By Michael Baxter
Whether you believe the UK downturn is slowly ending does to an extent depend on what you believe caused its problems in the first place.
Let's look at the data, the theories, and the policies and ask: do they stack up?
First there’s data on employment. It has improved and that’s good, of course it is. But the quarter also saw a 24,000 rise in the number of part time workers. There are now 1.42 million people working part-time in the UK, which is the highest number ever recorded — and records go back to 1992. So maybe the improvement in employment is not quite as impressive as it seems.
The jump in industrial production in July, the highest in 25 years, is to be celebrated, but to an extent this occurred as producers made up for lost production in the previous month due to the Jubilee celebrations.
What about forecasts that real wages are set to rise in the UK? Here the news is more encouraging but it hinges on an 'if'.
The CEBR reckons average real disposable income for households will rise by 0.5 per cent in 2013. If it is right, then it will be the first such rise since 2009. Incidentally, average wages in the year to June increased by 1.5 per cent, according to stats out last week. In the year to June, inflation — as measured by the retail price index — was 3.2 per cent. So during the 12 months to the end of June the average worker became a lot worse off.
The CEBR also forecast that the households who will benefit the most from rises in real disposable income will be those on lower incomes. It reckons households whose disposable income is less than £26,000 will see their income rise by 1.5 per cent next year, after inflation. Middle income earning households will see real disposable income rise by 1 per cent. And those receiving more than £50,000 are expected to see a rise of 0.7 per cent.
So what assumption did the CEBR make to draw these predictions? Firstly, the improvement for lower incomes is down to falls in bonuses. (In the year to June bonus pay fell by 4.7 per cent.) Secondly, the CEBR assumed that inflation is set to fall. It may be right about that, but the question mark here relates to the price of food. Droughts in Russia and the US are hitting crop yields. At the same time, too much arable land is being used to grow bio-fuels, a policy that seems pretty mad. As for the euro area, ECB President Mario Draghi said he will do whatever it takes to save the euro, and now he has delivered — or tried to anyway. The ECB is engaging in its own form of quantitative easing. It is not outright QE, it is not creating new money; rather it is taking deposits from commercial banks to match its bond buying.
But Mario’s scheme is complicated. It is really aimed at Italy and Spain, but for either of these countries to take part, they must first ask the European Stability Mechanism for help. And they must sign a memorandum of understanding, relating to the austerity cuts they must make. In other words, in order to avail themselves of ECB money, Italy and Spain must agree to cuts.
"Don’t do it," says Nobel Laureate Joseph Stiglitz. In an interview with a Spanish paper he said that for Spain to sign on the dotted line, to ask the ESM for help and agree to Germany’s insistence on austerity, would be tantamount to economic suicide.
As for the US, something pretty interesting is happening across the pond. While some of the Christian fundamentalists that seem to be gaining more sway over the US political scene seem hell bent on enacting policies designed to pretty much terrify the rest of the world, amongst economists the QE debate has reached a new level. Professor Michael Woodford is a big cheese at Columbia University. He also happens to be the most respected academic on monetary economics in the world.
He reckons that when the Fed sets its monetary policy, it should take into account what’s called nominal US GDP — that is to say GDP measured in dollars, not adjusted for inflation. He is also a big fan of the Bank of England’s big idea: funding for lending, in which the central bank lends to banks if they agree to lend this money on to businesses and for mortgages.
But what all this really means is that the thinking at the Fed and among its advisors is slowly coming round to the view that that a little bit of inflation may be a good thing. Let’s face it, when you are in debt and inflation is quite high, and your income is rising with inflation, then the value of your debt relative to income is falling.
So that’s just a hint that the Fed is relaxing its inflation intentions. Bear in mind that the CEBR’s forecast for the UK economy is based on the assumption that inflation will fall, you can see how the whole thing is based on contradictory ideas.
But this still leaves the questions: is the UK on the mend?
Markets have overreacted to the latest news on QE. The UK has plenty of problems and challenges ahead, but yes, the outlook right now is more positive than a week ago.
The real snag is that neither central bankers nor indeed many governments are fixing the underlying problem. And to find out about that, read on.
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