It’s almost certainly too early to get worried about a housing bust in the UK. It may well happen, the way things are going with the property market at the moment – but not for some years. All the same, here’s an interesting statistic released by the Bank of England this morning: in the final quarter of last year UK mortgage lenders wrote off more mortgage debt than in any quarter in the past two decades.
In Q4 2013 lenders wrote off £272m of debt secured on dwellings. This is a touch higher than the £270m hit in 2009 (though of course it will be a touch lower as a % of GDP). It’s only one piece of data – and from a volatile and unpredictable series at that. But I’d expect, given the increasing amount of debt being handed out by lenders, often at high income multiples, that write-offs may well mount up in the coming years, particularly when interest rates rise and households start to struggle with loan payments.
You can find the full data here.read more
It’s easy to forget just how important a contribution oil and gas makes to the UK economy. Britain, after all, is a large and highly-diverse economy. But while it’s not a pure petro-economy, by the same token there is simply no way the economy would have been as strong as it was or its public finances in decent (pre-crisis) shape were it not for North Sea oil.
Consider the following: at its peak in 1999, the UK was pumping out more oil each year (about 2.9m barrels a day) than OPEC members Iraq, Kuwait or the United Arab Emirates. In the 1980s, though total production levels were a touch lower, tax revenues from the North Sea nonetheless accounted for a large chunk of the Government’s total takings: peaking at more than 8% in 1984.
Even though the output from UK fields has dropped sharply in recent years Britain still produces more oil, in absolute terms, than Oman; more oil and gas combined than Azerbaijan.
In fact, while the simple amount of oil and gas being pumped out of the North Sea might have fallen, the fact that the oil price has risen during that period from below $20 a barrel to over $100 a barrel has meant that even that reduced amount has boosted Britain’s fortunes. Since the turn of the millennium the share of Britain’s goods exports accounted for by oil has risen from just over 5% to almost 14%. That’s the highest share since the mid-1980s.
And there is plenty of it left. About 42 billion barrels of oil equivalent have been extracted since 1965; there is probably about 24 billion still left. The problem is that the remaining stuff is harder to get hold of – it involves reaching into deeper waters, digging deeper underground and squeezing more resource out of older fields, rather than hoping for brand new discoveries. That, in turn, is changing the make-up of the sector. Whereas in the glory days of the ‘80s and ‘90s the big players were the oil majors – Shell, BP, Total and so on – the North Sea is increasingly home to so-called “scavenger” firms which buy old, abandoned fields and attempt to maximise return from them.
That change in constituency means it’s highly sensible for the Government to consider a shake-up in the regulation of the sector, as Sir Ian Wood’s report into the future of the North Sea today recommends.
However, all of this could end up being moot if the Scottish people vote for independence. Which raises a few vexed questions. First, how much of the existing output should go to Scotland? If one were dividing it based on geography, isolating the fields of the Scottish coast, around 90% of production would go to an independent Scotland. However, if one were dividing it based on population, then on a per capita basis the share would be closer to 8.4%.
That’s clearly an enormous difference. Were it to be divided on a geographic share, the rest of the UK would miss out on almost £6bn of tax revenues, equivalent to an almost 2% increase in basic rate income tax for every member of the population. However, set against that is the fact that it would no longer have to take care of Scottish social spending, which is considerably higher than for the rest of the UK.
Were the oil production to be split up on a per-capita basis, it’s hard to see how Alex Salmond could make his sums work.
But the split would also raise some more important long-term questions for both sides. The Wood Review today nukes the notion that the North Sea is all but dead. However, it underlines the volatility of the sector. An independent Scotland really would be a petro-economy, its demand and income buffeted about as the oil price rose and fell. By the same token, the rest of the UK would lose out on one of the main sources of its exports. The balance of payments – already extremely nasty – would be even deeper in negative territory.
In short, there are significant dangers on both sides.
Finally, there is the question of why Britain never set aside its oil revenues and did as Norway did, setting up a sovereign wealth fund for the nation’s long-term economic health. There is no good answer for this, save for that it was a decision of successive governments (Labour and Conservatives) to use the proceeds for today’s consumption rather than saving it for tomorrow. It helped support Britain through what would have been even darker economic days in the late ‘70s and 80s.
Was it wise that such an enormous sum of money, over £300bn, was spent rather than set aside? Today’s younger generation is facing decades of higher taxes to pay off Britain’s enormous national debt; however, some would argue that this would have been the case whatever the treatment of the oil revenues. Either way, there is no satisfactory answer to this vexed question – save that it will continue to spark anger as long as the oil keeps pumping, and probably some years thereafter.read more
There is an awful lot of confusion today about whether today’s jobs figures show that unemployment has risen or fallen. So here’s the simple answer.
