Ham­mond must not add to un­cer­tainty

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

Philip Ham­mond will de­liver his last pre-brexit Bud­get against the back­drop of a UK econ­omy show­ing con­sid­er­able re­silience. That’s what the eco­nomic facts on the ground demon­strate, de­spite the nar­ra­tive of neg­a­tiv­ity. Across the econ­omy, pay has been ris­ing faster than in­fla­tion for the past five months, with av­er­age real wage growth now at 3.1pc – a 10-year high. Com­pa­nies are hir­ing at record lev­els and un­em­ploy­ment is at a four-decade low, with un­skilled work­ers now fi­nally able to exert some bar­gain­ing lever­age over em­ploy­ers.

In­fla­tion eased in Septem­ber, the con­sumer price in­dex grow­ing 2.4pc dur­ing the year to last month, de­spite a 50pc oil price surge over the same pe­riod. Lower in­fla­tion­ary pres­sure should dis­cour­age the Bank of Eng­land from fur­ther in­ter­est rate rises, the last in­crease hav­ing come in Au­gust, when the “base rate” went up from 0.5pc to 0.75pc.

It’s of­ten said that “since the June 2016 Brexit vote, the British econ­omy has been at the bot­tom of the G7 growth league”. I heard the di­rec­tor of one of our lead­ing eco­nomic think tanks use ex­actly that phrase on the ra­dio only last week. Yet the UK grew by 1.8pc in 2016 – faster than the US, France and Canada, among oth­ers. Last year, our growth was 1.7pc – still bet­ter than Ja­pan and Italy, both in the G7 the last time I checked.

The UK cer­tainly suf­fered a slow growth start to 2018, hit by un­usu­ally cold weather. But it has since ex­panded at a steady, if un­spec­tac­u­lar pace. Growth hit 0.7pc dur­ing the three months from June to Au­gust – a two-year high. The In­ter­na­tional Mon­e­tary Fund pre­dicts a 1.4pc ex­pan­sion for 2018 as a whole – again, ahead of Ja­pan and Italy – but that’s prob­a­bly too pes­simistic.

Cer­tainly, the UK’S com­pos­ite PMI in­dex – an in­flu­en­tial econ­o­my­wide sur­vey mea­sure – stayed above 54 in Septem­ber, with read­ings over 50 in­di­cat­ing growth. That’s one rea­son I’d ven­ture we’re look­ing at UK growth closer to 1.7 or even 1.8pc in 2018 – plac­ing Bri­tain mid-ta­ble in the G7 growth league.

It’s not im­pos­si­ble, in fact, that the UK could out­grow Ger­many and France this year. The Bun­des­bank just warned that Ger­many’s third quar­ter growth fig­ures, due to be pub­lished in mid-novem­ber, will be slug­gish – given the re­cent sig­nif­i­cant drop in in­dus­trial out­put in the eu­ro­zone’s big­gest econ­omy. And last week the Banque de France said it ex­pected just a 0.5pc GDP ex­pan­sion dur­ing the third quar­ter – that is, July to Septem­ber. The highly-re­spected Na­tional In­sti­tute for Eco­nomic and So­cial Re­search now pre­dicts 0.7pc UK growth dur­ing the same pe­riod.

None of this is to say that the British econ­omy isn’t frag­ile. Busi­ness in­vest­ment is most def­i­nitely now be­ing im­pacted by Brexit-re­lated un­cer­tain­ties – which helps ex­plain why UK growth re­mains be­low its pre-ref­er­en­dum trend.

Hav­ing said that, growth has been slow­ing around the world of late – from the eu­ro­zone to Ja­pan and even China. Ris­ing in­ter­est rates, trade dis­putes, spi­ralling debt bur­dens and the es­ca­lat­ing cost of crude have com­bined to gen­er­ate sig­nif­i­cant jit­ters across global fi­nan­cial mar­kets.

