The end of the era of low interest rates?

On Thursday 2^nd November, the Bank of England increased interest rates. Although the increase was not large (from 0.25% to 0.5%), possibly it marks the end of an era. It was the first increase since 2007 and follows the cut in rates in 2009 from 4.5% to 0.5% after the collapse of Lehman Brothers. The rate was further cut in 2016 to 0.5% following the Brexit vote.

Traditionally the rate rise should benefit savers and make it more expensive for borrowers, particularly those with mortgages. However the UK economy has changed in the ten years since rates were last increased. Banks have been far slower to reward savers  than to punish borrowers when rates rise so savers should not get too excited by the rise in interest rates. More importantly, the number of homeowners with variable rate mortgages has fallen significantly, with The Times estimating that only 10% of households will be affected by the rate rise. This is partly because of the shift to fixed rate mortgages, which now account for 60% of mortgages, the increase in renting and the repayment of mortgages among older households.

Secondly, although in percentage terms the rise is large, in absolute terms it is relatively small and, for a family with a £250,000 variable rate mortgage, they will currently be paying approximately £1,125 per month and their payments will rise about 2.25% or £25 per month. This will reduce discretionary income and consequently consumption is likely to be slightly reduced. There are however two more significant effects. Those borrowing via  credit cards or taking out loans for large purchases such as cars or furniture, will see borrowing costs rise and this could deter future consumption. Another issue is that people currently with very high borrowing, particularly those on low incomes, might find it increasingly difficult to repay the interest on their existing borrowing, with an impact on bankruptcies. Most important is likely to be the psychological impact of the rate increase since a signal has been sent out that the era of ultra-low interest rates is coming to an end.

The rate increase is not unexpected, having been forecast in the press for some time. The recent rise in inflation to 3% made it more likely. However it is worth assessing the decision  in more detail. Normally interest rates increase as inflation rises in order to reduce inflationary pressures in the economy and keep inflation within the 1% – 3% band set for the Bank of England by the Government. According to the traditional Phillips Curve idea, rises in inflation are likely to occur simultaneously with falls in unemployment as increases in aggregate demand in an economy work simultaneously to increase prices and reduce unemployment as firms attempt to hire more workers to increase output, thereby putting an upward pressure on wages which then feeds into higher inflation. One could therefore easily argue that, at many times, an increase in interest rates is a sign of a strong economy experiencing rapid growth.

The current situation is slightly different. The increase in UK inflation can be partly explained by the fall in the value of sterling following the Brexit vote and this will drop out of the CPI index over the next few months. Secondly, although unemployment is at a record low at 4.3%, there has not been the rise in earnings which, in the past, we would have expected to accompany the strength of the labour market, thirdly there has been a slow-down in the UK’s rate of growth and finally there is still considerable uncertainty in the economy about the outcome of the Brexit negotiations which is affecting confidence among businesses. So why the rise in rates?

One explanation for the rise in interest rates comes from Ed Conway, the Economics Editor of Sky News who suggests that the UK’s ability to grow without inflation has fallen in recent years because of our poor productivity growth. Whereas in the past we might have been able to sustain growth of 2 – 2.5% without inflation, he thinks the maximum figure for non-inflationary growth might now be 1.5%. Therefore, without compensating action, inflation is likely to increase.

 

The WTO & Brexit

The World Trade Organisation has not featured  frequently in UK newspapers since its foundation in 1994. However since the Brexit vote, there has been increased interest in its role in regulating world trade  since, if no agreement is reached, the UK might be falling back on WTO trade rules following departure from the EU. Its aim, when it replaced its predecessor, the General Agreement on Tariffs and Trade (GATT), was to act as a forum for negotiations to reduce tariff barriers,  resolve trade disputes between members and provide technical assistance for developing countries.

