How are we really doing?

This post looks at the current state of the economy.  Although the data may seem to be a few months out of date, it is the latest available and indicates a difficulty for economic bodies such as the Bank of England who try to control the economy. Their task is made even more difficult because, for example, not only are the Labour Force Survey figures out of date, they also do not respond quickly to changes in the economy since employers often wait a few months before hiring or firing workers to see if changes they experience are permanent or temporary.

GDP growth slowed at the end of 2018 from 0.4% to 0.3% in the three months to the end of October. This was largely due to a 0.8% fall in the manufacturing sector, particularly the manufacture of vehicles and pharmaceuticals. Our productivity continues to disappoint having been almost flat for 10 years, and about 20% below what it would be if it had grown at the trend rate for the last ten years. Investment has fallen for the last nine months, unlike our G7 partners who have experienced double digit growth.

However, the labour market continued to do well between August and October with the number of people in work increasing to 32.48 million, 396,000 more than a year earlier. The employment rate (the proportion of people aged from 16 to 64 years in work) was 75.7%, higher than a year earlier (75.1%) and the joint-highest estimate since comparable estimates began in 1971 while the unemployment rate (unemployed people as a proportion of all employed and unemployed people) was 4.1% or 1.38 million people. As a result, the proportion of people inactive was approximately 21%, again the joint lowest since 1971.

Inflation, measured by the CPI, dropped to 2.1% in December, the lowest since January 2017 when it was 1.8%, caused by falling air fares and oil prices (causing falling petrol and diesel prices among other things). Employee average weekly earnings increased by 3.3% over the year, giving a real increase of 1.2%, a welcome change from recent years when the rate of inflation has exceeded the increase in earnings. However, over the year, poverty increased, with 14 million people (22% of the population) in relative poverty (defined as 60% of the median income after housing costs). This includes more than 4 million children, with more than half of the children in single parent families in poverty. Food bank use has increased by 13% in the last year.

The balance of payments current account deficit increased to £26.5 billion between July to September, 2018, which equated to 5% of GDP, the largest deficit recorded for two years in both value and percentage of GDP terms. Contributing to this was an increase in the deficit on trade in goods and services, as the service sector surplus fell, and an increase in the primary income deficit caused by an increased net outflow of profits from FDI in the UK. (Primary income is the net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers). The majority of the deficit was financed by foreigners purchasing UK shares and UK investors selling part of their overseas portfolios.

Finally – an apology to younger readers. The latest government figures have shown that the share of UK wealth held by those over 65 has grown to 36% of the total, averaging £1.1 million.  The proportion of over 65s who are millionaires increased from 7% in 2006 to 20% in 2016. This wealth is in the form of property, their pension funds, holdings of shares and other savings. The biggest losers were those in the 35 – 44 age group whose share has dropped from 15% to 10% (although the value of their wealth rose from £180,000 to £190,000. This is a major change over the last 20 years when 21% of pensioners were in poverty.

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UK household debt reaches peak

www.bbc.co.uk/news/business-46780279

Article of the week – Harjot M.

High levels of household debt pose a risk to the economy because any increase in interest rates could lead to a sudden collapse in consumption. Higher borrowing costs mean households have less discretionary income resulting in a fall in consumer spending. Aware of this risk, firms may consider cutting investment in the expectation of a fall in future demand. Consequently, aggregate demand decreases causing a fall in inflationary pressures, a decrease in economic growth and, potentially, an increase in demand-deficient unemployment.

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?

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.

A confusing week for economists

This week has seen a considerable amount of contradictory economic information. On the positive side, employment in Britain reached a record high in the three months to April, 2018, with an employment rate of 75.6%. Unemployment has remained at its current low of 4.2% and the inactivity rate, those people, such as students, of working age, but not in the labour force, is also at a record low. Retail sales grew by a record 4.1% in May

However the rate of increase in earnings, which we would expect to be high given the low unemployment figures (as suggested by the Phillips Curve), has dropped from 2.6% to 2.5%. In real terms, the rate of growth in real earnings was only 0.1%, implying that future consumption growth will be low.

