Tuesday, February 10, 2015

The latest statistics on industrial production show a slight drop on the month to December. Output remains higher than it was in December 2013, but lower than in February of last year - and this suggests that the annual rate of growth may well turn negative over the coming few months. Indeed my neural network forecaster of this variable continues to suggest that this will be the case, and that we shall continue to see a (quite pronounced) drop in industrial output over the coming 18 months.

Industrial output only represents a small fraction of total output in the economy, and the movement in this series should not unduly cause alarm. But the trend is in line with the more general observation that the rate of GDP growth peaked in the spring of last year and that the coming year will see growth that is considerably more modest.

Friday, January 09, 2015

The latest statistics on industrial production show a further (slight) month on month fall in November, though output in the production industries is still some 1.1% higher than it was in November 2013. The detailed monthly series indicate that growth in this sector has been trending down since May 2014 (when it peaked at 2.8%).

The publication of these data allow me to update my neural network forecast for this series, and the 2 year ahead forecast is shown below. It continues to suggest that the annual growth rate of industrial production will dip into negative territory soon; and that while it will turn the corner quite quickly, it will remain negative throughout the forecasting period.

Trends in industrial production are not necessarily indicative of those in the overall economy - this sector accounts for only about 15% of total GDP. But nevertheless, these data suggest that the recovery reached a peak in the early part of last year and that output growth in the coming year is likely to slow down.

Wednesday, December 03, 2014

Today’s Autumn Statement tells us something about the way in which the government sees the economy moving over the next few years, and rather less about how it plans further to reduce the budget deficit.

After peaking at 3% this year, GDP growth is expected to fall to 2.4% in 2015. That is no surprise – indeed I have been predicting a slowdown next year for some time, and the sluggish performance of the UK’s major trading partners in recent months reinforces the view that broader economic conditions do not offer a favourable wind. The longer term projections for growth are for it to stabilise at between 2.2 and 2.4 per cent each year to the end of the decade. This probably has more to do with the structure of the econometric models used in forecasting – which tend to revert to a mean – than any serious assessment of the economics. We might be so fortunate, but equally we might, post-recession, be in a new world in which the secular rate of growth is slower than it was before.

The public finances are forecast to improve dramatically beyond the current year. Last year’s outturn was a deficit of £97.5 billion. This year’s is expected to be slightly lower, at £91.3 billion (down from £133.9 in 2010-11). But by 2016-17 it is expected to be only £40.9 billion, and the following year just £14.5 billion. In percentage terms – as a percentage of GDP, that is – the deficit is expected to be 5.0% in the current year compared with 8.4% in 2010-11. It is coming down, but slowly. If the recent strength of the economy were to be maintained, there may be scope for tightening the belt – but many indicators suggest that this year’s strong performance has been a blip, and the Prime Minister may well be right to suggest that ‘red warning lights are once again flashing’ in the economies of some of our major partners. In any event, the Autumn Statement provides little information about how the turnaround that is still sought in the public finances is to be achieved, not least because the changes in planned expenditures and revenues announced today imply only a small net gain.

Big money changes include an increase in personal tax allowances, a major reform of stamp duty (moving to a marginal rate system), a restriction on tax relief that banks can claim on losses made in the aftermath of the financial crisis, and new employer contribution rates for public sector pensions. Moreover, a scheme will be introduced to tax multinational enterprises that seek to declare profits overseas rather than face UK tax; how this will be implemented is unclear.

Certain items of specific public sector investment are worthy of note – the Sir Henry Royce Institute for advanced materials will attract £235m in Manchester, and a Big Data centre at Daresbury will attract £113m. These are significant investments in the North West – though the Alan Turing Centre on Big Data will be located in London (which some may see as perverse given his connection with Manchester). Further investment in the Northern Powerhouse includes infrastructure improvement, including road improvements in Merseyside and on trans-Pennine routes, HS3, and investment in other rail services.

