Productivity and the election

Many of my recent posts have focused on productivity and the UK’s poor record when compared to other countries. As mentioned before, in general terms, UK workers produce in five days what workers in the USA, France, Germany and Italy produce in four. Although GDP growth has been good until recently (only 03% in the last quarter) and employment data in the UK is extremely positive with the employment rate standing at 74.6%, the highest since data was first collected in 1971, it has been accompanied by poor productivity growth with the increase in UK productivity since 2008 (the period immediately before the recession) being only 1.1%. This means that pay, and therefore living standards, will be lower in the UK than in more productive countries. The Bank of England’s latest Inflation Report suggests that incomes will rise 2% this year and inflation will rise to 2.8%, therefore implying a fall in real incomes.
There are many explanations for this. One explanation, which neatly sidesteps the problem, is that the main issue is not that the UK has low productivity, but is that we are simply poor at measuring it in the service sector, a key area in the UK economy. In manufacturing, it is relatively simple. One can count the number of goods produced; however, in services it is trickier particularly as the digital economy grows. 10 years ago, if I wanted directions, I would buy a map and eight years ago I bought a satnav and put it in the car (both are easy to measure). Today I  use my smartphone and these additional services are not easy to measure.
Nevertheless, most economists accept that there is a  productivity issue in the UK. Andy Haldane, chief economist at the Bank of England, suggests that poor management is a key factor, particularly in sectors where competition is low, allowing x-inefficiency to flourish. Lord Browne, former Chief Executive of BP, suggests three key factors. Firstly our service economy is not sufficiently professional compared with the USA; secondly there is a shortage of finance available in the UK for entrepreneurs wishing to start new businesses and, finally, he cites the anti-science culture in the UK where it is acceptable to profess an ignorance of mathematics and science. However almost all economists would agree that the UK’s low level of investment is a contributory factor and the uncertainty around Brexit and the election itself could cause businesses to delay their investment plans until the future is more certain. There is already anecdotal evidence of many financial institutions looking to open offices overseas.
There has been little focus specifically on the issue in the election. Labour plans to increase Corporation Tax to 26%. (It is currently 19% but due to fall to 17% over the next two years) which might impact on investment in the future but some of their spending plans might, in the long term, improve productivity. They also intend to renationalise the railways, water, the national grid and Royal Mail and borrow £250 billion to create a fund for infrastructure projects. The Conservative’s statement that “no (Brexit) deal is better than a bad deal” and a reluctance to remain in the Single Market has also caused anxiety among businesses, while a focus on grammar schools is not the best way to tackle Lord Brown’s concern over the UK educational system. However they do present themselves as a more pro-business, low tax government and hope that such sentiments will encourage investment. They are also committed to spend 2.4% of GDP on R & D by 2027 and to create a national productivity investment fund of £23 billion.
The IFS, an independent think tank focus on Labour’s additional infrastructure spending which would boost GDP in the near-term and would increase the productive capacity of the UK economy in the long term, although their increased labour market regulations such as a higher minimum wage would have the opposite effect as would four additional bank holidays and their higher rate of corporation tax. The Conservatives’ commitment to reduce net immigration would also weaken growth, although no specific timescale has been announced. Most disappointingly, the IFS suggest that there will be NO overall impact on productivity from either party. It is difficult to take into account the impact of Labour’s plans to take significant parts of the economy back into public ownership, not least because of the time which such measures would need to come into effect.

Roll on Thursday!

UN’s ban on child labour is a ‘damaging mistake’ | World news | The Guardian

Academics say policy ignores benefits and reflects western prejudice

Source: UN’s ban on child labour is a ‘damaging mistake’ | World news | The Guardian

Interesting piece ‘criticising’ a ban on child labour. It is somewhat difficult to immediately think of the merits of children missing school to work, but this article does produce a cogent argument. One benefit sees employers setting up schools for child employees who may otherwise not been able to pay school fees. Worth a read, if nothing but to provide an alternative perspective to a moral dilemma.

BREXIT- more questions than answers

Over the next two months there will be increasing discussion about whether we will be better off in or out of the EU. Some of this will focus on the political aspects, for example the potential gains in sovereignty and our ability to gain greater control of our borders  versus our loss of influence were we to leave the EU. However the purpose of this article is to focus on the economic arguments.

In theory the case for and against leaving the EU should be an ideal opportunity to apply cost-benefit analysis, weighing up the monetary costs of leaving and comparing them with the monetary benefits and then seeing which are greater. However, in practice, this will not be easy to do. Even our contribution to the EU is not clear with the Leave Campaign focussing on the £18.3bn we paid in 2014/15 (which sounds a lot) while the Remain Campaign concentrate on the net contribution which is about £9bn, which, when divided by the population, works out at less than 40p per day (which sounds very little). There is little consensus on the overall cost or benefit of being a member. The National Institute for Economic & Social Research suggested, in 2004 that membership of the EU contributed about 2% to GDP, the CBI is suggesting that each household benefits by £3,000 per year while the  Institute of Directors thinks it costs us 1.75% of GDP to belong.

