UK Inflation

UK inflation, as measured by the CPI, fell in September to 2.4%. Not only was this below last month’s rate of 2.7%, it was also 0.2% below the expected rate of 2.6%. (Note we are talking of a fall in inflation, not a fall in prices).  Currency dealers believe that the effect of this was to make a further rise in interest unlikely and therefore there was a fall in demand for sterling, leading to a small fall in the value of sterling on the foreign exchange market.

However, it is not clear whether their reaction was correct. The day before these figures were issued, figures for average earnings in the three months to August were published by the Office for National Statistics, which showed that wages are rising at 3.1%, up from 2.9%, their highest rate since the financial crisis.  The rise in earnings is not surprising since it has been predicted ever since unemployment started to fall towards the current, record low level of 4% or 1.36 million.

The idea that inflation and unemployment are inversely related was expressed by Phillips using what became known as the “Phillips Curve”. Recently, economists have doubted it since unemployment has fallen without the previously-expected rise in earnings which would, in turn, feed through to prices via increased demand and higher costs for firms.

If the increase in real incomes continues, it is possible that higher spending and higher wage costs for businesses might increase inflation which, although falling, is still above the 2% target. It is also worth noting, firstly that uncertainty created by lack of progress in the Brexit talks might limit increases in consumption, secondly, that the increase in earnings is not likely to be shared by workers across the country and thirdly, unless the UK is able to increase its productivity, which is still low compared to our competitors, significant increases in earnings are likely to be limited.

The Population Crisis

According to popular legend, the science of economics was christened “the dismal science” by Thomas Carlyle following the publication by Thomas Malthus in 1798 of “An Essay on the Principle of Population”. In this he suggested that poverty and hunger would be a country’s natural state since increases in population would tend to outstrip increases in food supply. Fortunately he was proved wrong as birth rates fell and new techniques increased the supply of food and the science of economics moved on.

We are currently focused on short-term issues such as Brexit but it is worth taking a longer perspective following the publication of a report in ‘The Lancet’ which has highlighted falling fertility rates across the world between 1950 and 2017. The reasons behind the fall include better education and employment prospects for women, improved access to contraception, better maternal education for mothers and prospective mothers and improvements in infant mortality. As a result, 91 out of 195 countries have been identified as having a fertility rate below 2.05 – the minimum necessary for stable population growth. For example, in Britain over the period, the fertility rate fell from 2.2 to 1.7.

The implications of falling fertility rates in richer countries, partially masked by inward immigration, focus on the conflict between increased life expectancy, creating an increased number of elderly pensioners receiving benefits and increasingly needing expensive medical care, and a falling supply of workers who are paying taxes to support the elderly. These workers will therefore face a greater burden in terms of the taxes they will need to pay to support the elderly.

This is already significant in Japan where 28% of the population are over 65, the highest proportion in the world, compared with 18% in the UK and 22% in Germany. One offsetting feature in Japan is that people often work on beyond their retirement age – 3% of their labour force is over 80! Although it is not suggested that working until 80 becomes the norm, the retirement age in many countries is being increased as a result of increased life expectancy and, in the UK, it will reach 66 by October 2020 and 67 by 2028 for both men and women. This will reduce pension payments and increase tax revenue but, alone, is unlikely to be enough to prevent developed countries facing increasing budget deficits to finance care and benefits for the elderly.

As this crisis unfolds, the people who will suffer most are not the elderly but younger generations who will not only be working longer and paying higher taxes but will face student debt and higher house prices than experienced by their grandparents

Brexit – considering some of the issues.

UK politics is in a state of turmoil. There are Tory MPs making public pronouncements about possible budget measures the Chancellor might include in his budget, the DUP are threatening to vote against the budget – something which commentators say might bring about the end of Theresa May’s premiership – and at the moment, less than six months before we leave the EU,  it is extremely difficult to predict whether a Brexit deal will be agreed between the UK and the EU, then ratified by Parliament and whether there might be a second referendum or even another election. Significant elements of our post-Brexit existence – namely the Northern Ireland border issue, the nature of any agreement with the EU on trade in goods and services and the movement of labour between the UK and the EU are yet to be agreed.

