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It's the economy, stupid!

Ironic Satirical Illustration of a Retro Classic Comics Woman Being a Drama Queen

Leaving Brexit aside, what sort of state is our economy in? Anecdotally things look good, high employment, house prices outside the SE still rising (not saying this is good per se just sign of a buoyant economy), stock prices sustaining and, despite the plummeting pound, inflation low.  If Brexit was called off tomorrow there’d be a flood of investment. On the other hand borrowing (personal, business and govt) are at record rates and its hard to see what’s sustaining us, and we’ve pulled all the economic levers already (interest rates, QE). Am I being my normal pessimistic self or do others feel we’re facing a recession some time soon regardless of Brexit? I guess you could say nothing which happens domestically matters and it all depends on the continuing US ‘economic miracle’ and them avoiding further trade wars.

Written by James

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  1. That’s a reasonable assessment of the current state of affairs. The economy i sdoing surprisingly well but a hard Brexit would almost certainly trigger some short-term economic panic (currency collapse, housing market slump). However, I wouldn’t underestimate the value of the removal of uncertainty. You talk about a flood of investment resulting from the (vanishingly unlikely) cancellation of Brexit, but investment levels are likely to rise once we leave with or without a deal. It’s the uncertainty, and the apprehension that goes with it, that’s killing everyone.

    Beyond Brexit, the UK is subject to the same forces as our European neighbours. We are a trading nation and depend upon the two largest markets, US and China, for demand. Lately the former has being going rather well and the latter slowing somewhat worryingly, which is why the Trade War is so badly timed for the neutrals in the firing line of the Sino-US antipathy. Pretty much as you summed up in your final sentence.

    Recessions ultimately become inevitable when economic cycles hit their nadir. But there are confusing signals at the moment. Many observers are pointing to the inversion of the yield curve in US Treasuries (put simply, the point when interest rates turn down) which today indicates that the US economy may have reached the end of its cycle, but other indicators like soaring employment and growth, suggest otherwise. The confusion is likely due to the distorting effect of the GFC with the resultant negative interest rates in may quarters. Tune into the Fed this afternoon if you want to hear the words of the man who should know. Jay Powell is due to give his assessment of the US economy today and is widely expected to cut interest rates as an “insurance” against a slowing economy. Or as he will choose to phrase it “to keep the existing expansion going”.

    I would at the very least interpret such a decision as recognising the possibility of recession in the world’s leading economy. However, a re-invigoration of China before that transpires might stimulate global markets to avert that eventuality. In this sense, Trump is playing a dangerous game seeking to suppress Chinese exports.

    • This idea that a no-deal would end uncertainty is a complete myth. A myth designed to make the promise of a clean cut slowly but surely more palatable to the fed up public.

      It might feel now that a no-deal would end uncertainty, but the reality is that current uncertainty would just roll over into much bigger uncertainties. You won’t know what the trade relationship with the EU and the rest of the world will be, there’d be considerable uncertainties on the status of employees from the EU who are vital to the economy, swathes of european law will disappear overnight which will leave gaping holes everywhere, etc etc.

      No deal won’t be a clean cut, it will be a dirty mess which will take a decade to fix.

  2. I’d agree with both of you, and just throw Iran into the mix. Any escalation of hostilities with Iran could have a big impact an oil price and hence the world economy.

    • Now that the economics of oil have fundamentally shifted with the explosion of production in US shale, I do wonder to what extent aggression towards Iran is aimed at removing it from the world’s supply chains. To the benefit of US producers, of course. It’s hard to see how the oil price could stay at current levels for at least a couple of years in that eventuality.

  3. I’m not sure the economy is doing as well as the headline figures state.

    Employment figures are higher than historically for one principal reason – the government changed how we measure “Employed people” – so anyone doing an hour of paid work in a week is considered employed.

    Inflation – we are being protected from it by companies squeezing their margins, and manufactures reducing their package sizes (Toblerone anyone?). We are also seeing retialers start to feed inflation through (Tesco put up 1000 prices last week). So I think this is about to rise quite steeply – how can in not when our currency has devalued by 30% and we import more than we export?

