Economic Prospects - from a Senior HSBC Economist

This survey of economic prospects is based on a key-note address given by Mark Berrisford-Smith, Head of Economics, UK Commercial Banking, at HSBC at the Hereford and Worcester Chamber of Commerce Midlands Manufacturing Expo on 21 June 2012.

The result of the election in Greece is likely to lead to a period of renegotiation of the bailout deal. The electorate have implicitly backed the single currency and now they are having to pay for that.  But it will not be all one way as Greece as some leverage with the rest of Europe – what might be called Drach-mail.  It was suggested there might be a long period of negotiation before Greece finally leaves.

To stand a hope of this being prevented and to keep the Eurozone together there will have to be a move towards a fiscal transfer union but there needs to be a credible roadmap with dates and milestones.  If this had been attempted some time ago it might have been enough, but now more needs to be done and there will probably need to be a banking union as well.  (Interestingly, Mr Monti, the Italian PM was reported as saying something similar in the media on Friday morning).  It will be difficult to get this to happen in the timeframe needed and past experience suggest the EU leaders will continually get to the precipice each time there is a crisis and look a long way over before doing just enough not to go over the edge.

Some countries may still leave the Euro – nobody knows.  But we should be under no illusions about the effect of this.  Greece and Italy’s currencies steadily lost value before they joined the Euro, which enabled them to remain competitive, but this points up the disparities with stronger economies.  When Argentina (the most commonly quoted example of a country defaulting on its debts) left the currency peg with the dollar that had maintained the value of the currency there was a pent up drop in the value of its currency that was cataclysmic and for several years the economy was reduced to barter.  It would be better to sort out the Euro, and perhaps in some year’s time when things are more settled and stronger, for countries to leave if cultural differences and staying within the rules make it too difficult.

We are, though, in a situation where the southern European states are getting all sticks and no carrots.  Austerity is pushing their economies into deep recession and we need to allow them the opportunity to grow their way out of this, otherwise their debt will not be paid down.  There are a number of ways to enable this growth to happen: inflation which erodes the value of the debt; a default on the debt or forgiveness, but Italy is probably too big for this and most of its debts are held by Italian banks and pension funds; or fiscal transfers from the north for growth.

Turning to the UK, we are in a technical recession but Mr Berrisford-Smith does not believe the recent GDP figures.  The various Purchasing Manager’s Indexes (PMI) are all above 50, which indicates growth, although manufacturing is now suffering.  What is true is that overall the economy hasn’t grown since 2010 (though in the past couple of quarters the West Midlands has out-performed the rest of the UK) and the debt crisis has undermined the rebalancing of the economy, especially in manufacturing – export demand is weakening and domestic stock levels are being run down.

The biggest factor, though, is consumer confidence.  If we are to get the economy to grow investing in infrastructure is too slow (with the planning system by the time anything is built it will be too late) but consumer spending makes up 60% of the economy (GDP).  It is difficult to get growth if that is flat or falling.  The Euro-crisis is affecting confidence but the other factor is inflation.  We are suffering the most severe incomes squeeze since the 1970s with low earnings growth compared with inflation.  This means spending power is down – final consumer spending by households has fallen.

(I would comment, though, that we might question whether increased consumer spending is desirable, particularly at the time of the Rio+20 Earth Summit.  It is not a value-free proposition either, even if it may seem that it is what much of our western society is based on).  

However, the Euro debt crisis has caused oil prices to fall and inflation is coming down more generally.  On the CPI measure it is now 2.8%, which is more in line with earnings.  There will be no return to the pre-2007 situation, we still have too much debt – it was easy to run it up but is much harder to reduce it, and if it took us a decade to get in this mess it will take us at least a decade to get out of it (this is our individual Greece – we are reducing debt with no increase in income).  Debt stood at 161% of household income in 2007and is 144% now so we still have a way to go, but where will it end up?  House prices are very important in this because of the effect on mortgage levels.  There were 120,000 mortgages per month approved in 2007 compared with 50,000 now – at what point will this change, and how?

Unemployment is a problem with a lot of part-time employment amongst people who would like to be full-time.  This means that if work picks up many people will be employed for longer hours rather than new people taken on – in the jargon, unemployment is sticky.  But the number employed grew by 160,000 last month which also casts doubt on the negative GDP figures (though not all commentators would agree with this).