While the Chancellor announced several public investment projects, the Statement is disappointingly thin on measures to promote business investment. There are minor changes to R&D credits, and proposals to extend the work of the British Business Bank, notably through an extra £400m under the Enterprise Capital Funds programme.

On the labour market, there are proposals to extend the National Insurance break for firms employing young workers to cover all workers under the age of 25 on apprenticeship schemes. While it is good to see the importance of youth training acknowledged, it is not clear that this is the best way to achieve progress in this area. The quality of many apprenticeship schemes remains an issue, and it is in any event not clear that incentives of this kind are efficient in view of the deadweight associated with providing a break to employers that would in any event have provided the training.

A particularly welcome innovation is the proposal for a loan scheme to finance taught postgraduate education. This will help end the current inequity that has made tuition at this level affordable (more or less) only to those with private resources.

Overall, the Statement is one with much detail to be pored over, but lacking a clear vision of the route ahead. The cuts that remain to be made in public spending are severe, and we still await information on where the axe is intended to fall.

Monday, November 03, 2014

The Chancellor of the Exchequer has announced that new powers are to be devolved to the Greater Manchester Combined Authority (GMCA). The GMCA will gain powers in the areas of policing, planning, transport and housing, and will be required to introduce the post of a directly elected mayor.

These powers are modest and do not offer the promise of any real capability to stimulate economic development. If the north of England is to be able to position itself as more power is devolved to Scotland and other regions, it will itself need further discretionary powers.

But the absence of such powers in the current proposals might in fact be a blessing.

For while this move is being portrayed as progress in the development of the Northern Powerhouse, it is not at all clear that it represents a positive development in that context. The Northern Powerhouse is intended to create a single urban area stretching across the Pennines, bringing in Leeds and Sheffield as well as Manchester - and reaching out further in both directions along the M62 corridor. Creation of a nexus of political authority in Manchester may well hinder economic integration of the north rather than aid it.

Northern cities face a drain of human capital to London and they lack the capital's levels of business investment. The disadvantage faced by the north thus amounts to much more than the lack of a high speed rail link over the Pennines. Integration requires a unified political purpose that is not well served by creating divisions now between Greater Manchester and weaker local authorities elsewhere.

Creating new jurisdictions in a UK that is characterised by devolved government requires careful thought. It should not come about purely as a consequence of 10 local authorities deciding to work together. Wider interests are at stake, and central government has a duty to take those fully into consideration. Should Manchester be a metro in its own right? What then of the Northern Powerhouse? So should the metro include Liverpool, Leeds and Sheffield? Maybe. But what then of Newcastle? And what of the rural areas in between? These are questions worthy of debate. Computable general equilibrium models are used to evaluate such issues elsewhere. Serious research is needed in the UK too.

Today's first step is not altogether promising.

Tuesday, October 07, 2014

Data on output in the production industries indicate a slowing of the recovery. As recently as March of this year, year-on-year growth in this sector was healthy at well above 3%. The latest figures show this measure slowing down to a little over 1% - and the seasonally adjusted figures show no month-on-month growth.

Further, applying my neural network forecaster to these data suggests that the next year or so will see a decline (albeit short lived) in industrial output. This may well be a pessimistic forecast - it does not take into account the surge in business investment that we have seen over recent months. But it does serve as a warning that some aspects of the current recovery are still rather more fragile than might be desirable.

Thursday, September 25, 2014

The cost of living has become a major concern in public debate on the UK economy. While unemployment data reflect an economic recovery, the continued decline in real wages points the other way, painting a confused picture of the state of the labour market.

The recent publication, by the Institute of Economic Affairs (IEA), of a book on the cost of living is therefore welcome. The main thrust of this contribution is to emphasise the role that can be played by the market in bringing down prices. Hence, relaxing planning controls can bring down the price of housing. EU policies such as the Common Agricultural Policy could be relaxed to bring down food prices. Environmental policies based on old technologies could be updated to bring down energy prices.

The IEA notes also that many policies being promoted by other participants in the debate would involve increased government intervention - raising the minimum wage, imposing controls on fuel prices etc. - and that these can be damaging. For sure.