    • > I’m not sure the economy is doing as well as the headline figures state.

      > Employment figures are higher than historically for one principal reason – the government changed how we measure “Employed people” – so anyone doing an hour of paid work in a week is considered employed.

      It’s always good to question official statistics and, if unreliable, we would see what you suspect in anaemic wage growth as a consequence of spare capacity. However, the opposite applies, with the latest figures showing wages rising at a galloping 3.4% a sure sign of an economy in a hurry!

      > Inflation – we are being protected from it by companies squeezing their margins, and manufactures reducing their package sizes (Toblerone anyone?). We are also seeing retialers start to feed inflation through (Tesco put up 1000 prices last week). So I think this is about to rise quite steeply – how can in not when our currency has devalued by 30% and we import more than we export?

      This is a real threat but you’re exaggerating the devaluation. GBP is only 5% down from its level nine months ago and roughly the same as its level three years ago. By which I don’t mean to ignore the original post referendum devaluation, just pointing out that most of the slump is already priced in and that recent moves ought not to be too serious. More to the point, it might all be resolved within a couple of months. GBP will be back at 1.40 (vs USD) if we strike a deal with the EU in October. If not, then inflation is the biggest implied risk (to the consumer) of a hard Brexit because GBP would certainly crash.

    • Where do you get this stuff from? The definition is the internationally agreed definition employed by the ILO (International Labout Organisation) since 1982. The government has collected it since 1992 and back calculated it to 1971 and it is broadly accepted that using another definition wouldn’t change the figures much. Employment is very high. Unemployment is very low.

      Inflation picked up a little immediately following the initial brexit related fall in sterling (peaked at 2.7%)and then sank bank down (to 1.8%). It will probably pick up again slightly, from very low levels, post the latest fall.

      Corporate profitability , as measured by quarterly net rate of return has generally been stable for the past two years (source ONS). The “shrinkflation” to which you refer in your Toblerone example is encapsulated in the published figures The ONS uses quality adjustment processes to account for any changes to a product’s weight, volume or size.

      In addition to the risks to the economy, the German economy is teetering and is in Trump’s sights when he’s roughed up China. That is not good for the EU or the UK.

  4. Recession here we come, after the Boris Bounce has waned and then impact of (no deal) Brexit is felt on the UK economy, sigh

    still, at least we will be in control of immigration……

  5. If, in a moment of uncharacteristic optimism, I decided to invest the money I’d set aside for stockpiling food and ammo ready for a no deal Brexit what would the hive mind of utterli suggest? Looks like I might have missed the boat with gold, China still seems to have significant growth if a little slower, US seem over valued, Bitcoin has come galloping back but I’ve had my fingers burnt already.

    • If you enjoy a roller-coaster, China. Valuations are historically low and there are several structural drivers providing a tailwind to an already energetic sector. But you’d do best not to look at your investments for a year at a time unless you enjoy volatility. Use an asset manager not an index fund.

      For a completely different perspective, Swiss family companies. A high proportion of listed companies in CH still have substantial levels of family ownership. Not surprisingly these are superb guardians of your hard-earned pennies. It’s one of the rare environments where the companies you invest in will look after your money as it it were theirs, because of course it is! Add the ever strengthening Swiss Franc in to the mix and you have an asset class that behaves like gold (ie it’s a haven currency), grows steadily and pays an annual dividend of approx 3%. Look for the Solactive Swiss family owned companies index https://www.solactive.com/wp-content/uploads/solactiveip/en/Factsheet_DE000SLA21T0.pdf 1. Sleep well but don’t expect to break the bank at Monte Carlo.

      All depends how much and what it is for.

  6. I am seeing a distinct levelling off in USA activity and am already starting to batten down the hatches for a recession. I am awaiting with interesting Caterpillars next Q sales results by markets and no of units sold. This is usually a realistic guide.

  7. Compared to before the Brexit referendum the pound has dropped about 17% – not all of that has been passed through in price rises so I think there is still some latent inflation from that, with companies hoping that a deal will, as you say, bring the pound back up again. If there is a further 10-15% drop from a no-deal Brexit and tariffs on top of that, I think we could be in for quite a big price shock.