Other disappointing news was an announcement from Land Rover that they are moving production of the Discovery from the UK to Slovakia and news that Poundland and House of Fraser have collapsed, putting thousands of jobs at risk. However even these news items are not clearcut. One of the reasons behind Land Rover’s actions is that, once production has moved out of the UK, the site will be used to produce new, more high-tech, more expensive hybrid and electric models and the decline in traditional retailing is happening as on-line purchases increase, creating delivery and warehouse jobs.

However possibly the most disappointing pieces of news were firstly the latest data on manufacturing output for April, showing the fastest fall for 6 years and secondly, the deterioration in the UK’s trade deficit which grew by £1.6bn to a deficit of £9.7bn, the worst monthly figure since October 2016.

Possibly the best way to evaluate the data is to look at what the markets thought and they were pessimistic, thinking that the weakness of the economy will make an interest rate rise less likely and therefore sterling fell in the foreign exchange markets.

TRADE WAR 2

It is rare to see two successive blog posts on the same topic but it is also rare for an economic issue to receive the attention which President Trump’s proposed tariffs on steel and aluminium have attracted. Since the last post, Gary Cohn, his chief economic adviser, has resigned in protest at the decision, swaying the political balance in the White House from supporters of free trade towards protectionists, the EU has added to its list of potential targets for retaliation to include peanut butter, Bourbon, Florida orange juice and Harley Davidson motorcycles, and President Trump has continued to threaten retaliation against the retaliation, talking of tariffs against EU car exports. There have also been comments in the newspapers looking back to the 1930s and the protectionist measures imposed by the USA as a way of helping them escape the Great Depression, which served only to make the world situation worse.

The language of the debate (if that is what it can be called) continues to be confused. On the one hand President Trump argues that the tariffs are justified by WTO rules on the grounds of national security, a legitimate reason for imposing tariffs; the argument being that steel is an important product for the defence industries. However the main exporters of steel to the USA are the EU (the largest), Canada, Mexico and South Korea – hardly countries which are likely to go to war with the USA. China does not feature among the list of the major steel exporters to the USA. Furthermore some of the steel exported is highly specialised and not even manufactured in the USA.

While talking of national security as a justification, President Trump simultaneously continues to refer to the need to reduce the US balance of payments deficit, arguing that the deficit is “BAD” and the fault of foreign countries. Not only has the deficit occurred in part because foreign producers can produce more cheaply than US ones, it has also allowed the US to consume more than it produces and, subsequently, living standards have risen. Foreign trade is not a zero-sum game – both deficit and surplus countries benefit from greater trade.

So how has a country like the USA (and the UK) been able to run such a large and persistent deficit? This is because foreign governments, banks and individuals have been willing to hold dollars and US assets rather than change them back into their own currency. In the same way that a generous parent’s continual lending allows their children to spend more than they earn, the UK current account deficit might be partially financed by a financial account surplus caused by rich foreigners and businesses placing money earned from selling to the UK in UK banks or buying property in London, UK shares or government bonds. The same applies to the US, but is reinforced by the additional benefit the USA has which is that the dollar is so widely used for international trade and as a reserve currency.

Structural Unemployment in Australia

http://www.straitstimes.com/business/companies-markets/gm-to-close-last-holden-factory-ending-over-a-century-of-car

Structural unemployment has many causes; advances in technology can make some jobs redundant, offshoring production to low-cost producers means a lack of domestic demand for certain workers, and a permanent decline in demand can make some industries obsolete.

This article, courtesy of Ryan Z, is an illustration of the 2nd cause mentioned above. Australian’s, obviously, will still buy cars, but all will now be imported as domestic production ends. Car plant workers will find it difficult to find work because their skills are no longer in demand. They either move overseas to find work or retrain. The latter is far more likely but does come at a cost to the individual, through lost earnings, and the government, who are likely to partly fund re-training programmes. Building a flexible workforce can help reduce the level of structural unemployment, but this is far from easy.