GATT was established after the Second World War to ensure that there was no return to the protectionism which  took place in the 1930s as countries tried to protect their economies from the effects of the Great Depression. The WTO replaced GATT because of  developments in international trade since the Second World War, namely the rise of intra-firm trade where a company manufactures components in one country, assembles in a second and sells in a third, increased globalisation and the rise of trade blocs, such as the  EU, and NAFTA. It can authorise sanctions if a country breaks its rules. For example, in 2015 it ruled that the USA had acted illegally in insisting that all beef and pork sold in the USA should have the country of origin labelled. Canada, which sells much meat in the USA, applied to the WTO to impose retaliatory tariffs which will hit many different parts of the US economy in order to persuade the USA to reverse its requirement.

As well as regulating international trade, the WTO attempts to promote free trade since it believes that freer trade provides benefits in the form of greater choice and lower prices, stimulates economic growth, raises incomes and promotes world peace. It does this  via a series of meetings (or rounds) lasting many years, the latest being the Doha Round, which started in 2001, lapsed at the end of July, 2008 as trade fell due to recession, and has now been revived. But its success in reaching agreement is limited and has moved towards agreements covering specific products e.g. removing tariffs on high-end semi conductors rather than wide-ranging agreements which have been difficult to reach.

Anyone wishing to join must agree to accept all its rules, particularly the  ‘Most Favoured Nation’ agreement whereby countries  must apply the same tariff to similar goods, irrespective of the exporting country, unless there is a free trade agreement between the importing and exporting countries. Thus if we leave the EU without an agreement, the EU will apply the same 10% tariff on UK car exports into the EU as it does to those coming in from Malaysia.

Another concern is that WTO rules do not reduce regulatory barriers. At present, because of the Single Market, a UK car manufacturer can sell products as easily in Rome as Romford. This will cease if there is no agreement with the EU and therefore we would expect our lorries to be stopped when entering the EU and inspected, in the same way that British goods entering  Japan are currently examined. This has the potential to hinder  trade as lorries are inspected and goods checked to ensure that they meet EU standards. This might not seem a major problem but exporters fear that these delays will be significant, delaying drivers and lorries and therefore increasing costs.

A third concern is that WTO rules do not currently provide as much freedom for trade in services as they do for trade in goods. At present, for example, UK banks provide services for individuals, businesses and other banks across the EU without needing to duplicate all of their physical locations overseas. Leaving the EU will make trade in services, which make up 80% of the UK’s GDP, far more difficult and might require UK financial consultants, bankers, accountants, etc to  have more physical locations overseas and also to re-qualify in the countries they export to.

It is difficult to predict what the effects on our trade will be until the Brexit agreement is reached. As part of the EU, we currently benefit from free trade treaties between the EU and other countries and we do not know whether we will be able to negotiate to keep these agreements. Equally, or possibly more importantly, we do not know what tariff and non-tariff arrangements will be in place between ourselves and the EU when we leave. Will UK consumers lose out because of  higher priced imports  from the EU or will these be outweighed by new trade deals negotiated by the UK with non-EU countries and will UK businesses see exports rise because of these new agreements or fall because of less trade with the EU?

 

 

 

Technology and unemployment

For many years people have worried about the rise of the robots and artificial intelligence. Science fiction writers have envisaged situations where robots gradually gain more intelligence and power until they are able to take over the world and whichever other planets feature in the story. Less exciting, but more immediately relevant, economists and politicians have also concerned themselves with the impact of the robots on society and particularly on the demand for labour. During eras of major technological change, it was predicted that the rise, firstly of steam, then electricity and more recently the computer, would lead to massive unemployment. Keynes, writing before the Second World War, predicted that new technology would drastically reduce the working week and we would have to tackle the problem of how to occupy our time with a 25-hour working week. In 1979 Fiat produced a now-famous advert for their new Strada (https://www.youtube.com/watch?v=-fXV6KzhBbM ) under the slogan “handbuilt by robots” which showed the construction of the car in a spotless factory without humans, with everything done by robots.