But this is where the book arrives at its limits. In pursuing the free market agenda so aggressively, the IEA misses the primary cause of the problem, and hence misses also the primary remedies. That primary cause is the loss of productivity. Until productivity growth is restored, the cost of living will remain a problem - regardless of how much tinkering (be it liberation or intervention) is done at the edges. That requires investment - barely mentioned in the IEA report. We have, over the last few months, seen the first signs of renewed business investment; sustaining this through maintaining low interest rates and facilitating access to finance has to be the top policy priority.

Thursday, September 11, 2014

On 18 September the people of Scotland will decide in a referendum whether they want independence from the UK. A majority in favour of independence have a profound impact on labour markets on both sides of the border.

Evaluating exactly what these implications might be is not straightforward. While we will know the outcome of the referendum at the end of next week, we will not know what party would form the first government in an independent Scotland. Neither do we know which party will win next year's election in the UK. Moreover, the status of either country as members of the EU remains uncertain, with the Conservative party in the UK promising a referendum on this in 2017.

There remains uncertainty about the currency that would be adopted by an independent Scotland. While Alex Salmond has expressed a preference for a currency union in which both UK and Scottish interests determine monetary policy, the UK government has ruled out the loss of sovreignty over its own currency that this would imply. Of course, Scotland could still use the pound, but with interest rates being determined by the Bank of England its room for manoeuvre in economic policy would be limited. Indeed the extent to which it could be considered an independent country would be limited - in much the same way that the independence of European countries could be questioned when a leadership of 'technocrats' was installed during the worst of the debt crisis.

The Scottish government's white paper on independence includes a proposal to set a 'competitive' corporation tax as a means of attracting business to Scotland (p.120). Corporation tax is, of course, one piece in a large jigsaw of factors that contribute a firm's location decision - and a cynic might suggest that many multinational firms already act creatively in order to make sure that they minimise their tax liabilities. But if Scotland were to succeed in this aim of attracting business from the UK, we should not be so naive as to suppose that the UK government would be passive.

The white paper suggests reducing corporation tax to 3 percentage points below the UK rate. This ignores the fact that the UK too could change its policies - and businesses already knows that. It seems that there would in truth be little benefit to either government of a race to the bottom - the outcome in terms of which jobs go where would be unchanged, but tax revenues for both governments would diminish. Yet such a race might be an inevitable consequence of independence.

The white paper (p.237) also envisages the removal of the nuclear facilties at Faslane. The likely outcome of this would be a transfer of those facilities to the UK, involving a transfer also of employment. Jobs in related industries could follow, and there would be knock-on 'multiplier' effects.

The uncertainty over currency has already led to banks stating that they have contingency plans that involve moving to the UK from Scotland in the event of a 'yes' vote in the referendum. This is motivated by their need of access to a central bank that can serve as a lender of last resort. The loss of jobs in the financial sector in Scotland would again have knock-on effects.

On the UK side of the border, some regions might benefit from jobs that are lost to Scotland, particularly in banking and defence. If the Scottish government manages to strengthen its business-friendly credentials - and if the UK government does not respond - then some firms could move in the opposite direction, and this would have adverse implications for the employment position in some UK regions. Of course, anyone who loses their job as a consequence of these events - on either side of the border - could become available for other employment. They would need to be flexible, willing to retrain, and willing perhaps to take a pay cut to regain employment. The long term effects on individual workers could therefore outlive short term turbulence - it could seriously disrupt careers.

There is nothing sacrosanct about current national boundaries. There is no reason why Scotland could not be a successful independent country. But to benefit from that independence, it would need its own currency and all the degrees of freedom in economic policy-making that that would imply. It would also need to ensure that its government fostered an economic climate that was seen by businesses as favourable, so that firms could with confidence create jobs in Scotland. If it could do so without setting off a tax race to the bottom with the UK, then it could succeed. The half-baked nature of current plans do not, however, provide much encouragement.