The possibility of a “No Deal” Brexit is still with us. This would mean that goods and services exported from the UK to the EU would have the same tariffs as those coming in to the EU from any country with which the EU does not have a trade deal  under what are referred to as “WTO (World Trade Organisation) rules”. It is also not clear whether we would be able to persuade countries which currently have trade deals with the EU to create identical deals for us once we leave. Although EU tariffs average 4%, our food exports to the EU would face a 15% tariff and our car exports (70% of our car exports go to the EU) would face a 10% tariff. Equally worrying to many producers are the non-tariff barriers such as customs checks which they would face. At present, because we are in the Single Market which gives free movement of goods, services, labour and capital, goods produced in the UK can be sold in the EU without needing to meet any additional safety checks or face customs delays at the border. UK financial service companies can offer their services across the EU and they would lose their ability to do this from London, hence a number are setting up offices in the EU. Many manufacturers now operate “just-in-time” methods of production where components and raw materials are delivered very shortly before they are needed, therefore avoiding the necessity of having money tied up in holding stocks and having to build large warehouses. There has been talk of how, with a hard Brexit, (i.e. no free trade agreement) small delays at customs posts could cause havoc for manufacturers. The head of Jaguar Land Rover talked of how they produce 3,000 cars using 25 million parts a day and how even a small delay would cause havoc and BMW has announced that, in the event of no deal, it will move production of the Mini and new electric Mini to the Netherlands

The Northern Ireland issue is tricky because of the way it goes beyond economics and into the religious and political history of the island. Without some sort of border between the EU and the UK, it would be possible for goods to flow into Northern Ireland and then cross into Eire without paying tariffs. Therefore, unless we have a free trade agreement with the EU, there must be a customs border between ourselves and the EU. For England, Scotland and Wales, this will be a sea border and existing customs facilities at ports and airports will deal (possibly with difficulty) with incoming and outgoing trade as they do at present for trade with non-EU countries. However Northern Ireland and Eire would either require a land border or an agreement which essentially keeps Northern Ireland in the EU for the purposes of trade and creates an imaginary border between Northern Ireland and the mainland – i.e.  separating Northern Ireland from the mainland, something the Government has pledged not to do. Because of the troubled history of Northern Ireland, a hard border (with customs posts, customs officers and possibly police) is not likely to be politically acceptable. It is also difficult in practice because there are many small roads between the two countries which would be impossible to police. Some politicians have suggested that technology might be able to solve the problem, somehow tracking the goods between Eire and the UK and ensuring that the correct duty is levied and paid to the EU. However, the UK’s record on introducing complex IT systems is not good and it is unclear whether this would be ready by the end of the transitional period before we totally leave the EU.

On the positive side, it is possible that, before you read this,  a deal might have been agreed but …………

How are we doing?

Those of you who are Manchester United fans will have been pleased by their comeback against Newcastle over the weekend. However, in the excitement, you might have missed the news that former United star, David Beckham, and his wife Victoria have sold their Beverley Hills house (or mansion) which has six bedrooms and nine bathrooms, for $33million. They bought it eleven years ago for $22milion. At the other end of the scale, you might also have missed the report from the Social Metrics Commission, (SMC) putting forward a new measure of poverty for the UK.

Measuring the number of people in poverty is difficult. Some countries, such as the USA, focus on absolute poverty where an income is identified as the minimum needed to meet a family’s basic needs and those below it are deemed to be in poverty. A variant of this approach involves estimating a minimum standard above which people should live. An alternative, which has become the benchmark for the UK, is to focus on relative poverty (i.e. compared to other people) and consider those in poverty as living in households with incomes below 60% of the median.  However this is not straight-forward since there are two different ways of considering income (before and after housing costs are deducted) and the measure excludes assets people possess.

The SMC focusses strictly on measuring poverty, which, for them, is not having the resources available to meet current needs to be able to “engage adequately in a life regarded as the “norm” in society.”

To assess the number in poverty they consider the resources available to households, namely net income (net earnings from employment and self-employment, benefits and unearned net income (e.g. from rent or interest). They also include assets, such as savings which can be easily accessed and subtract any costs that the family must pay. These costs include debt repayment, housing costs (rent or mortgage payments), service charges in flats, building insurance, council tax, water rates, the community charge, childcare costs and additional costs faced by the disabled. Subtracting these costs gives an estimate of the resources available to a household. The next stage was to estimate the required level of resources needed to meet their benchmark and then set a poverty line at a threshold of 55% of the three-year median resources available measure.