A recent report, “The Future of Skills: Employment in 2030” by NESTA, an innovation charity, paints a relatively attractive future. They suggest that while 20% of the labour force is currently working in occupations which are likely to shrink, about 10% are in occupations that are likely to grow as a percentage of the workforce. Re-training will be necessary for the former, either to cope with the way their existing job has changed or to allow them to join the latter group. These industries include those working in teaching and education, hospitality, leisure, health care, and other jobs which require workers to deal with people, such as care for the elderly. Another group which will do well are those working in occupations which require higher-order cognitive skills such as psychologists. Those possessing creativity and communication and problem-solving skills will do well while those in jobs which can be more easily adapted to robots and artificial intelligence, such as those involving routine calculations and basic manufacturing skills will be lost. If you are seeking advice as to how to invest your portfolio, it is already possible to put all the necessary information such as your attitude to risk, how much you have available to invest and for how long and a computer algorithm will devise your optimal portfolio.

The Return of the UK’s Productivity Problem

Last week the ONS reported a fall of 0.1% in UK productivity over the three months from April to June. This follows a fall of 0.5% for the three months from January to March and an overall fall and a fall of 0.3% compared to last year. While the numbers are small, they should be compared both to historical data for productivity growth and to other countries. Historically, some commentators have suggested that if productivity had grown since the financial crash at the rate it was growing before, we would be 20% more productive than we are today. When looking at other countries, German workers produce 36% more per hour while the French and the Americans are 30% more productive. Ed Conway, writing in The Times last week, noted that there are only three regions in the UK out of 168 which have higher productivity than the German average. A recent paper by Richard Davies, Anna Valero and Sandra Bernick for The Centre for Economic Performance (http://cep.lse.ac.uk/pubs/download/special/cepsp34.pdf)  note that productivity varies significantly by area with mid Wales at the bottom and, at the top,

“there are three high-productivity hubs: the oil industry around Aberdeen, the area around Greater Manchester and a band of productivity in the South. Contrary to popular belief the high productivity of London does not spread into the South East but rather spreads west along the M4 towards commuter towns like Reading and Slough which have their own high productivity companies.” (Page 3)

They also identify key sectors:

“The highest productivity sectors—real estate, mining and utilities—are small employers and so play little role in aggregate performance. Of the high employment sectors that drive national productivity the leading sectors are finance, information and communications, construction and manufacturing. Professional, scientific and technical services vary within and across regions–this sector houses some very high productivity firms together with much weaker ones. However, it is important to consider high employment sectors with weak productivity, such as retail and wholesale trade, administrative services and accommodation and food services. Raising average productivity in these sectors could have a large aggregate effect due to their high employment shares.” Pages 3 and 4

While not as exciting as Brexit or the Tory leadership, low productivity is a significant issue. If we have lower productivity then our workers are not producing as much as those in other countries and will consequently receive lower wages. Furthermore firms profits will be lower, hence meaning less funding available for investment, hence lower productivity growth and we find ourselves in a downward spiral relative to our competitors. Hopefully the Chancellor will address the problem in his budget next month but, if not, we face a slow decline in UK living standards and relative prosperity compared to our European neighbours.

 

What’s going on in the UK economy?

Trying to understand what is going on in an economy can be difficult. Running the economy has been described as similar to trying to drive a car while only being able to look in the rear-view mirror. You know where you have been but cannot see what is ahead. Economic forecasters today probably look back to the period before the financial crash when the UK was in the NICE decade (non-inflationary, continuous expansion) as a golden period. Today life is more complex and one cannot help but feel sorry for the Chancellor busy preparing his November budget and the Monetary Policy Committee of the Bank of England when they meet in November and have to decide whether to increase interest rates.