With the ex­cep­tion of the US – pumped up by Trump’s deep tax cuts, which could yet prove rash – stut­ter­ing growth is a global phe­nom­e­non. And even Amer­ica hasn’t es­caped mar­ket hee­bie-jee­bies. Ear­lier this month, the Dow Jones In­dus­trial av­er­age of lead­ing US stocks was al­most 10pc up on the start of the year. All those gains are now gone.

It’s also worth say­ing that the growth per­for­mance of the eu­ro­zone, with which the UK is of­ten com­pared, is still ar­ti­fi­cially in­flated by the Euro­pean Cen­tral Bank’s “ex­tra­or­di­nary mon­e­tary mea­sures”. The ECB con­tin­ues to pump out tens of bil­lions of eu­ros of “quan­ti­ta­tive eas­ing” each month. That’s due to end soon – at least that’s what ECB Supremo Mario Draghi said at his press con­fer­ence last Thurs­day, not least for Ger­man con­sump­tion.

This col­umn has ar­gued for months that Italy’s slow-mo­tion bank­ing cri­sis, and an in­creas­ingly testy bud­get row be­tween Rome and Brus­sels, means ECB QE will con­tinue into 2019 and be­yond. We’ll see. What’s clear is that di­rectly com­par­ing UK and eu­ro­zone growth is bo­gus. Bri­tain, hav­ing stopped QE years ago and in the midst of its own rate-ris­ing cy­cle, has taken some tough steps on the road back to eco­nomic nor­mal­ity. The eu­ro­zone, in con­trast, still suck­ing on the QE teat and with neg­a­tive nom­i­nal in­ter­est rates, re­mains in eco­nomic la-la land. Yet, UK growth could out­pace France and Ger­many dur­ing 2018.

Ahead of this Bud­get, of course, Ham­mond can point to im­prov­ing pub­lic fi­nances. In Septem­ber, the gap be­tween tax rev­enues and pub­lic spend­ing nar­rowed to £4.1bn, com­pared with £5bn in the same month a year ago. Since April, the Gov­ern­ment has bor­rowed £19.9bn, down sharply from £30.6bn dur­ing the same pe­riod in 2017. That why Labour is now call­ing on the Chan­cel­lor to “stump up the cash” for more spend­ing.

Some ideas be­ing floated ahead of this Bud­get are in­ter­est­ing. A flex­i­ble Vat sys­tem would cer­tainly be prefer­able to sim­ply low­er­ing the thresh­old – which would ham­mer small firms. A slid­ing scale, bring­ing hard-work­ing sole traders into the tax sys­tem grad­u­ally, would re­move the dis­in­cen­tive for them to ex­pand. Such mea­sures, pre­vented by EU rules, should be con­sid­ered af­ter Brexit. Pro­pos­als en­cour­ag­ing highly-reg­u­lated pen­sion funds to in­vest in in­fra­struc­ture projects also sound sen­si­ble.

Theresa May, des­per­ate for ap­plause, has al­ready pledged an ad­di­tional £20bn for the NHS – which Ham­mond should de­liver, tak­ing ad­van­tage of the re­cent uptick in rev­enues. Be­yond that, the na­tional debt is high and ris­ing. The Gov­ern­ment is now spend­ing more on debt in­ter­est than on schools – and debt ser­vice costs will clearly rise. In­stead of spend­ing ex­trav­a­gantly, Ham­mond should build fis­cal strength. Mar­kets are febrile and the global econ­omy is en­ter­ing a rough patch. This isn’t the time to rack up ever more debt.

The UK al­ready faces con­sid­er­able un­cer­tainty, not least due to Brexit. As such, Ham­mond should keep tin­ker­ing to a min­i­mum, adding as lit­tle ex­tra un­cer­tainty as pos­si­ble.

Above all, the Chan­cel­lor should to­mor­row at­tempt to put right the big­gest fail­ure of his ca­reer, do­ing ev­ery­thing he can to pre­pare Bri­tain for the “no-deal” Brexit which some of us have long pre­dicted, and now looks in­creas­ingly likely.

‘The UK suf­fered a slow growth start to 2018, hit by un­usu­ally cold weather. But since then it has ex­panded at a steady rate.’

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