In this guest post, Toby Nangle, the Global Co-Head of Multi Asset & Head of Asset Allocation, EMEA at Columbia Threadneedle, wonders whether rising wages caused by changes in demography could ultimately end the productivity slump.
Weak productivity growth has puzzled economists and policymakers but it doesn’t seem to have hurt investors: the period 2009-2016 might even be called “the Goldilocks Slump”. Ample slack in job markets ensured little bargaining power for workers, whilst central banks battled deflationary impulses with a combination of low (or negative) rates and asset purchases. The net effect has been falling real yields and tight risk premiums.
But productivity growth does matter. And we are nearing the point where its absence will be of overwhelming importance to financial market investors. Read more
HSBC is out with a note this morning warning about the consequences of the UK voting to leave the European Union.
It’s a 50-page, hefty bit of research spanning FX, economics, banks, real estate, gilts and equities. The headline figures: Read more
The UK has outperformed almost every rich country at creating jobs since the crisis, yet has done poorly at boosting living standards. Real take-home pay, while on the rise, is still substantially below the 2007 peak:
Unlike every other country in the rich world, Britain’s job market has been on fire for years, with employment and hours worked soaring at the fastest rate in decades:
If Jeremy Corbyn becomes leader of the UK Labour Party, one positive consequence will be the ensuing discussion of the monetary policy transmission mechanism.
It all started with his presentation on “The Economy in 2020” given on July 22:
The ‘rebalancing’ I have talked about here today means rebalancing away from finance towards the high-growth, sustainable sectors of the future. How do we do this? One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects: Quantitative easing for people instead of banks. Richard Murphy has been one of many economists making that case.
That passage seems to have been mostly ignored until August 3, when Chris Leslie, Labour’s shadow chancellor, attacked the policy, which in turn led to a detailed response from the aforementioned Richard Murphy (see also here and here), at which point what seems like the bulk of the British economics commentariat erupted. Just search the internet for “Corbynomics” if you don’t believe us. Read more
If you accept the standard textbook view of central banking — roughly, that employment near its “natural” level coupled with accelerating wage growth will lead to faster consumer price inflation, whose pace should be kept moderate — UK domestic conditions would seem to merit significantly higher interest rates.
The number of hours worked is booming at the fastest rate in decades:
Nominal private sector wage growth has recently accelerated to its fastest pace since the crisis even as price inflation has slowed to a crawl: Read more
British real economic output is only about 3 per cent higher than at the beginning of 2008. Yet labour input (hours worked adjusted for schooling and experience) is up around 11 per cent and the real value of the UK’s net capital stock has grown about 6 per cent.
The implication, as it can’t be measured directly, is underlying productivity has plunged in the last seven years. One of the most important concepts in macroeconomics, the decline matters for living standards and anyone hoping to improve them, yet explaining the UK experience remains a puzzle without a solution. Read more
Remember how inflation in the UK hit zero in February and this is all part of the government’s plan, apparently?
Well, Bank of America Merrill Lynch would like to draw your attention to a chart of consumer price indices in the UK, US and Eurozone since February 2008 (rebased).
One of these things, the bank’s rates and currencies team suggests, is not like the other: Read more
In celebration of the Bank of England’s One Bank Research conference, the Bank has, for the first time, produced information on its balance sheet going back more than three centuries “in a user-friendly spreadsheet form and as continuous time series.”
There’s lots to digest in there, but one thing we’d like to focus on is the size of the balance sheet relative to the UK economy. Bond-buying initiated under the Bank’s quantitative easing programme boosted the relative size of the Old Lady’s holdings by a large amount relative to the recent past. Relative to the full history, however, QE looks somewhat less exceptional: Read more
The UK did worse than almost every other developed economy from 2007-2012 but has been among the best performers since the start of 2013. Slightly out-of-date chart via the Reserve Bank of Australia:
What gives? According to a new analysis from Goldman, this demonstrates both the damage to the UK’s banking system after the crisis and the subsequent power of credit easing, specifically the magic that was worked on bank credit spreads after Mario Draghi uttered his priestly incantation in July, 2012: Read more
For years, the UK has added more jobs than almost any other country in the rich world even as real incomes plunged thanks to underwhelming productivity growth. Now it seems that a new burden has been added: disinflation. Prices are just 0.5 per cent higher than a year ago.
The BBC’s Robert Peston worries that this “is not much of a buffer against deflation” and that “if we became accustomed to prices falling as the new norm, we would spend less – in that delaying would always make our money go further. And then the economy would sclerotic and stagnant, and desperately difficult to reinvigorate.” Given that UK household debt is already staggeringly high relative to income and projected to rise much further, that could pose serious problems down the road. Read more
The Bank of England’s latest quarterly bulletin, released on Monday, contains an interesting article on “the potential impact of higher interest rates on the household sector.”
A few interesting tidbits:
–Raising rates by 2 percentage points would redistribute income “from higher-income to lower-income households”
–But would probably lead to a reduction in spending, since 60 per cent of borrowers would spend less and only 10 per cent of savers would spend more. The BoE estimates that the net effect of a 1 percentage point increase in the Bank Rate would be a reduction “aggregate spending by around 0.5 per cent via a redistribution of income from borrowers to savers.” A 2 percentage point increase would lower spending by 1 per cent. (The total impact on spending could be a bit different, however, since monetary policy works in other ways besides redistributing income from net savers to net borrowers.)