The Chancellor still aims to balance the structural budget by 2017/18 and shows no sign of changing his mind about this seeming cornerstone of his economic policy.  This will still, though, be 80% of GDP if he hits his target, which is twice what is was in 2008.  The question is, ‘where do we want this to be?’.  At 80% there is no room for manoeuvre if hard times return.  We could aim for 60%, which is the EU benchmark, or return to 40%.  How much do we want to pay off and how much do we expect our children to pay off? – but one day they will be in charge and we will be old (and concerned about care for the elderly)!  There is an issue about the inter-generational contract (which in the past has been that we handed on at least as good, if not better, prospects to our children) and that doesn’t include all the un-funded pension plans.

Turning to exports, we are now, finally, exporting more to the BRICs than to Ireland and also to the ‘PIGS’ (Portugal, Italy, Greece, Spain) and especially Spain, which is worrying considering their economic difficulties.  Demand is falling in Europe with the debt crisis, affecting our exports alongside increasing imports.  This is affecting the rebalancing of the economy.  We are now exporting more cars (£2bn pa) to China than scrap metal ((£1bn pa), which is clearly helping companies like Jaguar, Land-Rover and the West Midlands economy.

We should hopefully inch our way to recovery in the third quarter, helped by the Olympic effect, and then inflation will be more in line with income growth and we may possibly see a revival in the economy.  In the mean-time, we will probably see more quantitative easing in the next few months (Mervyn King’s £80bn credit scheme is QE by another name).  Lending to businesses is still very weak and the debate continues about whether it is due to lack of supply from the banks or demand in the economy but the BoE credit scheme should give the answer to that debate.

Finally, it will take until 2015 for GDP to return to 2008 levels, which is twice as long as most other recessions but whatever the GDP figures say what matters is lost jobs, homes, and businesses, and despite the length of this recession it has not hurt as much as the 1930s without the social security net or the 1970s with high inflation.  Its greatest effect will be on the public finances and between the generations.  We think we can keep growing and that along with that we can grow the capacity to supply the public services that we expect.  We haven’t woken up to the fact that we are in a different place and whilst the politicians keep giving way on small things like the pasty tax and the conservatory tax what chance is there of sorting out the really big things?  (This, of course, begs the question that we can agree on what are the big things).

Unemployment in Worcestershire inMay 2012

Here is a summary of the unemployment situation in Worcestershire taken form the County Economic Summary for June 2012.  Broadly, unemployment fell on the claimant count, which reflects the headline fall in unemployment nationally (though the national claimant count went up slightly).

The unadjusted number of people claiming Job Seeker’s Allowance for Worcestershire was 10,516 in May 2012, a decrease of 205 claimants from the previous month.  The Worcestershire unemployment rate is 3.8%, down 0.1% compared to the previous month.  This compares favourably with the unemployment rates for the West Midlands region (6.6%) and England and Wales (5.5%). The male unemployment rate in Worcestershire is 4.7%, unchanged from last month, compared to the female rate of 2.7%, down by 0.1%.

Across the county, the district with the highest unemployment rate is Worcester City (4.8%) and the Districts with the lowest unemployment rate are Bromsgrove and Malvern Hills, (2.8%). In terms of urban centres, Kidderminster had the highest unemployment rate at 5.5%. The lowest unemployment rate was in Wythall (1.8%).

Four of the six districts in the county saw falls in unemployment of between 20 and 40, except for Redditch, down 75 and Malvern Hills, up one, compared with last month.  Compared with a year ago there were falls between 80 and 116 for Bromsgrove, Malvern Hills and Redditch, and 14 for Wychavon, but rises of 14 for Worcester and 192 for Wyre Forest, giving an overall drop of 89.

There were 3,045 people aged 18-24 claiming JSA benefit compared to 3,145 in April and 2,995 in May last year. Of the 3,045, there were 2,665 that had been claiming for up to a year, which is 6.4% of the 18-24 population, down 0.3% compared to April 2012 – the same as the England average.

The ward with the highest youth unemployment rate is Gorse Hill, Worcester at14.7%, up 2.1% compared to last month and 1.0% higher than April last year.  The adjoining ward of Rainbow Hill has the tenth highest rate at 10.9% and between these two figures are three wards in Wyre Forest, three in Redditch and one each in Malvern Hills and Bromsgrove.