Unemployment today is higher than the last time the Office for National Statistics reported it in January. That goes for both the unemployment rate and for the total number of people out of work.
In January the ONS reported that the number of people out of work was 2.32 million (in the three months from September to November). It reported that the unemployment rate was 7.1%.
Today, it reported that the number of people out of work was 2.34 million (in the three months from October to December). It reported that the unemployment rate was 7.2%.
Of course, that constitutes a rise on both counts. The confusion creeps in when one takes a glance at the official press release issued by the ONS. In this, the ONS chooses to compare the latest unemployment rate (for Oct-Dec) not with what they reported last month but with what happened in the previous three months (namely July to September).
On this basis, unemployment is most certainly down, after all back in the late summer of last year the unemployment rate was 7.6% and the number was closer to 2.5m.
The verdict is quite simple: unemployment is sharply down on where it was late last summer. However, when one’s strictly comparing what the ONS reported last month with what they are reporting this month, it is up a touch.
If you’ve understood that, and don’t want any further complications, then you should probably stop reading now. Because I’m afraid the story gets even more complicated.
As you’ll have noticed above, the unemployment number and rate are reported over three-monthly periods. The confusion above creeps in when one compares different three-monthly averages to another.
However, it so happens the ONS also publishes the figures for those single months as well as the three month averages. On this basis, it turns out unemployment is actually falling. To be more precise, the unemployment rate on a single-month basis last month wasn’t 7.1%, it was 7.4%. Today it’s 7.2% (yes, in line with today’s three monthly average, but that’s a coincidence).
So the reality is that unemployment is either falling or rising or falling, depending on which numbers you’d most like to focus on. The real lesson is that these numbers are volatile (and that’s before we get into questions over the methodology). On a broad basis, the labour market is most certainly improving. However, the rate of that improvement may be slowing a touch.read more
Mark Carney has a name for the new framework for monetary policy he unveiled yesterday: “forward guidance phase two”. My first thought yesterday when I listened to him at the Bank’s press conference was that it would be better entitled “fuzzy guidance”. It is, after all, a far vaguer version of the guidance policy the Bank was following since last August.
But the more I think about it, the more I think this name underplays its weaknesses and its dangers. It strikes me that fuzzy guidance is yet another example of an insidious trend that has overtaken the world of central banking – one that was at least in part responsible for the crisis.
But before we get to that, let’s start with the basics. Whatever anyone tells you, there is nothing new about forward guidance. Since the very earliest days of macroeconomics, policymakers – whether central bankers or politicians – have had to grapple with two opposing demands. On the one hand they have to reassure people that the economy is in safe hands, and that they know what they’re doing. This involves giving them some indication of what to expect in the coming months and years, so that businesses and households can invest and spend with confidence.
On the other hand, the more explicit they are about the future path of economic policy, the more likely people will be to try to game it. If you commit to leaving interest rates low for a set period of time, you will almost certainly create a mini (or major) boom and bust as people borrow and spend with wild abandon until that deadline, and then shut up shop.
So throughout history central bankers have done their best to be as vague, and simultaneously as reassuring, as possible. This has had various different manifestations over time: Depression-era Bank of England Governor Montagu Norman was wont to tap the side of his nose slowly when asked what he planned for the UK economy. Alan Greenspan of the Federal Reserve attempted to tie his testimonies and speech up with as much jargon as possible while giving the impression that he was preternaturally in control of the US economy.
Since the beginning of central banking, every monetary policymaker has had to walk this tightrope, but all of them, in their own particular way, has dispensed a form of guidance to households and investors. Mervyn King’s brand was a peculiar one: when asked what the future path of interest rates was likely to be at a speech or press conference, he would respond that he and the Monetary Policy Committee would never pre-commit to a certain path. The Bank’s job, he occasionally added, was to keep inflation as close to its target as possible. And yet in the Inflation Report each quarter, the Bank would publish its own assessments of how close to target inflation would be, depending on a variety of scenarios for interest rates (the famous “fan charts”). By reading between the lines, you could work out whether the market was too hawkish (thinking rates were going up too much) or dovish (rates too low), and then adjust your expectations accordingly.
It may have been branded differently, and have been esoteric in the highest degree, but this was guidance plain and simple. Journalists and analysts would come away from each Inflation Report knowing that the Bank expected to leave rates lower for longer, or to lift them sooner than had been previously expected. Even within the Bank, officials would refer freely to a “tightening” fan chart or a “loosening” chart.
This served the Bank pretty well until the recent crisis, when a massive slide in economic activity came alongside a big rise in inflation. The overall economic picture was screaming that low interest rates were necessary; but the inflation target alone seemed to suggest that higher rates were needed (after all, higher rates usually push down inflation).
