Thursday 22 March 2018

Still a long road to normality: Update

The US raised interest rates yesterday, as did China following suit. It is a very long road back to financial normality after a financial crash of the like that we had in 2008 (on average 19 years historically, so we are only just over half-way!).

However, in the UK we have a particularly dovish Bank of England Governor at the moment in Mark Carney. This week has seen wage growth pick up and the economy continue to modestly improve alongside record employment. Few commentators or even economists seem to notice that with near full-employment the days of rapid economic growth are gone - all improvements have to come from either improving productivity or investment, neither of which is easy to do in the UK economy. The days of just hiring more migrants on shit wages and declaring economic nirvana as nominal GDP rises are over - THANK BREXIT FOR THAT!

Still, the Bank of England is left with a choice today, does it raise interest rates again? The Bank will likely decide to wait another month or two to see what is happening in the economy and take a view that the awfulness of Brexit means that it should stay with very low rates.

Which is a shame because we won't get investment levels from companies up and from individuals whilst the saving rate remains so low. All we see now is the continuation of the nightmare economy where the already rich borrow very cheaply and make easy returns; whilst the small companies and business are starved of capital holding back productivity gains.

Of course, too high rates can stall the economy; food retailers and general retailers are already struggling in an easy money environment so won't cope. But the wider economy will not recover its vigour until we move back to a more 'normal' economy - its a difficult balance to achieve but the Bank of England really needs to get its Hawkish skates on to fix the economy.

UPDATE: BOE holds rates, murmurs about doing something next time, circumstances allowing etc etc.


Anonymous said...

I can see what you intend to mean but I can't quite get my head around the comment of "businesses are starved of capital holding back productivity gains".

The UK is not set up like that. Never has been - given the share of GDP held my international / multi national / global companies.

The only productivity gains come from transplants from global companies with the gains hard wired in viz Nissan.

Perhaps what you are trying to say that with Brexit we'll see a few more transplants as global companies may use us a springboard to these new markets we'll be in.

[That last part may appear to be sarcasm but it is not]

miker22 said...

I'm no economist so this is probably bollocks, but it just seems to me that if you try and manipulate the market, it won't work - our old friend unintended consequences rears its head.

CityUnslicker said...

Disagree anon - 80% of the economy is SME's, they are starved of capital at the moment. Look at the rise of Funding Circle with is 8%+ loans!

Most productivity gains in the real economy would be felt at this level where new equipment and technology would really help (think self-serve kiosks in corner shops rather than just Tesco etc) - but they have NO money.

You are quite right re larger scale transfers due to foreign ownership structures, but relatively this is a small part of the economy

Electro-Kevin said...

Nephew wants to be a hedge fund manager.

He's known this since he was nine (with a bit of a prod from gramps, ma and pa.)

More aid to hedge fund managers is what I say.

Electro-Kevin said...

Niece wants to be a journo - lined up for Oxbridge already. Getting A** (two stars already ? WTF ???)

Suitably lefty, feminist and vegan. Should do well.

Parents like this need all the support we can give them.

More hedge fund managers and lefty journos is what Britain needs. Low interest serves their parents exceedingly well.

Anonymous said...

Disagree anon - 80% of the economy is SME's

But 79% is the service sector. So are all those robotic waiters delivering pizza's going to lead to productivity growth. Actual production - making things rather than moving them about is 14%.

What world changing, employment creating innovation is coming out of the (UK) SME arena that capital could support?

We are too wedded to the illusion of house price inflation, taking out the apparent equity we have on it and spending it on non-UK produced goods.

Money has never been so cheap and plentiful - but decent ideas are few and far between in the UK

Nick Drew said...

Niece wants to be a journo

Kev, get in touch (via Lils)

rwendland said...

I guess national min wage going up 4.5% next week (5.4% for 18 year olds), with two 7.2% rises needed to get to the £9 "National Living Wage" in 2020, will push the plus points for more capital investment up causing some efficiency improvements.

NB part of the reason for ending the 1% NHS pay rises must be that the national min wage has now caught up with the starting pay for Administrative Assistant, Health Care Support Worker and similar (Agenda for Change bands 1 & 2), so they had to do something.