The jobs blood­bath that never worked out

The Sunday Telegraph - Money & Business - - Business - LIAM HALLIGAN Fol­low Liam on Twit­ter @liamhal­li­gan

Wages across the UK are 2.8pc up on a year ago, ahead of in­fla­tion. Unem­ploy­ment is at a 42-year low. The PMI man­u­fac­tur­ing in­dex reg­is­tered 54.0 in July, with read­ings above 50 in­di­cat­ing growth – its 24th suc­ces­sive month of ex­pan­sion since the June 2016 ref­er­en­dum on EU mem­ber­ship.

Back then, a jobs blood­bath was widely pre­dicted if the UK voted for Brexit. HM Trea­sury pointed to an “im­me­di­ate and pro­found eco­nomic shock” af­ter any such vote.

De­spite that, em­ploy­ment has bal­looned over the last two years, mainly in full-time jobs – di­rectly con­tra­dict­ing the Trea­sury’s ir­re­spon­si­bly po­lit­i­cal fore­cast. And now we’ve just learnt UK growth rose to a rea­son­ably healthy 0.4pc dur­ing the sec­ond quarter, up from 0.2pc at the start of 2018, when ac­tiv­ity was hit by snow­storms. We of­ten read that, since the Brexit vote, the Bri­tish econ­omy has lagged other ad­vanced na­tions, lan­guish­ing “at the bot­tom of the G7 growth league”. That’s not ac­tu­ally true. UK GDP ex­panded 1.8pc in 2016, ahead of the US, France and Canada, among oth­ers. Last year, growth was 1.7pc – still bet­ter than Ja­pan and Italy, both in the G7 the last time I checked.

With France, Ger­many and the broader euro­zone slow­ing this year, UK growth is set to fall to 1.5pc in 2018, ac­cord­ing to the Bank of Eng­land, again ahead of Italy and Ja­pan. And there’s an im­por­tant pro­viso. Growth in both th­ese na­tions re­mains propped up by ul­tra-loose monetary pol­icy – in the form of on­go­ing quan­ti­ta­tive easing. The Euro­pean Cen­tral Bank (which cov­ers Italy, of course) and the Bank of Tokyo con­tinue to pump out the equiv­a­lent of tens of bil­lions of dol­lars each month. Yet, de­spite that, it looks like growth in Italy and Ja­pan will strug­gle to reach 1pc in 2018.

The Bank of Eng­land stopped QE years ago. And now, fi­nally, UK in­ter­est rates are on an up­ward trend. It was the right de­ci­sion to raise rates to 0.75pc ear­lier this month. As reg­u­lar read­ers will know, in my view such a move was long overdue. While ul­tra-low rates were jus­ti­fied in the im­me­di­ate af­ter­math of the 2008 fi­nan­cial cri­sis, monetary pol­icy has, across the western world, stayed too loose for far too long. As long as real in­ter­est rates are nega­tive – with nom­i­nal rates less than in­fla­tion, as they still are not just across the euro­zone but also the US and UK – that pe­nalises not only or­di­nary savers but also in­sti­tu­tional in­vestors.

Low bond yields, in turn, mean that to meet on­go­ing obli­ga­tions, ma­jor in­vestors are forced to chan­nel money into far riskier fi­nan­cial assets, stok­ing an­other boom/bust cy­cle.

Nega­tive real rates also squeeze banks’ profit mar­gins, mak­ing them even less will­ing to lend. Far from en­cour­ag­ing growth, that slows eco­nomic ac­tiv­ity. For years now, frothy fi­nan­cial mar­kets and a lack of bank credit have com­bined to stymie non-fi­nan­cial in­vest­ment in ma­chin­ery, con­struc­tion and other “or­di­nary” sec­tors. And, in gen­eral, the on­go­ing “weird­ness” of monetary pol­icy has also caused many firms to sit on the side­lines, hoard­ing cash, amid con­cerns that cen­tral bankers have taken us into un­charted ter­ri­tory,

with over-stoked as­set prices primed for col­lapse. It is a good thing that, de­spite such fi­nan­cial fragility, the US Fed­eral Re­serve has raised rates seven times since late 2015. The world’s largest econ­omy is on a clear path back to­wards some kind of monetary nor­mal­ity – and it’s en­cour­ag­ing the UK has fol­lowed.

What’s now needed is for the US, the euro­zone, Ja­pan and Bri­tain to agree on a co­or­di­nated rate rise. That would send a strong sig­nal that, a decade on, the 2008 disas­ter is truly be­hind us – but with­out the in­di­vid­ual cen­tral banks wor­ry­ing about their re­spec­tive cur­ren­cies ris­ing, so los­ing com­pet­i­tive­ness, as a re­sult of in­creas­ing rates alone.

I’m by no means com­pla­cent about the UK econ­omy. Yes, the lat­est growth num­ber is rea­son­able – and makes a non­sense of all that pre­ref­er­en­dum doom-mon­ger­ing. But the signs are the econ­omy could cool again over the next few months. The sec­ond quarter data shows the UK’S ser­vice sec­tor grew 0.5pc, with con­struc­tion up an en­cour­ag­ing 0.9pc. But over­all growth slowed from 0.3pc in May to just 0.1pc in June – with our piv­otal ser­vices sec­tor, ac­count­ing for around four-fifths of the econ­omy, look­ing weaker. And unofficial sur­vey data shows the PMI “com­pos­ite” in­dex, cov­er­ing the en­tire econ­omy, down from 55.0 in June to 53.8 last month.

As a Brex­i­teer, I be­lieve Bri­tain’s long-term growth tra­jec­tory is higher out­side the EU – al­low­ing us to trade more com­pet­i­tively with the rest of the world. I’ve al­ways ac­cepted, though, that Brexit-re­lated un­cer­tainty would im­pact short-term in­vest­ment. While that im­pact has so far been lim­ited, I fear it could soon rise as a re­sult not of Brexit it­self, but the quite as­ton­ish­ing ex­tent to which the Gov­ern­ment is bungling th­ese ne­go­ti­a­tions.

Back in Jan­uary 2017, Theresa May’s Lan­caster House speech dis­played ad­mirable clar­ity of thought. The UK would be leav­ing the sin­gle mar­ket and cus­toms union. And, the Prime Min­is­ter made clear, if the EU was too in­tran­si­gent to of­fer a de­cent free­trade agree­ment, we’d trade un­der World Trade Or­gan­i­sa­tion rules in­stead – an en­tirely rea­son­able out­come. Busi­ness lead­ers, in gen­eral, wel­comed that clar­ity, even those who voted Re­main. Now, May is in­stead pur­su­ing “half-in, half-out” fan­tasies”.

Min­is­ters are is­su­ing WTO scare sto­ries, rather than pro­vid­ing en­tirely jus­ti­fi­able as­sur­ances such ar­range­ments are man­age­able. Gov­ern­ment pol­icy now seems to be to make as big a mess of Brexit as pos­si­ble – a strat­egy that, in stark con­trast to the Lan­caster House ap­proach, is sow­ing max­i­mum un­cer­tainty. No one should be sur­prised at the re­sult­ing eco­nomic fall­out.

‘Gov­ern­ment pol­icy now seems to be to make as big a mess of Brexit as pos­si­ble’

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.