Economic prospects for 2018: New Weather and the FT survey

Each year the Financial Times newspaper investigates the UK’s upcoming economic prospects with a survey of analysts. New Weather took part. For most the projection is ‘gloomy’. But, these are our responses to their questions on everything from growth to Brexit, consumer spending, wages, monetary policy and productivity. There is much to concern, including the prospect of ‘dragflation’…

 

1. Economic prospects: how fast do you think the UK economy will grow in 2018 and how will this compare to other countries? 

The question implies that the UK’s rate of GDP growth is an effective shorthand for the wider success of the economy. In fact it measures only the quantity, not quality of economic activity. GDP excludes many social and environmental costs, and includes defensive expenditures on things such as poor health, crime and pollution, which are not measures of success. That this remains our principal, default economic indicator belies decades of critique about its unhelpfulness and powers of misdirection.

At the global aggregate level the economy has already breached several key environmental thresholds, such as with climate change. That means that a burden of proof to demonstrate the viability of further GDP growth, particularly for the economies of wealthy OECD countries, rests on its advocates. If growth is to be pursued, then the key questions are, according to a recently published set of Theses for the reform of economics, ‘growth of what, why, for whom, for how long, and how much is enough?’ It may seem esoteric to some, especially with the pressing distractions of Brexit, but looking back a decade or more hence from now, I believe the most important question for us to answer will be judged to have been: what rate of growth, at what rate of decarbonisation, is compatible with the UK’s role in meeting the targets of the Paris Climate Accord?

That said, the UK economy probably will see low-to-moderate growth. It will benefit from the sigh of relief that business has breathed at the prospect of Britain staying in the Customs Union and the Single Market for the transition period, and possibly beyond. It will however be hampered in comparison to the rate of the rest of Europe, partly because all the focus of the business, enterprise and trade departments will be on Brexit, rather than looking, for instance, at the urgent development of our modern, low carbon industry and enterprise, or at the training of young people for the tomorrow’s green collar economy and the development of resilient and vibrant, small and independent, local and regional enterprises.

 

2. Brexit: compared to what you thought 12 months ago about the UK’s long-term economic prospects outside the EU, are you now more optimistic or more pessimistic than you were?

There are books to be written about the psychopathology of the anti-European sentiment exerting influence over negotiations, as it seems to be about something other than it claims to be. Why rail against remote unaccountable powers in Brussels, but welcome them in ratings agencies and financial markets? Why complain of European bureaucracy, then trigger the UK’s largest bureaucratic folly of modern times in Brexit?

With details daily emerging of what does, and doesn’t, lie behind the government’s handling, shift’s occur not simply on the scale of optimism and pessimism, but credulity and disbelief. Charities applying for small, short-term grants engage in greater due diligence than the government appears to have done in committing the country to large scale, long-term fundamental economic re-engineering. David Davis’s admission of there being no economic impact assessments made for leaving the EU steps into territory that is surreal. It is stranger still that government spokespeople are treated with deference and respect at odds with their shambolic performance, by a mainstream media either browbeaten or punch-drunk by bluster.

If it is possible to take and hold political office with such disregard for even rudimentary competencies as impact assessment, there is only one basis upon which to be more optimistic. That is that the conversation in the UK will turn back to our democratic option to change our minds, and choose to remain part of Europe. It is worth repeating that even before recent displays of extraordinary political incompetence, the vote upon which the whole process is based was only advisory, marginally won in a campaign fed glaring untruths, and quickly regretted. So far, Brussels has been kind to the UK, which is a cause for some mild positivity provided the kindness continues. But the revelation that the Government is prepared to be so easily bullied by 35 Parliamentary Brexiteers reveals their level of weakness and is cause for continuing anxiety. The sheer ideological fervour of the few who would have the UK to leave the EU as quickly as possible, and without a care for the resulting economic and political harm, was less obvious a year ago.

 

3. Outlook for consumers: in 2017, consumers’ finances were squeezed by rapidly rising prices. Will 2018 be an easier year for UK households and what are the implications for consumer spending?

With a depression in average pay continuing for the foreseeable future, compared to pre-financial crisis, and the Brexit effect pushing up key prices for households, there’s no scope in 2018 for households having more disposable income to play with. Given that there are also rising levels of household debt, what the country faces is not so much stagflation, but an economy weighed down by too much low-paid, insecure employment and rising prices, a sort of ‘dragflation’.

Debt-fuelled rising consumer spending would, though, be no basis for a viable recovery. And, to wish simply for a generic increase in consumption would be like just wishing for ‘more weather.’ What matters is the kind of economic weather, or activity, and where it happens. With real unemployment in some former industrial regions of the UK closer to 10 percent, there’s a need for economic and industrial strategy to help such areas thrive in a modern, low carbon world, and take advantages of its opportunities.  The great collective challenge is to find ways of increasing useful and ecologically realistic economic activity – which means the demand for and consumption of goods and services which can displace other more damaging consumption patterns, reducing aggregate material use and environmental impact. The opportunity is there to identify pioneering transition hotspots, and rebuild local economies around new fundamentals such as community renewable energy, the circular economy of goods and services, a social housing renaissance and new low carbon infrastructure including transport.