The Bank carried on with its semi-guidance. In its Inflation Reports from 2009 to 2013 the fan charts signalled that although inflation was indeed high, a rise in interest rates would put it well below target. It was plain enough to us economics journalists and city analysts what was going on: the Bank had no intention of raising rates any time soon. However, to those who paid less attention to this version of Threadneedle Street Kremlinology, the situation looked a little more confusing. Why, they asked, wouldn’t markets simply assume that rates would be yanked higher the moment the economy looked like recovering?
Which is where Mark Carney comes in. When the new Bank Governor came into office, at the Chancellor’s invitation he introduced a new version of Forward Guidance. The objective was the same as those fan charts: to reassure investors that even if inflation was above target, the Bank wouldn’t be lifting rates any time soon. However, rather than simply saying so outright, Dr Carney put this in econometric terms. He committed not to consider raising rates until the unemployment rate, then close to 8%, was down to 7%. This wasn’t supposed to happen for two years or so, based on the Bank’s forecasts. In the event it has happened in about six months. This was fortunate for the economy, but unfortunate for the Bank, which looked a little foolish. On the flip-side, inflation was, also against all expectations, back on target. So one reasonable conclusion might have been to ditch forward guidance and return to old-fashioned inflation targeting.
Which is, in a sense, what happened yesterday. The Bank signalled, in a way not unlike the Mervyn King version of guidance, that the market’s expectations for future interest rate movements were pretty reasonable (maybe a touch hawkish, but nothing massive). Unemployment-related forward guidance was pretty much declared over.
However, this was apparently not enough. The Governor also unveiled a whole new form of “guidance”. Quite what it is remains rather unclear, even to those of us who were there yesterday (hence the name “fuzzy guidance”). One explanation is that rather than predicating its future rate movements based on the unemployment rate, the Bank will instead focus on something called “spare capacity” – in short the extent to which the economy is growing at a rate below its long-term potential. In so doing the Bank published, for the first time, its estimate of the “output gap”, and this implied that there was some spare capacity now. This implies that rates don’t need to go up soon. He also said that when rates do rise they will do so only gradually, and won’t go up very far.
All of this is fair and well. However, it doesn’t really tell us anything new: the output gap is a deeply subjective and frankly obscure measure of economic potential, of little use to any but economic wonks. Whereas hinging monetary policy on the unemployment rate did indeed make it a little clearer to businesses that rates wouldn’t go up for at least a while, using the output gap is only likely to obfuscate things.
We always knew from market expectations for interest rates that borrowing costs weren’t likely to go up any time soon, and that they would only rise gradually. Having the Bank Governor reiterate that explicitly is all fair and well, but it doesn’t exactly tell us anything new. The same message could quite easily have been given using those old-school fan charts.
What’s insidious about fuzzy guidance is that it dresses up what could quite reasonably be old-fashioned vague reassurance, of the kind everyone from Montagu Norman to Mervyn King used to dispense, in purportedly scientific clothes. As part of fuzzy guidance, the Bank will monitor not one, not two, but eighteen different metrics. This cult-of-numbers variety of economics was one of the trends which contributed to the economic crisis in the first place, attributing a spurious scientific nature to forecasts and assumptions which were often simply guess-work.
The problem is that the Bank’s assessment of many of these 18 metrics, whether unemployment, the output gap or indeed GDP, is likely in time to be proved wrong. Its credibility will suffer as a result (it already has). This could well undermine confidence in its ability to manage monetary policy in the future.
Far better, as Andrew Lilico also argues today, to be what central bankers have always been: reassuringly vague.
UPDATE: The folks at the Bank have been in touch to emphasise that although the latest Inflation Report did indeed include 18 economic metrics the Bank is forecasting, these are not an integral part of forward guidance phase two. Instead, they merely represent more information on the Bank’s forecast, a response to the Stockton Review. While this doesn’t change my main thrust (that forward guidance is really just a resumption of old-school inflation targeting) it does suggest that the new form of guidance is less reliant on specific statistics than some suggested yesterday.read more
The main message of today’s Inflation Report is that the Bank of England won’t be lifting interest rates anytime soon. It more or less endorsed market expectations for future changes in borrowing costs which means, all else being equal, interest rates should be going up some point early in 2015. This may or may not be before the General Election – trying to pin that down is a mug’s game at this point, but it could be close (my hunch, for what it’s worth, is that it’ll be before).
However, the supplementary message is that when rates do rise, it’ll happen very gradually (at present markets don’t expect them to get past 2% until 2017). And they won’t get high for a long, long time. Indeed, while before the crisis a “normal” level for rates might have been 5%, the “new normal” is likely to be closer to 2.5% – certainly for as long as Mark Carney is in office (until 2018).