On the one hand, implying  a rate rise is not yet needed, the Office for National Statistics has just announced that GDP growth has fallen from 1.8% for the first quarter of 2017 to 1.5% for the period April to June which is below expectations and the weakest figure for four years. This is partly down to a fall in services of 0.2% which comprise 80% of GDP inflation. Furthermore discretionary income (what you have left to spend after tax and spending on essential items such as food, energy and transport, has fallen and 60% of households are worse off than they were a year ago as a result of wages rising at 2.1% while inflation is currently 2.9%. Another piece of evidence is that a survey published over the weekend by the Nationwide  reported that house prices dropped in London by 0.6% between July and September compared with the same period last year. This is the first such fall for eight years. 

However the high rate of inflation combined with the fall in unemployment  to 4.3% would suggest it is now time  to reduce the level of aggregate demand by raising interest rates.

Just to make the whole picture more confusing , there is the danger of depressing demand at a time when the economy is fragile because of uncertainty regarding Brexit and one does not want to do anything to discourage business investment which is supposed to be weak because of low confidence. Yet business investment actually rose by 0.5% in the second quarter of 2017! Furthermore, although the current account deficit rose to £23.2bn in the second quarter from £22.3bn in the first quarter, exports of goods and services actually rose by 1.7% while imports increased by 0.4%. Finally, just when you might think you have taken account of all the main variables – what about oil prices which have a significant impact on inflation and discretionary income. OPEC’s decision to curb production is intended to keep prices high and, although this looked to be failing earlier in the year, the combination of hurricanes damaging US oil refineries and the OPEC production curbs have started to have an effect on fuel prices.

 

Good news for the Chancellor?

Friday’s papers contained news which might make life easier for the Chancellor when he prepares for his budget on 22^nd November. Government borrowing in August fell faster than expected, meaning that the Chancellor will have approximately £10bn more to spend on helping reduce student debt, boosting public sector salaries, spending on the NHS, improving our infrastructure, etc. At £5.7bn, the Government’s August deficit has fallen to its lowest level for a decade. The reason for the fall is twofold. VAT receipts have soared because of  high consumer spending while current government spending, particularly local authority spending, has fallen.

However all is not rosy. Firstly, when interest rates rise, which is likely to happen sooner rather than later, government debt interest payments will increase, as will interest paid on index-linked borrowing because of higher inflation rates (borrowing where the rate of interest is linked to the rate of inflation). Furthermore, there are certain commitments which have already been made, particularly with regard to public sector pay, which will necessitate higher government spending. If these factors are not to increase government borrowing then either taxes will  increase, other areas of government spending fall or the UK economy must grow sufficiently strongly to generate enough extra tax revenue.

Secondly Moody’s, one of the major ratings agencies, last week downgraded the UK’s credit rating from Aa1 (the top rating, sometimes referred to as triple A) to Aa2 on the grounds that leaving the European Union was creating economic uncertainty at a time when the UK’s debt reduction plans were in danger because of the decision to raise spending in certain areas. This follows a downgrading in 2016 by the other major agencies, Fitch and S&P. The downgrade might affect how much it will cost the government to borrow money, particularly on foreign financial markets. The Labour Party has called the downgrade a “hammer blow” to the economic credibility of the Conservatives.

Thirdly the stronger than expected level of consumer spending which boosted VAT receipts is unlikely to be sustainable as real incomes fall because of the low levels of wage increases combined with the higher levels of inflation. The forecast for the growth in retail sales compared to a year ago was 1.1% whereas the actual number was 2.4%, with last month showing particularly strong growth. There are many possible reasons for this. Possibly the weak pound caused more people stayed at home instead of going overseas for a holiday, possibly the falling unemployment had an effect and possibly the figures will reverse next month since they are extremely volatile.

Finally it is worth noting that the OECD (the Organisation for Economic Co-operation and Development, an organisation comprising the world’s major economies) forecasts that we will fall from being the second fastest growing  G7 economy to the second slowest as the other main economies improve and we do not.

If the UK economy is to flourish, an increase in the rate of growth, an improvement in productivity and a satisfactory agreement with the EU are all crucial.