    I don’t believe that what is holding back investment is uncertainty so much as fear of a hard, no-deal Brexit. Having industry’s worst fears come true won’t release anything like as much investment in the UK as avoiding them. Also the type of investment is likely to be different in the two scenarios – a no deal Brexit will force companies to invest in warehouses and stock to try to offset some of the damage to their logistics chains. Not only will that be less efficient than the current situation, it will squeeze out investment to improve productivity so there will be a double long-term hit on economic growth and hence incomes.

    Actually the world’s largest economic areas are the USA and the EU. The EU’s GDP is almost as big as the US and nearly 1.5x China at the moment. Given that the rest of the EU is on our doorstep and we have the advantage of being a member with full access to the single market whilst the other two are thousands of miles away and extremely protectionist, I don’t see them being as important to the UK in direct trade terms any time soon. Also, given their mutual hostility, I think it is going to be hard to do a trade deal with one that doesn’t close us out, to some degree, from the other. At present 46% of our exports are to the EU, 13.3% to the USA and 5.7% to China.

  8. To take a longer view than where we are in the current business cycle, there’s a strong argument that the economy has been showing serious structural weaknesses for more than a decade. The evidence for this is the collapse in productivity growth since the global financial crisis. Productivity – measured as GDP per hour worked – grew solidly and steadily at around 2.3% a year between 1970 (and probably before, but this is when the ONS data series starts) and 2008, but since the crisis it’s barely more than flatlined, and is down more than 20% on what you’d have expected if the pre-crisis trend had continued.

    This directly translates into flatlining average wages and weak overall growth – if GDP per hour worked is static, the only way GDP can grow is by the expansion of the working population and increasing working hours. Weak overall growth in turn translates into lower tax receipts and more difficulty reducing government deficits. After several decades in which people grew to expect to be a little bit better off every year, we’ve had a decade with very little wage growth and conspicuous cuts in public services, so it’s not surprising politics has turned sour.

    No-one seems able to agree why productivity has stopped growing – somehow the economy doesn’t seem to be able to benefit from technological progress in the way it has before. I think this is a problem throughout the developed world, but the UK is worse affected than anywhere else (with the exception of Italy).

    • It’s mixed. If you are an exporter then usually you are highly productive. Simply by the fact that you are competing globally drives you that way.

      The service sector which has grown ranges from care homes to hairdressers where perversely more people are required. Those with money are prepared to spend on those. In my local village the number of men’s hairdressers has increased from 1 to 8 for example.

      the gig delivery economy has grown exponentially , needing moredrivers to deliver parcels etc.

      so it’s a difficult one to judge.

      • I agree, the aggregate figure is an average over all sectors, some of which (especially those parts of manufacturing & knowledge intensive business services which operate in world markets) show very strong productivity growth, many of which show none at all. The problem is some combination of our high productivity growth sectors not performing as well as they did in the past, and there simply not being enough of them relative to the size of the economy as a whole.

    • > To take a longer view than where we are in the current business cycle, there’s a strong argument that the economy has been showing serious structural weaknesses for more than a decade. The evidence for this is the collapse in productivity growth since the global financial crisis. Productivity – measured as GDP per hour worked – grew solidly and steadily at around 2.3% a year between 1970 (and probably before, but this is when the ONS data series starts) and 2008, but since the crisis it’s barely more than flatlined, and is down more than 20% on what you’d have expected if the pre-crisis trend had continued.

      Very true. People often forget when looking at the growth figures, that most if not all of the growth in the UK since 2008 has been down to increased population and increased employment.

      > No-one seems able to agree why productivity has stopped growing – somehow the economy doesn’t seem to be able to benefit from technological progress in the way it has before. I think this is a problem throughout the developed world, but the UK is worse affected than anywhere else (with the exception of Italy).

      I’d say that technological progress hasn’t actually been that great. We just confuse novelty with progress. There is a lot of hype, for sure, but at the end of the day, the proof is in the pudding, and I haven’t seen much pudding.

      Moreover, in areas where undoubtedly technology has the potential to be transformative, businesses generally don’t have the means to take advantage of it because of skills shortages.