–On the whole, though, UK households are (slightly) less sensitive to increases in interest rates than they were a few years ago Read more
The UK’s current account deficit is at its widest level in decades, and over the previous four posts we’ve managed to narrow down the cause to falling earnings from UK direct investments abroad since 2011.
In our final post, we will do our best to figure out which specific investments are to blame, as well as what all of this means for people who actually live and work in the UK.
Our main limitation is that the most detailed data end in 2012, although we can use that information to make some reasonable inferences about what has happened since then.
About half of the decline in the UK’s earnings from foreign direct investment from 2011 to 2012 came from the “information and communication” sector, which includes publishing, media, software, data processing, and telecoms. Almost all of that decline can be attributed to the European Union. So what happened? Read more
In the first three parts of our investigation into the UK’s rapidly widening current account deficit, we managed to narrow down the problem to the declining earnings of UK companies on their foreign direct investments, even though the amount of actual cash repatriated from abroad is actually much higher now than it was in 2007:
In other words, UK companies are reinvesting much less of their foreign profits back into additional FDI. In this post, we will attempt to address why this happened and what it means. Read more
In the first part of our series on the UK’s balance of payments we identified the net investment income paid to foreigners as the culprit behind the widening current account deficit. In part two, we mapped this onto the changing asset allocations of UK investors abroad and foreign investors in the UK. Now we’ll focus on the changes in the actual income payments by economic sector and the type of asset.
It’s important to stress that cross-border dividend and interest payments in and out of the UK are enormous, so while the difference between the money sent to foreigners and the income from abroad is big relative to the size of the UK economy, it is relatively small compared to the total flows:
In the first part of our investigation into the UK’s balance of payments, we attributed the sharp deterioration of the current account since 2011 to the increasingly poor returns that UK investors have been earning on their foreign assets relative to the returns that foreign investors have been getting from their holdings of UK assets.
We also looked at how the size of the UK’s gross international investment position has changed and which sectors of the economy have been growing and shrinking their balance sheets. Read more
The UK is more dependent on foreign capital than at any point since the end of WWII. Unusually, the trade deficit isn’t to blame:
(Source: Office for National Statistics, 4-quarter rolling average) Read more
In the latest from Andrew Smithers, our eye was drawn to a line in his gloomy state of the world summary, that the UK economy is driven by an unsustainable fall in household savings.
What it turns out we had not been paying attention to lately is the fact that the UK household saving rate is the worst among the developed economies apart from Japan, where a dip into negative territory has some investors nervously (gleefully?) eyeing the sovereign debt load. Read more
Who thinks UK base rates will go higher this year? We ask because Economics Editor Chris Giles made precisely that bold prediction in the FT’s collection of holiday prophesy.
Will the Bank of England raise interest rates in 2014?
Yes. It is fashionable to think this is an absurd question to which the answer is obviously no. But not for the first time, fashion sucks. The British economy is growing at an annualised rate of more than 3 per cent, unemployment is rapidly falling towards the Bank of England’s 7 per cent threshold when it considers rate rises and inflation has been above the central bank’s 2 per cent target for all of the past four years. The reason the BoE would keep rates on hold at 0.5 per cent amid a fast expansion is a rapid improvement in productivity, allowing recovery to coexist with an absence of inflationary pressure.
In contrast I am an optimist. I believe in free markets.
–George Osborne, Conservative party conference 2013
Details TBC, of course. But UK banks will be lending mortgages with a five per cent deposit in the very near future, under the rushed-forward Help to Buy 2 scheme.
And that means the UK government will be guaranteeing them — not the borrower — the next 15 per cent of mortgage value. Hence the fee paid by lenders for the guarantee (90bps for a 95 per cent loan to value, less for lower LTVs, apparently). Read more
The UK economy definitely expanded in the second quarter, by 0.7 per cent, the Office for National Statistics has confirmed.
Phew, recovery on track, although as the FT notes, household consumption was slightly weaker than previously thought, a 0.3 per cent gain rather than 0.4 per cent. Read more
First — GDP or unemployment as the slack indicator in forward guidance about low rates?
More on why the Bank of England chose unemployment (the 7 per cent threshold, not seen being reached until 2016), from the July/August minutes of the MPC: Read more
To the untrained eye, this might look like the usual buzzword-soup from the European Commission (home of “growth-friendly fiscal consolidation”): Read more
There’s loads of serious-minded UK Budget news & analysis on FT.com already, so…
Another update by NIESR of its monthly UK GDP projections… another prediction of flatlining growth, now extending into the first two months of 2013.
Breaking: deputy prime minister Nick Clegg has hit soundbite pay dirt.
In Tuesday’s FT he is quoted as saying that the Funding for Lending Scheme, whereby financial institutions get cheap loans from the Bank of England to boost credit to the wider economy, should be “put on steroids”.
(This is getting to be a genre.)
Robert Chote, head of the Office for Budget Responsibility – the UK’s independent fiscal watchdog – writes to David Cameron about this speech… Read more
Getting a favourable leader in the Economist is pretty Establishment, surely.
At the very least, it’s interesting that the red-top weekly has managed to endorse and explain a fairly specific nominal GDP target for the Bank of England. Read more