%, private sector wage settlements are probably running at more like 2+%. The UK economy has longer term problems which are not being addressed, but this may take time to become apparent.
  • The second challenge is that without fundamental reforms of the economy, current levels of inequality and squeezes on living standards can only be alleviated rather than permanently repaired.

 

Blue Labour and One Nation economics

In an article for LabourList ("Taking another look at Blue Labour") I looked at what our One Nation approach can take from discussions under the Blue Labour banner.  I suggested that "New Labour focused on solving problems by governing better and spending where necessary.  Both were important but they did not embed change.  New Labour did embark upon bold reforms, but tended to treat citizens as consumers.  The Blue Labour lesson is that we should encourage change through new or reformed institutions that are properly accountable, owned by the people so that a future government cannot remove them without effort."

Our economic policy needs to take account of this, giving people a real stake in our economic future. Ultimately, that means our overall theme should be investment, in people, in jobs, in infrastructure.

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