Using this approach, their key findings, using 2016/17 data, were that:

  • 22% of the population (14.2 million) is living in a family considered to be in poverty. However 52% of people in lone-parent families (2.6 million) are in poverty.
  • Of those in poverty, 8.4 million are working-age adults; 4.5 million are children and 1.4 million are pension age adults.
  • The poverty rate for working-age adults is 21.6%; for children it is 32.6%; and for pension-age adults it is 11.4%. For pensioners, the rate has fallen from 20.8% in 2001 to 11.4% in 2017.
  • The majority (68.0%) of people living in workless families are in poverty, compared to 9.0% for people living in families where all adults work full time.
  • Those in poverty are not equally distributed across the country. Poverty rates in Scotland are lower and Welsh poverty rates are higher than in other UK countries. England has the highest child poverty rate and the overall poverty rate in London is more than 10% higher than in some other English regions.
  • The report also found that the number of people (2.5 million) above the threshold by 10% or less is almost identical to the number of people (2.7 million) below the threshold by 10% or less, suggesting that small changes in circumstances can either take people out of or put them into poverty. However 2/3 of those in poverty (12% of the total population) have been in persistent poverty, (being in poverty for two out of the last three years), suggesting that although they might be close to the benchmark, it is not easy to escape from poverty.

The SMC findings raise questions about the benefit system and how we deal with poverty.

Are we happy that over half of single parent families are in poverty?

Are we happy that 2/3 of those in families where no one is working are in poverty?

Are we happy that twice as many working age adults and three times as many children are classed as living in poverty compared to the percentage of pensioners in poverty?

UK Consumer Spending

Consumer spending is a major component of GDP and, to assist in its analysis, the Office for National Statistics has just produced an analysis of spending within regions across the UK. The data was collected using two surveys –  the Living Costs and Food Survey (also used as the basis of the Consumer Price Index) and the Annual Business Survey which records sales of businesses. The former looks at 5,000 households (not a particularly large number when broken down into regions) which are interviewed and keep a diary of their expenditure for a two-week period; the latter records retail sales of 80,000 businesses, so provides a larger sample, but suffers in accuracy because some sales go to businesses, not consumers.

The data is broken down into twelve categories which are in turn subdivided into narrower classifications. The twelve categories are food and soft drinks, alcohol and tobacco (and narcotics), clothing and footwear, household goods and services, housing, health, transport, communications, recreation and culture, education, restaurants and hotels, and a miscellaneous category covering items not included in previous sections. The data is also split down into nine English regions, Scotland, Northern Ireland and Wales.

The average spending per person in 2016 in the UK was £18,787 and, not surprisingly because of high incomes and high housing costs, London had the highest national expenditure (£24,545), while the lowest spending was in the West Midlands (£15,276) and Wales (£15,965). The region with the highest growth between 2015 and 2016 was the North East (8.1%) while the lowest growth was in Northern Ireland (- 0.4%), the only area to see a fall in spending per person in this period.

The survey also provided information about the levels of savings across the country with an average savings ratio (savings out of disposable income) of 6.9%. The ratio was highest in London (14.5%) while the lowest levels occurred in the South West, (1.5%).

The ONS looked at the breakdown of spending between the different categories. London stood out, with 42% of spending going on housing, compared to the UK average of 27%. As a result, it spent proportionately less in the other categories. Excluding London, there is relatively little variation between the regions although, proportionately, spending on tobacco in Northern Ireland is high, spending on food and clothing in Yorkshire is lower than in other regions and spending on recreation and culture in London is the lowest of all areas. The UK averages were: Food 10%, Alcohol and tobacco 4%; Clothing and footwear 5%; Housing 27%; Household goods and services 5%; Health 2%; Transport 13%; Communications 2%; Recreation and culture 10%; Education 1%; Restaurants and hotels 10%; Miscellaneous 13%.

Since 2014, among the sub-categories are drugs and prostitution and their inclusion has added about £10billion to the UK’s GDP. However, because these activities are traded in the shadow or hidden economy and the suppliers do not disclose their earnings to the tax authorities, the ONS has warned that the accuracy of these two categories is low. Nevertheless, it was still able to suggest that more is spent on prostitution than on gardening and DIY activities.

The impact of technology – The Fourth Industrial Revolution?

Amazon has opened a shop in Seattle with no checkouts and customers who do not pay on leaving. Instead, with the appropriate app to link the shopping to an Amazon account, all that is needed is to go round the store, put items in a bag and scanners and sensors do the rest. After leaving the store, payment is debited from your account. There are no queues and no cashiers.  So successful has it proved that more have been opened. It already has three in Seattle and one in Chicago and plans ten by the end of 2018, 50 by the end of 2019 and, according to some press reports, 3,000 such shops within three years.

