Wednesday, April 22, 2009

Today's budget presents the Chancellor, Alistair Darling, with a tough challenge. The immediate prospects for the economy remain poor, and further stimulus would be welcome - so long as it can be concentrated in areas where the impact will be instantaneous. The recession, alongside the bailouts of the banks, is taking a toll on the public finances, though - tax revenues fall as the national income is reduced, while at the same time government spending on benefits increases. The scale of the hit on the public purse is such that the markets need reassurance that plans are in place for the government to repay what it is borrowing. The problem for the Chancellor is that the more reassurance he gives, the more likely people are to curtail their current spending in anticipation of future tax rises and spending cuts, and so the harder it will be to ensure a healthy recovery. That's a difficult tightrope to walk.

Things have been made easier for the Chancellor - but not necessarily for the country as a whole - by the failure of the G20 to agree a coordinated fiscal stimulus. It makes little sense for the UK to go it alone on this (any more than it has done so already). Much of any extra spending would likely spill out of the domestic economy. Hence, for example, the much mooted deal for the car industry - giving discounts on new cars to people who scrap old ones - would involve the British taxpayer in subsidising foreign car manufacturers; while the policy would no doubt help car dealers, parts manufacturers, and other firms in this country, it still does not look like smart policy. Proposals to stimulate construction (which does not involve such leakages out of the domestic economy) look like a better bet. But they need to be implemented quickly.

Friday, April 03, 2009

There are mixed signals about the state of the housing market this week, in reports from the Nationwide and Halifax. Nationwide shows a slight increase in house prices during March, while Halifax indicates that prices continued to fall.

A graph of the two series of statistics together appears to show that the downturn in house price inflation - as measured year on year - is bottoming out. But while the curve lies below zero, prices remain lower than at the same time last year.

Other recent statistics, released by the Bank of England, show that the number of mortgage approvals for house purchases increased quite sharply in February, albeit from horribly low levels. It is probably too early to talk of green shoots, but in the housing market the dead leaves are now falling less thickly.

Thursday, April 02, 2009

The G20 London summit has closed. The world leaders have achieved agreement on some, but not all, of the issues on the agenda.

The summit subscribed to sound principles for the reform of the banking system, broadening the scope of regulation to include the credit rating agencies and hedge funds, removing conflicts of interest, adopting international standards, and regulating bonuses. The leaders also committed to a common global approach to tackling the problem of toxic assets.

Over $1000 billion will be committed by the G20 to support international agencies such as the International Monetary Fund (IMF) and World Bank. In turn, the IMF will increase its allocation of Special Drawing Rights (SDRs) to its members by up to $250 billion. SDRs were created in the late 1960s as an alternative asset to gold and the US dollar. This is the first time an increased allocation of SDRs has been made since 1981, and it represents a means of increasing liquidity at an international level in much the same way as quantitative easing increases liquidity in a domestic economy. This relaxation by the IMF is likely to be particularly helpful to middle income countries that are big enough to have reserves at the IMF yet not so big that they have been able to put major quantitative easing programmes of their own in place.

The rhetoric is anti-protectionist. Good - protectionism would be hugely damaging to the efficiency of the global economy, and would throw into reverse the fantastic gains that have been made in alleviating poverty, particularly in the developing world, over the last 20 years. But, here at least, we know that the reality is diverging from the rhetoric - a recent VOX publication demonstrates that trade has collapsed dramatically in the wake of increased insidious protectionism. The rhetoric needs to win out, and the moves toward back-door protectionism strongly resisted. The summit resolved to support trade by injecting $250 billion of trade finance to be made available through the development banks, the World Bank, and other international agencies. It also resolved to ask the IMF to use the proceeds of gold sales to help the poorest countries.

There has been no agreement to co-ordinate a further fiscal stimulus, though there was an anodyne statement that the governments would 'do what it takes to restore global growth' and that a global stimulus of $5000 billion has already taken place. In the absence of this, any major further unilateral stimulus from the UK government is now unlikely, especially in the form of further tax cuts - the benefits of these would too readily leak out of the domestic economy. This news is a mixed blessing - the public finances are weak, but a coordinated stimulus would have been very welcome. There has been mention of investment in green projects, and this seems to be an area where countries will each work things out their own way. Let's wait and see what happens in the budget later this month.

The summit represents a political as well as an economic watershed in that some rapidly developing countries - notably China - will contribute more to international agencies, and so will gain considerably more voice. At the same time, the international agencies will increase their surveillance of the world economy.

Overall this represents a mixed outcome. The G20 will meet again later this year. By then it may be clearer where the world economy is headed, and we will know more about how desirable an extra fiscal stimulus might have been. The extent to which, amongst the countries that make up the G20, the response is as coordinated as the rhetoric will also, by then, be clearer.

Wednesday, April 01, 2009

The plot is straightforward. Britain and the US want a coordinated fiscal stimulus package. Meanwhile France and Germany want reform of the regulatory system for the financial sector. In truth no-one would disagree with them, but they are promoting the idea of regulation as a smokescreen that can hide their opposition to what they brand as the 'Anglo-Saxon' calls for further fiscal expansion.

The reality is that the world needs both regulatory reform and fiscal stimulus. The G20 summit in London is likely to provide the first, and we need to wait and see whether it will deliver on the second. Sarkozy and Merkel need to act tough to impress their domestic audiences, and it is not clear how closely matched their rhetoric will be to their actions. The hype is that the crisis started, and so needs to be solved, in countries other than their own. But they must surely know that, in an integrated world, blame is really irrelevant to the solution. And solution, now more than ever, requires co-ordinated response.