The proportion of those aged 18-24 claiming for over 12 months as a proportion of all claimants has now reached 12.5%, the highest figure since 2008 when it was only 2%.  This proportion has been rising steeply for the past 11 months, following a drop between mid-2010 and mid-2011, though it may now be slowing down.  It suggests a worrying issue about long-term unemployed young people as part of a trend towards growing long-term unemployment generally in the County.  The proportion of all claimants receiving benefit for more than six months increased by 0.8% to 41.9% between April and May and for more than 12 months by 0.9% to 21.4% over the same period.  Whilst none of the populations of unemployed people are static, none the less the drop in overall unemployment suggests that those finding jobs are not the long-term unemployed when they are a rising proportion of those unemployed.

The number of notified vacancies in Worcestershire was 3,699 in May 2012. This is 34.7% lower than in April 2012 but there was a similar drop last year suggesting this may be a seasonal change.  Most of the stories from the local press featured in the county economic summary are positive but where firms are expanding the numbers being taken on are quite small.

I will offer a separate commentary on the overall economic situation, including reference to unemployment, in a separate blog based on a seminar addressed by a senior economist from HSBC that I attended recently.

Sharing Work Around

Last weekend my church, which is dedicated to St. Barnabas, celebrated our patronal festival.  The New Testament Morning Prayer reading on Monday (St. Barnabas’s day) was Act 4 vv 32-end, which is about the believers in Jerusalem holding all things in common. Among them was Barnabas who sold his field or estate (depending on the translation) on Cyprus and gave it to the common fund.

Afterwards, one of the staff team was talking about their son who was soon to leave school but had been told by the JobCentre that there was no suitable work for a 16 year-old until he went to college apart, perhaps from an ‘apprenticeship’ at £2.06 per hour at a high street shop.  We suspected it was an ‘apprenticeship’ because it would pay less than the national minimum wage for a 16 year-old.

Whatever one makes of some of the controversy surrounding those who were ‘training’ to be security guards at the Jubilee celebrations and found themselves sleeping under London Bridge and then expected to sleep the following night at a campsite in the pouring rain, I am forced to wonder about some of our attitudes to those who are unemployed and possibly comparatively young (though probably not 16).  Some of these people were not paid at all and one wonders what chance they have of landing jobs at the Olympics for which this was supposed to be a trial.

Our staff team were reflecting on when we left school, and compared with the experience of many young people today, we found it relatively easy to get jobs.  One person said they had a choice of five jobs and the general feeling seemed to be that it wasn’t the problem for us that it is for many today.  We were also aware that many people today who are in work are working ever harder because of cutbacks and redundancies and because they feel they have to in order to be seen to be committed by their employer.  Again, one of us spoke about their son who had worked for 30 hours with hardly a break in order to get a job done.

At the other end of the age scale some of us look at retirement disappearing off into the distance along with our pensions, or a rather uncertain future of eking out what jobs we can in what a few years ago was dignified with the name of portfolio employment.

Our economy is in a very different place to when those of us who are older started work, both in terms of there being fewer jobs that can be done with limited qualifications but also because the post-war boom fuelled by reconstruction and beyond ended a long time ago.  Not only are we in a cyclical downturn (the bust that followed the boom that was supposed to last forever) but Britain is well and truly into a different phase of its place in the world.  Economically, our position is decliningrelative to many countries and it is a real question whether we can maintain over the longer-term growth in living standards.

As people we seem to be in danger of slipping into the territory of Acts 5, where Ananias and his wife kept back some of the proceeds of the property they held, and as we read, it did not benefit them because they lost their lives.  In a situation where work and the rewards of work are not shared out very evenly (let alone equally) we too often blame or demonise those without work rather than asking the deeper question about the overall amount of work available and whether some have too much of it, and are hanging onto it, whilst others go without.  Some have got out of the habit of work (or never had the chance to learn it) but some of the indolence may be due to there being little real prospect of them finding meaningful work.

This is difficult and challenging territory, and would that we could take the inevitable politics out of it, but whilst we may question aspects of the various schemes that seek to fix the symptoms by finding some kind of ‘training’ and work experience for those outside the system, we also need to ask about the backdrop to the wider employment situation where the real problem is insufficient work to go round and a mal-distribution of that work.  I suspect the many vested interests would make it fiendishly difficult to find a way of sharing out the available work more equitably, not least because the corollary of that is if hours worked went down for some so that others had work then that means income would also have to go down for some in order for others to have a share.  Could we be Barnabas or would we be Ananias?

