George Osborne has today made a pledge to restore Britain to “full employment”. It is not at all surprising that the chancellor is setting his ambitions in terms of jobs because that is the one area of the UK economy that has performed extremely well over the past four years.
Economic growth has disappointed as the economy stagnated in 2011 and 2012. Living standards are well below 2010 levels even with the growth that has been achieved. Tax revenues are causing concern across government because they are persistently weak. And productivity – output per hour worked – has been close to the worst among advanced economies, raising big and difficult questions over Britain’s ability to sustain rises in living standards once unemployment has returned to normal levels.
But what does Mr Osborne think constitutes full employment? Here are some possibilities.
Forget George Osborne’s speech; ignore Ed Miliband’s response. Politics does not tell you anything about the nation’s finances. These charts do. The big message is that the public finances in Britain were terrible, are terrible and still need lots of work to repair the damage.
1. The deficit is still terrible
Borrowing is falling and public sector debt is not rising so fast, but these facts are small comforts. The big picture is that Britain is still borrowing hugely – more than almost any other advanced economy – and will do so for many years to come.
The good news from the red line is that the borrowing outlook is better than a year ago, but still falls short of expectations in the 2012 Budget.
This is a question to which I have not given a huge amount of thought, since all central banks have declared an intention to unwind QE eventually and have given the impression that any other policy would be disastrously inflationary.
The Bank of England has always had an eventual unwind as part of its declared policy. Normally the logic goes that without selling assets back to the private sector and destroying the money the central bank has created, the price will be a huge credit boom once the recovery is underway. In this world it’s best to get back to a more normal level of base money in the system to prevent the money supply growing out of control.
This logic is challenged by the BoE’s quarterly bulletin article on money creation in a modern economy. The article attacks those who think QE is automatically inflationary because it will lead to a ballooning supply of money chasing too few goods. Wrong, says the bank. Commercial banks lend because there is demand from households and companies, not because they have base money burning a hole in their pocket. And furthermore, the BoE adds, it can always control the demand for loans with monetary policy.
But if QE never can create inflation, the article raises a bigger question, which it fails to answer. Why bother to unwind QE?
In a talk delivered on 3 January, which the ever-so-slightly disorganised Andy Haldane has just got round to writing up, the Bank of England’s head of financial stability beautifully sets out the new central bank orthodoxy on the benefits of macro-prudential policy.
First, he clearly defines the term:
“In a nutshell, it means that policymakers have begun using prudential means to meet macro-economic ends.”
Next, he looks back at the crisis and asks the correct question: what would have been different had macro-prudential policy been fashionable (it was invented) rather than deeply unfashionable in central banking circles.
Once upon a time, the Bank of England’s Monetary Policy Committee sounded like a group of nine individuals with differing views. One of the most interesting aspects of Mark Carney’s arrival is the monotone now coming from the interest-rate setting committee.
It has been noticed: for example Fathom Consulting put this slide up at its recent monetary policy forum.
In a note last week, JP Morgan also made a rather damming comparison between the BoE’s reticence to acknowledge any discussion over a new form of guidance with the Federal Reserve’s minutes which demonstrated a healthy debate over the options. Allan Monks, the author of the note, concluded:
” In our view, the lack of discussion about the presentation and specifics of this new ‘framework’, or the consideration of any alternatives, does not suggest the committee as a whole is strongly invested in it. While Governor Carney may suggest policy-setting has undergone another innovation, the rest of the MPC has merely acquiesced and views the changes through a different lens.”
The question seems absurd. John Rentoul of the Sunday Independent would be tempted to add it immediately to his list of journalistic questions to which the answer is “no”. I think the answer is obviously “no”.
But the Treasury and the Information Commissioner believe anyone revealing details of the Bank of England’s forecasts is doing something that is:
“likely to have a destabilising effect on the financial markets and thus have a prejudicial effect on the economic interests of all or part of the UK”.
Hence, in the eyes of government, Mr Carney, who revealed details of the BoE forecasts on Wednesday, is something of a traitor. At least that was the view of the Treasury last year.
At the World Economic Forum in Davos, Mark Carney got to speak briefly at the main debate on the global economy. Asked about the news on forward guidance he talked about it coming to the end of its “first phase”. He said:
In terms of exit, I am not signalling an exit on UK monetary policy, just to be clear. Our first phase of forward guidance with a 7 per cent threshold of unemployment rate is approaching – we don’t know exactly when – the achievement of that threshold. We will assess the overall conditions in the labour market; more broadly the supply capacity of the economy, just as we’ve said all along that we would do at that point and set policy appropriately.
Headlines are headlines. British unemployment plummeted from 7.4 per cent between August and October to 7.1 per cent between September and November. This puts it 0.1 percentage points away from the point the Bank of England said it would start considering raising interest rates. It is a big story but there has to be a question whether the unemployment rate is a false friend to the BoE. Could it be suggesting strength in the labour market and a drop in slack that other labour market measures do not show.
Luckily, when the BoE introduced guidance, it published a pentagon diagram of other labour market indicators. It is inserted below and each point shows the same degree of slack, pretty much, (1 standard deviation from normal levels). I call it the BoE’s presumptive pentagon. It was presumptive because it was suspiciously regular (rarely things show such a consistent message in economic data) and it presumed unemployment would behave similarly to other indicators. The time has come to find out.
On Wednesday, the Office for National Statistics for the first time published regional growth figures for the UK. The obvious question that popped into my mind was to compare the Scottish growth with that published by the Scottish government.
I produced the following chart and wrote what looked like a cracking story because the ONS measure showed little over half the growth of the Scottish Government data, raising questions over the strength of Scotland’s economy.
A wealth of data was published by the Office for National Statistics today, as officials try to clear the decks before Christmas. In chart form, here is a condensed version of the inflation statistics, producer price figures and house price statistics for November.
1. Inflation is getting close to the 2 per cent target