Unemployment, inflation and the Phillips Curve

Recent data published last week on inflation and unemployment in the UK is causing excitement among economists – something rare among the practitioners of what Victorians called the “dismal science” after the gloomy predictions of Thomas Malthus.

Employment reached a record high of 75.3% and unemployment fell to 4.3%, a 42 year low, and almost half its 2011 peak of 8.5%. However, inflation rose, reaching 2.9% in August, up from 2.6% the previous month. Since wages rose only 2.1% in the quarter ending in July, real wages fell because the rate of inflation exceeded the rate of wage increases. This is unexpected since falling unemployment normally coincides with rising real wages as workers use the tightening labour market to obtain pay increases. Compared to the other 34 members of the OECD, only Greece, Mexico and Portugal have experienced weaker recoveries in wages than the UK.

There are two theoretical questions resulting from these figures. The first is whether we have yet reached the “natural rate” of unemployment (the rate at which inflation is stable) or whether there is scope in the economy for unemployment to fall even further without causing a significant rise in inflation. The Bank of England previously estimated the natural rate to be  5% and now estimates 4.5%. Yet wages are still not increasing as fast as before the financial crisis. Is 4% rate a better estimate?

The second, linked question is what has happened to the Phillips Curve. This was an important idea for economists and politicians since an article written by William Phillips, a Keynesian, in 1958. He suggested there was an inverse relationship between the rates of wage inflation and unemployment via the level of demand. Subsequent economists substituted price inflation for wage inflation and the idea of politicians facing a trade-off between inflation and unemployment was born. This lasted until the stagflation (stagnation and inflation) of the early 1970s when many developed economies simultaneously started to experience rising inflation and rising unemployment, something not possible with the original Phillips curve. As a result, economists such as Milton Friedman, argued that although the trade-off indicated by the Phillips Curve was valid in the short run, there was no long run trade off. He suggested that there are a number of short run Phillips Curves and a vertical long run Phillips Curve, which exists at the natural rate of unemployment – the rate of unemployment at which inflation is stable. Although one would experience lower unemployment and higher inflation in the short run if the government were to stimulate the economy, in the long run, as inflation eroded the effects of the stimulus and workers and businesses adapted to the higher rate of inflation, the economy would move back to the natural rate of unemployment but with a higher rate of inflation.

What we have today is a curve which seems flat. Unemployment has been falling but, although inflation has risen, it is still low (and largely explained away by the fall in the value of sterling following the referendum) and real wages are falling. Has the labour market changed significantly to finally kill off the Phillips Curve or is it that fear of the consequences of Brexit and economic uncertainty are allowing employers to recruit more staff without significantly raising wages?

Mini cheers for BMW

At the end of July there was positive news about the UK car industry. Production was 1.7 million vehicles, the highest since 1999, and  newspapers reported favourably on the decision by BMW to assemble the new electric mini at its Cowley plant, near Oxford, rather than in Germany or the Netherlands, when it goes into production in 2019.

Greg Clark, the Business Secretary, called this a “landmark decision” showing confidence in the Government’s intention to make Britain a key player in the production of the next generation of motor vehicles.

However it is worth examining this decision in more detail to see what it suggests about the UK economy. A key concept in the discussion of the gains from international trade is “comparative advantage” which relates to those goods and services in which a country has the greatest relative advantage in production over other countries. (In economic terms we are looking at focussing on the production of goods and services where a country has a lower opportunity cost than its trading partners).

Ideally, the UK would like to be involved in the high value-added aspects of the production process since this is where the most income is likely to be earned and hence workers’ pay, profits and living standards will increase. In car production this is in the development and production of such things as batteries and motors rather than the assembly of component parts into the finished product. The most important parts of the new Mini, the electric motor and battery, containing new technology, will be manufactured and assembled in Germany and then shipped to Oxford to be put in to the vehicles. While the assembly of the vehicles will ensure that jobs will remain in Britain, the greatest value-added is likely to occur in Germany since that is where the highly-skilled parts of the production process will occur.