Some of the factors making consumers’ lives difficult are to do with Government policy. For all the talk of making affordable homes available, the benefits of schemes have been grabbed by Persimmon-style predatory rent-taking. Housing has been allowed to be a playground for opportunistic profiteering; while the recent Budget failed effectively to lift the restrictions on local authorities that prevent them borrowing to build, so consumers are paying increasing sums for housing which skews the rest of their budgets. Inside Housing magazine recently evidence that four out of 10 council homes sold under right to buy are now owned by private landlords with tenants paying double the rent they would if their home was owned by local authorities. Unsurprisingly a London Renters’ Union has formed recently. In addition the equality gap is widening, with no Government plan to narrow it, which feeds unhappiness and anger and is not a stable basis from which an economy can be re-shaped.

 

4. Wages: with unemployment at a 40-year low, how much of a pay rise will British workers get in 2018?

As the ONS pointed out in autumn, despite unemployment being at the lowest level since 1975, real wages fell in the previous year by 0.4%, and average earnings were no higher than they were in 2006, in spite of the economy having grown. This sits uncomfortably alongside egregious, continuing examples executive hyper-pay, like the Persimmon debacle over its CEO’s £100m plus package, which appears to be classic rent seeking behaviour. If people find this perplexing, one reason for the failure of the economy to distribute its benefits more equally was highlighted by the IMF, which is the erosion of unions and the important role they play in combating inequality.

Another reason is that the employment figures create a misleadingly binary impression. It is not just a matter of being in a job or not, as the weakening of employer’s responsibilities through the use of zero hours contracts and faux freelance status has shown. That’s the context in which British workers ended-up putting in an estimated 2.1 billion hours of unpaid overtime worth £33.6 billion in free labour last year, around 5.3 million people gifting an average of 7.7 hours work a week. Properly remunerated the TUC estimates that to be worth an extra £6,301 in pay. Across a range of public sector professions, from teacher, to paramedic and crown prosecutor, the TUC also estimates that public sector workers have seen real terms pay cuts of between £2.4k & £4.4k since 2010.

Yet another reason is that the employment figures themselves probably seriously underestimate unemployment. Research by Sheffield Hallam University calculated that in 2017 the real level of unemployment across Britain was nearer to 2.3 million, compared to just under 800,000 on the claimant count and 1.5 million on the ILO measure used by government. The most recent ONS figures for the three months to October 2017 also show the employment rate falling and the number of people in work on the official measure down by 56,000. What then, in the light of these factors, might push pay rises for British workers: stronger unions, an economic revival and competition for labour? None of these seem likely in 2018. The case to remain in Europe was often made on technocratic grounds, to do with markets and efficiency. The protection of workers’ rights and models in which the benefits of economic activity get more equally shared was, perhaps, foolishly overlooked and should be the focus of future campaigns.

 

5. Monetary policy: how far will the Bank of England raise interest rates next year? Do you think they should?

There’s a sense in which the November 2017’s rate rise of 0.25% may only have happened because to have left the rate static would have been seen as a vote of no confidence in the economy. However, its modesty, and the apparent rowing-back from expected levels of future rises had the opposite effect of instilling confidence, with Sterling weakening. In fairness the Bank faces a mess, inflation, suppressed wages, weak growth and productivity, high levels of household debt and the Brexit effect.

The problem remains that interest rates are, regardless, a dumb, ill-focused instrument, when what the country needs is the intelligent targeting of affordable credit where it is needed – irrigation as opposed to flooding a field. The industrial strategy is a start, but what’s needed is much larger scale public investment that pays for itself, in key areas like housing, renewable energy, energy efficiency and modern low carbon infrastructure. Not only is this ultimately self-financing, it helps make markets, and vitally, potentially in some cases where inconsistent government policy has nearly broken them, such as the solar power sector.

 

6. Productivity: will the UK experience a resurgence of productivity growth in 2018?

The UK’s weak productivity growth is reported as a general cause for concern, but strong productivity growth also creates problems that pass generally unreported. As an advanced industrialised economy the UK produces and consumes at a level which means its economy operates far beyond safe ecological thresholds – overreaching at least threefold according to the ecological footprint measure. So, if as an economy we start producing more per hour, per job or per worker, and everything else stays the same, we push deeper into the environmental red. To prevent that something has to give, but if so, what should it be: the social norm that governs the length of the working week, or the number of jobs and workers in the economy?

It’s an old question about how productivity gains should be reaped where they occur. Back in the 1930s Keynes imagined productivity gains would result in a 15 hour working week, with everyone left free with more time to perfect the ‘art of living’. He did not predict our current reality, a stressed precariat with many people working long hours in insecure employment and sometimes multiple jobs just to get by. In many professions like teaching, health, care and a range of personal services, it is the opposite of conventional productivity that determines the quality of outcomes – more people doing fewer things and taking their time over it, not the opposite. Smaller class sizes, one-to-one care these conversely are the routes to quality and optimal outcomes in many areas. Producing more ‘stuff’ with fewer people answers few problems of the modern economy. So, I think there needs to be a more thoughtful debate about what constitutes optimum productivity, against a range of social and environmental measures, and how we should share out the benefits of any gains that are made. Improvements depend on workers being valued and therefore committed to their employment- and on research and development. You can’t opine about productivity without looking at what happens to the proceeds of the workers labour. There is little incentive if any gains generated go straight to dividend holders with no loyalty to the firms they own shares in.

 

(This material was first published on www.ft.com on 2 January 2018 behind a paywall)