The Bank’s relaxed attitude towards interest rates comes in spite of its forecast that 2014 will be a boom year for the economy. It lifted its forecast for economic growth this year from an already punchy 2.8% to a near-breakneck 3.4%. Not only is that the strongest annual growth rate since 2007, the year before the bust, it’s also notably imbalanced. Much of the growth comes courtesy of consumer spending and the housing market – not the manufacturing and export sectors which have provided so little impetus in recent years.read more
When it comes to independent assessments of the UK economy, few come with as much authority, or indeed independence, as those from the Institute for Fiscal Studies.
The cover of the Green Budget, its annual audit of the UK’s economic and fiscal situation, comes with endorsements from both Ed Balls and George Osborne. So those with time and enough interest in the state of the economy would be well advised to flick through the document’s 270 pages themselves.
For those without the time or inclination, here are a few highlights.
1. Real, punchy recovery
The economy will grow by 2.6% this year and by a very decent 3.2% next year, according to Oxford Economics, who provide the economic forecasts in the report (the IFS focuses specifically on government finances, welfare and other issues). It even expects last year’s 1.9% growth will be revised up. The bad news is that, so far at least, this growth doesn’t seem to be very balanced, reliant as it is mostly on consumer spending (itself partly fuelled by a raid on long-term savings as I revealed a couple of months ago).
These projections, it should be added, are reliant on the assumption that the economy is currently operating far below its normal capacity, which in turn means it has far more potential to bounce back in the coming years. Estimates of this so-called output gap differ enormously. But they are very important, since they lead to the next bullet point.
2. The end of the beginning of austerity
The upshot of this stronger growth is that the public finances look like they might soon get better or, at the least, won’t get much worse. In fact, for my money the most striking finding from the GB is that we’ve now finally got to the stage where the coalition government’s plans are enough to repair the damage done to the public finances by the crisis.
This is in some senses a watershed moment: after all, each successive Budget and Autumn Statement since 2010 has carried with it more bad fiscal news – whether that meant deeper cuts or an extra year’s worth of cuts. The IFS’s finding is that by now, even if the most pessimistic forecasters are right (in other words those who think the output gap is close to zero), the damage done to the deficit by the crisis will be put right by the coalition plans.
In fact, if the economy turns out rather better than expected, there might only need to be one more year (2014/15) of fiscal tightening (cuts or tax rises).
3. There’s still more pain
Planning more spending cuts isn’t the same as carrying them out, and the IFS has calculated that we are not even half-way through the total period of austerity, either in terms of time (2010-2018) or amount (10.1% of GDP target; 4.7% of that done). Which means that there will be plenty more pain to come in the next few years. In fact, the IFS has calculated that the impact of the cuts in spending on public services is likely to be greater than is currently appreciated, in part due to population growth and ageing.
It means that while overall public spending growth is due to fall 1.7% per year between 2010–11 and 2018–19 (to the lowest level since 1948, incidentally) the spending cuts per person will be 2.4% a year.
It’s a similar story for health spending. Although spending in real terms may not be due to fall under current government plans, the rising population, and the increase in number of elderly (and more expensive) patients means that there will be a 9.1% cut in real age-adjusted NHS spending per person during that same period.
4. No housing bubble…?
The Green Budget thinks that it’s not yet time to worry about a bubble in the housing market. It says that based on most measures (prices, prices vs earnings and inflation-adjusted prices) the housing market is still cheaper than before its peak in 2007. Some might argue (reasonably, I would say) that 2007 is no yardstick of where house prices ought to be. But the IFS’s main point is quite sound: that across the UK as a whole the housing market is still relatively depressed compared with recent years.
London, however, is another story entirely. In fact, one of the more interesting nuggets from the report is that in 2012/13 Westminster and Kensington & Chelsea alone contributed a full 15% of the UK’s entire stamp duty revenue. For that matter, another interesting and related nuggets, underlining the reliance of the Treasury on wealthy households, is that the share of income tax paid by the top 1% of UK earners has risen from 11% in 1979 to 27.5% in 2011/12. Given the wealthiest pay the lion’s share of capital taxes the overall proportion may be even greater.
5. The end of the ever-increasing personal allowance?
One of the coalition’s most eye-catching policies (originally it was a LibDem proposal) has been to increase the allowance of tax-free cash one can earn to £10,000. The Green Budget warns that increasing this allowance further (say to £12,500) would barely help the lowest paid at all. It says that “the lowest-income 17% of workers will pay no income tax in 2014–15 anyway”. Instead, the majority of the giveaway would go to families in the top half of the income distribution, or with no one in work (mostly pensioners).
Instead, it recommends raising the employee National Insurance threshold.