Wednesday 12 July 2017

UK economy is still going Japanese

We warned on here many, many years ago that the policy prescriptions coming out of the Great Recession would induce a Japan like coma on the UK economy.

High levels of quantitative easing and low inflation would lead to an investment strike and a huge debt over-hang simultaneously on the public and private sector balance sheet.

Low, it has come to pass.

Today's good news, of the unemployment rate dropping to 4.2% is sadly not the triumph that it should be for the UK economy. Due to low investment by corporates, the productivity of UK workers is low and still below 2007 figures in 2017 - 10 years of effectively no productivity growth at all!

As a result of this, it is unsurprising that wage growth is so low - companies are not making extra returns on their staff and so cannot reward them with more pay for the same productivity.

Adding to this, massive immigration supplies plenty of low wage workers, so that less business investment is made and there are more people with which to share the slowly growing GDP (hence GDP per capita has also grown only 2% since 2006, and only 4% from the 2009 trough!).

At the moment, this feels worse as the Brexit induced currency fall in Sterling has also pushed inflation to 2.4% - ahead of wage growth. No wonder Jeremy Corbyn is riding high, it is a time of economic malaise (not a crisis, but not nice either!).

Of course, this could be Japan or the UK in terms of the economic issues - the Bank of England has seemingly little room to move, keeping interest rates low and the QE piled up.

There is though a chance to change. We need desperately now to end QE which is no longer the prescription for our 2017 economy - it went to far in 2011 anyway. Ending QE will raise interest rates and harm the housing market - but will improve the saving rate for younger people and will encourage older people to spend - like they used to, in a normal economy.

Also essential is a continuation of the lowering of income tax to help generate demand. The continued Brexit issues may help in an odd way - the low currency effect will stimulate also demand, as will the now small growth the EU has managed to spark with its own ill-thought out QE program.

If we had not already reached £1.7 trillion of debt, there would be a fiscal loosening room too, but we don't have that luxury when we need to reduce QE as it is.


Nick Drew said...

Low ?

many a freudian slip ...

Steven_L said...

Japan? Do we need to end QE or do we need our own Shinz┼Ź Abe then?

Bill Quango MP said...

I remember when Blue Eyes had his own blog, back in the day, he once asked 'what does a recession look like?'

He had not been old enough to remember 1981. Or 1987. Or 1990.

I told the tale of my going to work. And along the footpath to the railway station there was a bin. An old, 1970s style wooden slatted refuse container. With a wire mesh holding it together. It was secured by metal bands, to a tree. As was common at the time.
The bin was vandalised in about 1983. As was also common at the time.
And for the next fifteen years a splintered, crushed, rusting, broken bucket of rotting wood hung off the tree. As a hazard to the rain macs of commuters.

It wasn't until the Blair years and the splurge to local councils that the brand new, fireproof, vandal proof, large black and silver/gold street bins we are familiar with today appeared.

That's what a recession looks like.


This one hasn't completely looked like that. The verges are overgrown.The line painting on the streets has been rolled over an extra few years.
But it has gone on far, far longer. Without a boom in between.

We said it would be like this. And we also said it might, {might} have been better to take the house price hit and debt damage at the time of the crash. Have a deeper, but shorter recession. Instead of life supporting it for a decade.

I'm still not sure that wouldn't have been better.

Electro-Kevin said...

Britain can't be Japan. Japan doesn't allow mass immigration and is preparing herself (with low population) for the march-of-the-robots when she will boom like no other - if not in reality, it will at least feel like it to those who live there.

The pound started falling long before the referendum. Not saying that there haven't been post referendum shocks.

The crushing reality is this: It doesn't matter how well the economy is doing on paper if all it does is entice more people to come to Britain and dwell in subletted tower blocks and either drive down wages or drive up welfare - the feel good will not materialise.

Phil Spencer was on TV last night trying the impossible task of housing a hard working couple in stable accommodation - competition for it is tough.

A balanced population is everything.

Corbyn likes an unhappy population.