Fifteen years ago James Dyson moved the manufacture of his vacuum cleaners to Malaysia because of the significantly lower labour costs while emphasising that the high value areas, such as research and development will remain in Britain. Similarly, Apple designs its products in the USA but the manufacture is outsourced to plants in China, Korea, Mongolia and Taiwan.

Is the BMW decision a sign that this is the way the UK economy is going?  Are we going to become a low-skilled assembly hub, trying to keep costs low in order to offset tariffs imposed on us by the EU? (With no deal with the EU, we could be facing tariffs of 10% on vehicles and 4.5% on parts). Alternatively do we look to the success of prestige British manufacturers such as Rolls Royce, Bentley and Jaguar which, although now foreign-owned, successfully manufacture high quality products in the UK?

 

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!

The UK Economy – how are we doing?

Since the Brexit vote ten months ago, there have been many reports about the state of the UK economy and its prospects for the future. In an ideal world, we could look at the recently-published data and decide how we are doing. Unfortunately, the picture is unclear with different data sets indicating different things.

On the positive side, unemployment has fallen to 4.7% and employment has risen to almost 75%, both numbers reaching impressive lows and highs respectively. What we would also expect to see simultaneously is an acceleration in wage increases as workers take advantage of a tighter labour market indicated by  low unemployment, high activity rates and employers reporting recruitment difficulties, with the effect magnified by an increasing number of migrant workers returning home because of the fall in their incomes when exchanged into their own currency due to the fall in sterling since June. However, money wages are rising at only 2.3%pa and, as inflation increases, real wages will fall. Possible explanations for the low average increase in wages are the 1% cap on public sector pay increases thereby reducing the average, a possible increase in retired workers returning to the labour force depressing wages and the increase in self-employment since the self-employed are not counted in the data.

Other positives for the economy are our growth rate, the reduction in government borrowing and improvement in the  balance of payments. Our annual GDP growth of 1.8% has been the second highest in the G7 behind only Germany at 1.9%. However there is concern that consumer spending, which has been an important contributor to the UK’s growth, is now slowing.  Further factors which might impact on consumer spending are the expected fall in real income, mentioned above,  and the slowdown in the housing market which, according to the Halifax, grew at its slowest rate for four years.  The housing market is important for an economy in terms of the wealth effect, its impact on consumer confidence and the effect it has on related markets, such as carpets, furniture and household appliances, which people buy when they move.

The slowdown in consumption growth, and therefore probably GDP growth, is such that the Bank of England is now thinking that the increase in interest rates which has been talked about for some time, is likely to be postponed from late 2018 until the middle of 2019. It will then be almost twelve years since the last increase in UK interest rates which took place in July 2007 when they were increased from 5.5% to 5.75%.

The Public Sector Borrowing Requirement (PSBR) has come in below expectations and is now back to levels experienced before the financial crisis. This is largely due to  income and corporation tax revenues being greater than predicted. However, if the economy slows down in the run-up to Brexit, tax revenues will fall and benefit payments increase, increasing the PSBR.

The current account deficit dropped from 5.3% to 2.3% of GDP in the last three months of 2016. Unfortunately this proved to be a temporary improvement and the deficit has widened again this year. This makes it clear that devaluation alone will not be sufficient to improve our balance of payments and significant structural changes will also be necessary to improve the attractiveness of UK products. (Consider Germany which has a current account surplus equivalent to 8.7% of GDP not because of cheap goods but because of high quality, well-designed products). FDI increased in the last quarter of 2016 but a worrying development are recent surveys which have found that the UK has fallen in attractiveness as an overseas country in which to set up compared to other countries.

On the positive side, we could be in Greece where unemployment is 23%, and average wages have fallen approximately 10%, income tax has been increased from 40% to 47%,  the retirement age has been increased from 60 to 67 and  pensions have been cut 14 times compared to 2009.