      • “Very true. People often forget when looking at the growth figures, that most if not all of the growth in the UK since 2008 has been down to increased population and increased employment.”

        Very true. Isn’t that down to skills mix, which in turn reflects educational priorities? Hence your final observation below. To be fair some significant strides are being made now to improve IT skills in schools and colleges. But the pay-off will take a while to come through.

        “I’d say that technological progress hasn’t actually been that great. We just confuse novelty with progress. There is a lot of hype, for sure, but at the end of the day, the proof is in the pudding, and I haven’t seen much pudding.”

        And for dessert:

        Health – data, devices and automation have transformed diagnosis, patient experience, drug R&D as well as creating whole new fields like genomics

        Manufacturing Industry – productivity is transformed by robotics and software automation

        Warehousing and Logistics – have you visited an Ocado or Amazon automated facility? Or even just ordered some plumbing from Screwfix?

        Banking – Applepay and PayPal have transformed payments worldwide while fintechs are doing more to pull Africans out of poverty than any previous innovation (giving them access to an old technology called markets and money).

      • Governments like to measure growth in terms of GDP, because that gives the best indication of how big tax receipts are likely to be and how sustainable the public debt level is. But for individuals the most relevant measure is the real (i.e. corrected for inflation) GDP per person, because for obvious reasons it is the per person measure that is connected to average levels of wages, pensions and living standards.

        In the ten years to 2007, GDP per capita grew by 27%, pretty much in line with the post-war average. In the decade to 2018, it grew by just 5%.

        • Does the fact that the decade to end 2018 starts in Jan 2009 provide any clue?

          Do forgive the facetious tone. I wasn’t suggesting you don’t already realise this. But we simply can’t discuss macro-economics without mentioning the GFC. It left devastating scars across Europe in particular. Even the US only recovered pre-crisis levels of growth in 2015. The effects can be seen today in the Brexit vote, in support for Trump and populists across the developed world, in the yellow vest riots, in persistent EU youth unemployment etc.

          In that sense, we’re looking less at a failure of productivity and more at the cost of paying for the remedies taken since the crisis. Economists are bemoaning the disappearance of the Philips curve which states that inflation, now generally very low, must accompany today’s full employment. The breakdown of this golden rule appears to offer a similar conundrum.

          • Yes, that fact had not completely passed me by.

            There is a view, held by for example Simon Wren-Lewis, that the post-GFC collapse in productivity growth was a result of a wrong macroeconomic response to the post-crisis recession (i.e. a premature introduction of austerity).

            What I think, for what it’s worth, is that the causes of the productivity slowdown predate the crisis. Two big sectors account for about a third of the slow-down – the rapid fall-off of North Sea oil production since its peak in 2000, and the loss of the (possibly illusory)productivity growth in the financial services industry post-crisis. There’s been a world slow-down in innovation in the pharmaceutical industry, which has affected the UK particularly badly because of its specialisation in that area and its relative failure (compared to the USA) to capitalise on biotechnology. And in general the R&D intensity of the UK economy has fallen substantially relative to its competitors, for a number of reasons, so perhaps it isn’t surprising that the UK’s innovative performance has slowed down.

  9. That’s NDP not GDP.

    Depending on what one is trying to demonstrate I would argue that one should look at the figures from the crisis nadir, which was 2009. If I am using my calculator right that gives growth of 10.9% to 2018. Still very weak, but unsurprisingly so, and France’s growth was 8.9%.

    • If you plot the Bank of England numbers since 1948 or so, what you see is that there is a very regular trend of growth at 2.3% per annum up to 2008. The GDP per head falls below trend during recessions – notably 1973, 1979, 1989 – and then after each recession, grows back faster to recover the trend.

      The post-2008 recession is unique in two ways – the fall in GDP per head is bigger than in previous recessions, but most importantly, and unlike previous post-war recessions, GDP per head does not grow back faster to recover the previous trend, but instead seems to settle down to a lower growth rate (around 1.2% on my fit).

      By 2020, the gap between the GDP per head that would have been expected by extrapolating the pre-crisis trend and the actual outturn looks like it’s going to be more than 20%. That’s absolutely unprecedented in post-war economic history.

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