My thanks to colleagues in my parish team and also in the Faith at Work in Worcestershire Team who shared in discussion about these ideas.

Assuming Money Gives Everything a True Value

I have mentioned previously Michael Sandel's recently published book 'What Money Can't Buy' that has had many reviews and extracts published in recent weeks.  Much has been made of the various examples he offers of the way in which things he thinks shouldn't have a monetary value palced on them have been drawn into markets of one kind or another, from blood donation in the US through to the interestingly negative effects of experiments of offering monetary rewards in cases where moral imperatives are felt to be a more important driver (e.g. in charity collections or even a community which is felt to be the right palce for nuclear waste to be stored).

An article I read recently goes behind the examples that have been widely quoted to an extract that gets to the nub of the question about why the market seems to have aquired a status in tjhemselves as an arbiter of what is important:

'A fascinating question he addresses is why the financial crisis appears to have scarcely put a dent in public faith in market solutions. "One would have thought that this would be an occasion for critical reflection on the role of markets in our lives. I think the persistent hold of markets and market values – even in the face of the financial crisis – suggests that the source of that faith runs very deep; deeper than the conviction that markets deliver the goods. I don't think that's the most powerful allure of markets. One of the appeals of markets, as a public philosophy, is they seem to spare us the need to engage in public arguments about the meaning of goods. So markets seem to enable us to be non-judgmental about values. But I think that's a mistake."

Putting a price on a flat-screen TV or a toaster is, he says, quite sensible. "But how to value pregnancy, procreation, our bodies, human dignity, the value and meaning of teaching and learning – we do need to reason about the value of goods. The markets give us no framework for having that conversation. And we're tempted to avoid that conversation, because we know we will disagree about how to value bodies, or pregnancy, or sex, or education, or military service; we know we will disagree. So letting markets decide seems to be a non-judgmental, neutral way. And that's the deepest part of the allure; that it seems to provide a value-neutral, non-judgmental way of determining the value of all goods. But the folly of that promise is – though it may be true enough for toasters and flat-screen televisions – it's not true for kidneys."

Sandel makes the illuminating observation that what he calls the "market triumphalism" in western politics over the past 30 years has coincided with a "moral vacancy" at the heart of public discourse, which has been reduced in the media to meaningless shouting matches on cable TV – what might be called the Foxification of debate – and among elected politicians to disagreements so technocratic and timid that citizens despair of politics ever addressing the questions that matter most.  "There is an internal connection between the two, and the internal connection has to do with this flight from judgment in public discourse, or the aspiration to value neutrality in public discourse. And it's connected to the way economics has cast itself as a value-neutral science when, in fact, it should probably be seen – as it once was – as a branch of moral and political philosophy."'


I was struck by a comment at a recent conference entitled ‘God Talk’ (in Leicester on 24 May 2012) that since the enlightenment we live in a secular society which is thought to offer a level playing field for any belief or faith (in this context religious belief).  One can see how the operation of certain aspects of our society such as markets and by extension economics as a (social) science being value-free could be seen as useful.  But just as no branch of social science operates in a neutral way like the physical sciences are believed to, so economics and markets are influenced by the actions and beliefs of human beings.

For classical economics and the so-called efficient markets hypothesis to work, markets need to have perfect information and for the actors to be always logical in their responses.  The money markets in their reactions to the situation with the Euro show how there is less than perfect information (we have significant uncertainty (as opposed to risk, which one can measure) because nobody knows what will happen – this is a very good example of Keynes’s saying that you cannot extrapolate the future from the past) and markets tend to over-react through the effect of the crowd).  For a more thorough demolition of classical economic theory and markets, see Steve Keen’s book ‘Debunking Economics’ that I referred to on 13 January 2012.  Some prefer so-called Behavioural Finance or Economics but as Keen shows, that is not without its weaknesses and really one needs to understand the mathematics of probability much better.  He argues that many economists have ignored some of the key points of the mathematics and it certainly requires some close reading to follow the argument about how the mathematics might properly work.
 

What all this seems to suggest is that we don’t live in a world of simple relationships and that it is dangerous to abdicate responsibility to assumptions that we do.  It also suggests that what may, or may not, be relevant for some very specialised parts of the economy such as stock or bond markets is not so for much of the rest of life, or even many of our own more modest and infrequent economic transactions.
 