Even assuming that we could agree on the amount of our net contribution to the EU, we are not going to be able to quantify the costs and benefits we will face if we leave. Crucial to this figure will be the type of trade deal we are able to negotiate if we leave. Will the EU be keen to encourage trade with us and therefore allow us to negotiate a favourable deal or will they be keener to discourage others from leaving and therefore impose significant tariffs on UK goods entering the EU? Possibly a more important question, given that non-tariff barriers are of increasing importance,is whether or not we will be able to gain easy access for our services, particularly financial services, if we leave the EU? It is true that we run a deficit with the EU but we cannot infer from this that we will be able to negotiate  a favourable deal. Almost half our exports go to the EU while only about 7% of theirs come to us, therefore a favourable deal is far more important to us than them.

Furthermore,  the deal we eventually agree will involve us making a financial contribution to the EU as Norway and Switzerland do. How much will this be and how many of the regulations we currently have to meet will we need if we leave and how much will it cost us to do so?

Another key question is what sort of trade deals we will be able to agree with non-EU countries? We would have less influence negotiating individually than we would as part of the EU given that the EU market is almost five times as large as the Uk’s.

[An unbiased analysis of the various claims and a good source of data is thr Channel 4 Factcheck (http://blogs.channel4.com/factcheck/tag/eu)%5D

India 1 China 0?

Does the economic rise of India make it the country to watch instead of China?

There has been much talk of the BRICs [Brizil, Russia, India and China] and then the  MINTs [Mexico, Indonesia, Nigeria and Turkey] –  newly-industrialised countries which were going to be instrumental in driving the world economy. Of these, Russia and Brazil have suffered from slow growth and falling commodity prices and the MINTs also seem to have faded from the economic horizon and so only China and India remain.

Last month China’s growth fell and India’s GDP growth rate overtook it. Previously China had consistently outpaced India so that China’s average income per head which was approximately equal to India’s in the 1970s is now four times as high. Although the change in relative growth rates is currently more to do with a slowdown in China than an increase in India’s growth, the future is bright for the latter country. China is currently facing up to the need to look after a rapidly aging population while India has a much younger population and so will not face the burden of dealing with an aging population for some time.

Long Term Growth Prospects

As oil prices continue to fall, stock markets collapse and the world economic recovery falters, it is worth thinking occasionally about what is in store over the next thirty years rather than the next thirty months.

Some economists suggest that continuous, rapid world economic growth is a thing of the past since we will never again experience the waves of technological change which boosted growth over the last 150 years. In the late 19th and early 20th centuries life changed out of all recognition. The basic tasks of living, for example collecting water and washing clothes took much effort; speed and travel were totally different – journeys considered normal today, such as travelling from London to Birmingham or from London to New York were major expeditions. Communication  relied largely on the delivery of mail. It is difficult for us to understand how the gradual spread throughout the population of things today considered commonplace, such as the telephone, railways,  washing machines and the motor car transformed everyday living in developed countries.

Recently there has been concern that the world is not going to get the same positive external shocks from technology to boost economic growth that it has previously experienced. Some believe that information technology will provide the stimulus while others suggest that such things as driverless cars will provide less of a stimulus than the original invention of the car itself. To quote Peter Thiel, a major venture capitalist “We wanted flying cars but instead we got 140 characters”.

Possibly we should not be worrying about the long and focus on ensuring that the world does not head into another major recession. As Keynes said “In the long run, we are all dead.”

What has happened in the UK economy recently?

GDP 3rd quarter growth dropped to 0.5%, largely due to a weak construction sector.

Private sector wages are growing at their fastest rate for 13 years at approximately 3.5% in real terms in the three months to August. However this is partly due to the very low inflation we have experienced in recent months.

The unemployment rate has dropped from 5.5% to 5.4% in the three months to August, the lowest since Spring 2008 and deflation has returned with the September rate being -0.1%.

Oil demand is predicted to fall still further, suggesting prices will remain low throughout 2016 according to the International Energy Agency.

China and the UK

There has been much attention given over to China in recent weeks, following the visit of President XI and the signing of many deals between China and the UK, not least in the energy sector where China (and France) will be financing and largely building a generation of nuclear power plants in the UK. The Times commented that it will not be long before a Midlands UK businessman or woman could breakfast on Chinese cereal (Weetabix), travel to London on a partly Chinese-financed railway (HS2) for a meeting in a Chinese office development (China has invested heavily in UK property), then make a call home on a Chinese mobile phone and arrange to take the family out to a Chinese owned pizza chain (PizzaExpress) to discuss the possible purchase of a Sunseeker Yacht, a company acquired by China in June 2013. It is also worth noting that Chinese tourists to the UK have doubled between 2009 and 2014 to 185,000 and there were 10,468 Chinese pupils and 87,895 students at UK  independent schools and  universities respectively in 2014. By 2030 the World Bank estimates that 30% of global investment will come from China, the year it is estimated that it will become the world’s largest economy.

Currently China provides 9% of our imports of goods but we are only their 7th biggest source of their imports and our 22nd largest export market for goods so there is considerable potential for growth there. Given the UK Government’s intention to move to a budget surplus and not to borrow even to invest, China provides a valuable source of finance for infrastructure investment.

However all is not well at home with recent Chinese growth figures falling to 6.9% in the third quarter, slightly below the target rate of 7%. There has been some doubt expressed about the validity of this figure and some economists suggest that a true figure would be significantly lower, not least because nominal growth was only 6.2% implying a 0.7% deflation in China over the period which some commentators suggest is inaccurate. An alternative measure looks at statistics for electricity, bank lending and rail cargo which suggests growth of between 3% – 4%. Such discrepancies put the UK’s recent fall in GDP growth to 0.5% into perspective.