He's thriving on it at the moment. But that was always the intention of mass immigration - a never ending supply of the Labour voting class, with the unexpected bonus of a de-propertied and de-staked young middle class with no council stock for the Conservatives to buy their votes with.

I'd LOVE to be Japanese. Their railways are superb too.

hovis said...

"We need desperately now to end QE which is no longer the prescription for our 2017 economy - it went to far in 2011 anyway. Ending QE will raise interest rates and harm the housing market"

Remember a large enough percentage of the debt/mortgage paying population have never known a rise in interest rates.
It is not just what is needed/possible economically but also politically.

Btw: End QE or reverse it, two different things no?

Anonymous said...

No "bad areas" in Japan, no parts of cities where a Japanese person might fear to tread at night.

But then they didn't bring in 'cheap labour', as we did in 1947 (from the Caribbean) for public services, from the Indian subcontinent in the the 60s and 70s to work in the foundries of the Midlands (now mostly gone) and the textile mills of the North and Leicester/Nottingham (ditto).

That cheap labour turned out to be remarkably, ruinously expensive long-term, and all to prop up the profits of a small number of then-wealthy people.

Now, the CBI are singing the same song "we must have cheap people".

You'll know when we have recovered, because the hand car wash will have vanished save for rich men's car valeting services. I won't hold my breath.

CityUnslicker said...

Hovis - I meant end as in , buy it back yet and so reverse it. Certainly not just leave it where it is. The BOE have no plan for this at all, never have had, the depth of their ineptitude is amazing.

Steven_L said...

I reckon central banks see their interventions as a success, saving us from the gutter. So they'll probably start thinking along the lines of becoming bigger actors in the market, much like the Bank of Japan is.

DJK said...

Central bankers liked to boast during the NICE decade how they were controlling inflation through nudging interest rates up and down. But in reality it was clear (and I argued at the time) that they were no more controlling inflation that a child with a toy steering wheel in the back of a car is controlling the car. Firstly, inflation was not controlled --- how could it be with rampant house price inflation? --- and secondly, if RPI/CPI was low, it was because of a flood of cheap Chinese imports, not through the genius of Eddie George or Mervyn King. Sadly, the hubris of central bankers is just as bad as it ever was.

And I agree with most of the comments about immigration. Yet still, every morning on the Today show there is some CBI type pundit arguing that we need more immigration. As if an extra 10m people in the last 15 years isn't enough?

Anonymous said...

Britain is massively overpopulated. Five or six million would be plenty for an island this size. The last thing we need is immigrants.

Siberia is mostly empty. Why can't they go there ?

Don Cox

MyEndGameName said...

I have to take up BQ on the idea that this blog suggested a hit to house prices should have been taken after 2008 - I have typed myself hoarse (?) on this blog pointing out that inflated house prices were catastrophic for the economy and I dont remember many regulars backing me up.

So I'll say it again, house prices need to come down by about 50% to get the economy moving. Unfortunately, when that happens the pensioners will be fucked. But hey, ho!

On the BoE - I think people are reading their options and motivations wrong.
What is about to happen is that credit will be curtailed because of 'concern' for indebtedness. This massive indebtedness, you'll recall, was the BoEs prescription for fixing the economy right up to Andy Haldanes 'Sledgehammer' comments last year.

Again the BoEs fix for the economy was asset inflation via massively increased debt levels.

The real reason for the coming 'credit crunch' is not economic concern but to punish and dissuade the electorates Brexit stance.
Brexit cannot be tolerated and the desire of the people to attain it must be utterly crushed. Forcing a brutal recession and house price collapse will hopefully give the populace pause for thought.
The BoE policy has moved from financial repression to outright Treason.

This is what is currently happening and how the rest of this year will play out.

(My personal view is that the BoE are about to fuck up again and their policies will cause civil conflict in Britain within 5 years, unless they are wholly broken and QE undone. Thats the only way out, but big losses must be endured to attain this.)

Anonymous said...