The ‘God Talk’ conference, which was supposed to be about how to speak of God amongst the challenges of lack of religious understanding and rapid change, seemed to me to be a bit too much like theologians talking to theologians, but there were some interesting points to which I might return, as I am supposed to be taking some time off work this week!    


 

A Farming and Food Update

I thought it would be appropriate to write something in my role working with the Chaplaincy for Agriculture and Rural Life in Worcestershire.

Having recently had rogation-tide, and with the Three Counties Show coming up in a couple of weeks, it might be useful to offer some extracts from the many briefings I get about agriculture and rural issues.  It is interesting that this seems to be much more organised for this sphere that I find for my work on industry and employment issues.  Perhaps farmers and rural people see themselves as more of a community and perhaps that they need to promote their interests in a way that isn’t true of more diffuse parts of the economy where there is no shortage of information to be gleaned from the news media but it is more difficult to form a coherent picture.

Most of the information below comes from RuSource, which is an Arthur Rank Centre Project.  Other information can be found on the Diocese of Hereford’s website from their Chaplain, Nick Read.

Food inflation rose to 4.6%% in March and is well above general inflation (3.5%). The rise is due to an unusually large drop in food prices a year ago, rather than an increase now. The largest rise was among processed food products which rose by 8.1%.

The provisional estimate of Total Income from Farming for 2011 shows that the income to those with an entrepreneurial interest in the agricultural industry (typically farmers and their spouses) increased by 25% in real terms compared to 2010. This is the highest income level since the mid-1990’s and has been driven by strong world prices on the back of increased demand. Input costs have also increased, but not to the same extent as output (though there can be a lag in the increase of some inputs, such as animal feed).  There is more information on this and a graph on the effect of EU farm payments, which are affected by the exchange rate between the Euro and Sterling in a summary of Andersons Agribrief May 2012 that is part of the RuSource briefing for 31 May 2012 that has not yet been posted on the website.

Agricultural markets have been relatively stable over the last few months. World wheat prices followed a slight downwards trajectory, reflecting the strong Australian harvest and solid UK production.

On the whole UK livestock sector prices are little changed on the past month with the exception of sheep, where prices dipped slightly over the Easter period with increasing numbers of lambs being marketed earlier than the previous year.  This was borne out by farmers’ sentiments at Worcester Livestock Market during my chaplaincy visit a couple of weeks ago.  One farmer was explaining to me how poorer prices made it more difficult to invest in the business, given the price of much of the complex machinery that is needed on farms.

Cumulative milk production for the full milk year April 2011 to March 2012 was 1.4% higher than the previous year and the highest production level since 2005/06.  However, most milk buyers have now cut their prices by 2p when many farmers were hoping for a modest price rise of around 0.5p.  The fear is that this will hasten the exodus from the industry as more and more farmers are forced out by falling returns and there could be shortages of fresh milk unless it is imported because the loss of volume in the UK makes the industry not viable.  This will have a knock-on effect on the beef production as a lot of meat for burgers, mince and the like comes from the dairy side of the industry.

Free range egg prices have increased since the turn of the year, possibly as a consequence of a reduced supply originating from cage eggs since the introduction of the EU cage ban in January 2012, with free range eggs being sold into the non-free range market to make up supply contracts.  In March 2012, farmers welcomed the UK ban on imported eggs originating from conventional cages in EU member states.

Finally, looking beyond immediate concerns and prices, there are huge questions about long-term food provision in a world with increasing population and complex environmental concerns:

 ‘“The low value of food is caused by its abundance”. The danger is that pursuing maximum yields of high intensity crops now may undermine longer term food-security by degrading the ecosystems that agricultural production ultimately depends on. So the costs (and benefits) for the environment from food production should be internalized within the food system. Reducing food waste and changing diets would support population health and provide nutrition more efficiently – 30% to 50% of food is wasted worldwide.’

The rest of the paper (No. 1512) is worth reading on the RuSource website.  It raises many concerns about how we use the creation given to us by God, over which we have dominion (Gen 1: 28-30) as benevolent stewards not exploiters.  I wonder if many of us who are town and city dwellers have lost contact with the earth and see food as something that simply is to satisfy our needs and wants and because so much of the food chain is meeting that on an industrial scale that insufficient concern is given to the necessary rhythms and balance of nature.