Electric cars have also been in the news over the summer, with a focus on how they will reduce the environmental damage from driving. What has been less well-publicised is their possible impact on the demand for workers in the factories of the future. Electric cars are easier to manufacture than current ones because their mechanism has fewer moving parts than the internal combustion engine. This means both that fewer workers will be needed and those on the manufacturing process will be less skilled, making it easier to outsource manufacture to other countries. However new technology in the motor industry could, potentially, have an even greater impact with the arrival of driverless vehicles. Uber is already looking into driverless taxis and black cab and white van drivers could become a distant memory in the same way that stokers on railways are no longer with us and blacksmiths are a rarity.

A robot is being developed, based on technology used in the NASA Rover to explore Mars, which will drive itself round battery chicken sheds, measuring the chickens by sight and checking their temperatures. This machine is likely to be popular if farmers face a shortage of labour after Brexit since they will replace human workers.

There is considerable dispute over the numbers and what the future will look like. Some suggest traditional, full-time jobs will decline and there will be an increase in remote working but overall, there will  be little impact on the number of jobs. Others argue that the impact will be positive, with new technology creating more jobs than are lost. They suggest there will be a much greater need for workers to develop, build and maintain the new technology and there will be some areas such as the care industry (growing because of an ageing population) where more human workers are likely to be needed to care for patients. McKinsey, a worldwide consultancy form,  recently predicted that robots will have the same impact on the global economy as the development of the steam engine, adding 1.2%pa to global growth by 2030.

A report by the World Economic Forum (The Future of Jobs, 2018), one of the more optimistic forecasters, has suggested that 42% of the world’s jobs will be done by machines by 2022, up from 29% today. It also estimates that although 75 million jobs will be lost by 2022, 133 million new jobs will be generated, resulting in an additional 58 million jobs. They see losses in administration, clerical, manufacturing, construction, legal, and maintenance sectors but increased demand for those in data analysis, management, computing, architecture, engineering, sales, education and training. Different numbers come from PWC, a worldwide firm of accountants, who predicted in July that about 7 million jobs will be lost by 2020 because of technology but 7.2 million will be created. They see losses in manufacturing, transport and public administration while the increases will occur in healthcare, science and technology and education.

Others are less optimistic. During the summer, Andy Haldane, the Bank of England’s chief economist, made the news by predicting that the impact of artificial intelligence could be more disruptive than previous industrial revolutions and would lead to widespread job losses. He argued that previously machines had replaced labour doing manual tasks whereas increasingly machines, because of developments in AI, are undertaking tasks previously thought to be beyond them. Mr Carney, the Governor of the Bank of England, suggested that the latest industrial revolution would threaten 10% of jobs in the UK and, while some workers would benefit from being more productive and earning higher wages, others, losing their jobs,  would not easily be able to find employment providing a reasonable standard of living and would need to be able to access education and re-training throughout their lives.

However the big issue will be that the people filling the new jobs are unlikely to be those losing the old ones. How society copes with this will be a major issue for the future.

Government proposes energy drinks ban for children – BBC News

High levels of sugar and caffeine have been linked to obesity and other health issues.

Source: Government proposes energy drinks ban for children – BBC News

Energy drinks contain high levels of caffeine and sugar. A can of Monster, for example, includes 160mg of caffeine and 55g of sugar. Such high levels can create physical and mental health problems for consumers, these are known as ‘private costs’. However, excessive levels can also create spillover costs for third parties, for example, lower productivity at work or increased pressure on the NHS. These costs are known as external costs or ‘negative externalities’. The problem is that the market tends to ignore these costs resulting in an inefficient allocation of resources. In order to reduce consumption, the government has a series of options. Recently we have seen the introduction of a sugar tax, which should increases firms costs and lead to higher prices. However, the government has decided they need to take more direct action on energy drinks by using an alternative means of intervention, regulation. Approximately 68% of buyers of energy drinks in the EU are aged 10-18, so the UK ban is likely to have a significant effect on firms revenues and profits. One issue for the government is that, unlike a tax, which raises revenue, regulation needs enforcement, which creates administrative costs. There is also an alternative view, that consumers should be free to make their own choices. However, that, in my view, is a difficult case to make when you think about the relentless efforts of the marketing departments at Red Bull et al and the fact that so many of the buyers are children.