House prices are proportional to the inverse of interest rates. House prices (or at least the prices of houses that actually sell) will fall when interest rates rise to more realistic levels. Which is as good a reason as any for raising interest rates now.

Electro-Kevin said...

Nicky Morgan - I despair.

Talk of 'consensus' is can kicking.

My End Game Name - I agreed with you. The issue is not the house prices per se but that people are allowed to borrow against them and buy holidays and big ticket items. If ever there was a 'magic money' tree it is housing.

A 50% drop will see many sensible borrowers wiped out too as they will have no LTV to remortage on the best interest rates with. The loss is all theirs, not the lender's.

Anonymous said...

If you increase the population by ten million, house prices must go up and wages down.

It is the converse of what happened after the Black Death.

Don Cox

Electro-Kevin said...

Don Cox - I disagree. House prices will come down with the wages when proper credit restrictions are in place.

They will still be unaffordable.

Down to the population crisis.

Nomad said...

I wouldn't worry about house prices, but I would be worried about the Black Death and alike. The permafrost is melting and ready to release all manner of nasty bugs upon us - I won't mention climate change as that will get you all hot and bothered.You know the bugs, the ones that we have had no exposure to at all because they had been frozen long before our footsteps arrived.
Population control is coming whether we want it or not. I am off to find an Island.

Anonymous said...

I think a plague is more likely to be started by somebody trying biological warfare than by the melting permafrost.

Don Cox

Timbo614 said...

@MyRegularlyChangedName: If you haven't noticed, you are a regular. RegularlyChangedName or not. :)

Thud said...

wow! the above was all rather cheering I must say, how do some here face getting out of bed in the morning? I'm a glass half full type so I'll just have to bimble along believing it will all come out in the wash.

hovis said...

Nomad - don't worry about the permafrost that can be refrozen by the 'nuclear winter' from when the super volcano in Yellowstone goes up :-) I see some are getting (unreasonably?) excited about it in the last few months.

MyWittyRiposteName said...

@Thud - A pessimist is what a fantasist calls a realist.... was said by someone smarter than me.

I'm not pessimistic at all, I just think that the current situation is untenable.
I am very optimistic about what could replace it.

@Timbo - I wasnt sure if people realised that the same person was behind each character name.....

CityUnslicker said...

Not sure that is fair, I have always wanted house prices to fall. Always, just not all at once so as to take the economy with them. I wanted a managed decline - through more house building, higher interest rates and less immigration.

In fact, I have been remarkably consistent on this for a decade now!

so by the by, as I have always valued your comments, we generally disagree about the actions and the remedies more than the facts and the causes.

MyLateNightName said...

@CU - I dont know if if you've seen my other recent post on Economics itself being the problem....

As a counter, I'll posit this; One cannot be a Capitalist and support price controls, right?
We often imagine price controls to be aimed at keeping selling costs down - milk or potatoes or rents.

However no genuine Capitalist can or could support a rigged system whereby central bank interference and asset price inflation - price controls by another name - just because they personally benefit from them.

That would be Clientelism; feudalism by another name.

I hold strongly to the view that current ECB/Fed/BoJ/BoE/modern Economic policy is an ideology (not a science) imposed to justify a particular social order.
It is the very opposite of Capitalism and freedom; it is the modern incarnation of Fascism. (It is the opposite of Socialism too, incidentally, if that is possible).

But, yeah, okay, I'll accept that its unfair of me to equate lack of overt support for (my suggested) remedies as lack of acceptance of a problem.

I only hope that Capitalists get to grips with these problems before they are handed off to the hard left to solve. But (I'm a bit of a political slapper truth be told) if the hard-left offer solutions, then thats who I'll support.

Thats what the rightist Brexit vote and the surge in hard left vote is telling you; we need solutions, not semantics.

(FWIW - I doubt I'm alone here but just to say; I enjoy and greatly value the depth and breath of debate on this site from all sides.....)

Electro-Kevin said...

Great comments, MLNN.

I voted Brexit for EXACTLY the same reason as you. Fool that I am. (I'm in the firing line.)