Posts Tagged ‘g7’

If house prices boom all over again, then the chancellor may be able to take much of the credit. In fact, it rather looks as if he is gambling on rising house prices. It’s a shame, because there is something else the UK really needs to rise, and that is its stock of entrepreneurs and wealth creators.

George Osborne is spending £3.5 billion on helping people chasing a new mortgage. That’s a lot, and he is guaranteeing £130 billion worth of mortgages. That is a risky thing to do but perfectly safe, if – and it is a big if – house prices rise.

The plan is for the UK government to extend its share equity scheme, so that the government will offer an equity loan worth up to 20 per cent of the value of a new build home to anyone looking to move up the housing ladder. House buyers will be required to put down a five per cent deposit from savings, and the government will then loan a further 20 per cent interest free for the first five years and repayable when the house is sold.

“It’s a great deal for homebuyers,” said George.

The government will also offer a new mortgage guarantee, to be available to lenders to help them provide more mortgages to people who can’t afford a big deposit. These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending. In all, the government will guarantee £130 billion of mortgages.

These are bold moves. But what effect will they have?

The risk is that these measures will push up house prices, which will soon become unaffordable again, but for a new reason. At the moment the challenge for home buyers is raising finance. If house prices rise, the challenge will relate to being able to afford mortgages, even if the finance is available.

If the government really wants to help more people own their own homes, it needs to try to get house prices down, not up. It can do this by taxing land that is lying idle, and reforming planning regulation. It can do this by forcing zombie banks and home builders to revalue the value of land on their balance sheets. Such measures will benefit the UK in the long run, but will be hugely controversial.

You can’t blame George for not implementing these measures, because if he did, an election disaster may await but it would have nonetheless been the right thing to do.

For too long the UK has grown on the back of rising house prices, giving consumers the confidence to borrow and spend.

The UK needs to grow via business making bold investments, entrepreneurs creating wealth by dint of their ingenuity, and through creating an innovation culture in which innovators are not afraid to risk failing.

Instead George tweaked. Sure corporation tax is falling to 20 per cent: “The lowest business tax of any major economy in the world,” he said. But US companies are sitting on $1.4 trillion worth of cash, according to Moody’s. Companies in the UK and across the world have money, and they are not spending it.

Cutting UK corporation tax will give the UK an advantage over rivals in much the same way that a trade subsidy would benefit UK exporters, but it will do nothing to solve the problem of cash lying idle and sitting on corporate balance sheets around the world. There is a case for saying we need to see a global fixed level of corporation tax. Mr Osborne is pushing for the opposite.

The Chancellor is also cutting £2,000 from every employer’s contribution to national nsurance. This is a bold move. George put it this way: “For a person who’s set up their own business, and is thinking about taking on their first employee, a huge barrier will be removed. They can hire someone on £22,000, or four people on the minimum wage, and pay no jobs tax.” Hats off to George – that is an interesting move.

But the UK’s underlying problem is productivity. According to the ONS, output per hour in the UK was 16 percentage points below the average for the rest of the major industrialised economies in 2011, which was the widest productivity gap since 1993. On an output per worker basis, UK productivity was 21 percentage points lower than the rest of the G7 in 2011. To enjoy sustainable growth, the UK needs improvements in productivity, and reducing the tax on jobs will not help.

The Chancellor announced other measures: a fivefold increase in the value of government procurement budgets spent through the Small Business Research Initiative; vouchers available to small firms seeking advice on how to expand, but these are little more than tinkering.

The most interesting idea to help business may have been his plan to cut stamp duty on shares traded on the AIM market. The Chancellor said: “Many observers of the British tax system complain that it has long biased debt financing over equity investment.” So the reform to stamp duty will encourage equity investment over debt.

Now it is time to turn to the missed opportunity. What entrepreneurs need is hard cash – money they can see, touch and smell.

Supposing that the £3.5 billion set aside to help home buyers was instead spent on funding entrepreneurs; perhaps spent on a sort of student loan system but for entrepreneurs, or just invested into venture capital firms and business angel networks. Now that really would have created the foundations for the UK to become the most dynamic economy in the world.

©2013 Investment and Business News.

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Growing demand and growth in productivity are a bit like a horse and carriage. You can’t have one without the other. At least you need both, if you want sustainable economic growth.

In an ideal world, over time we want to produce more output for every hour we work, and we want our hourly pay to go up in proportion to our extra productivity. Multiply that across the economy and we get more output, and more demand to meet the extra supply.

In the UK, we have a double problem. Wages are not going up with inflation. In fact in the three months to December average pay including bonuses rose by just 1.4 per cent. Annual inflation back in December was 2.7 per cent. So once again, average workers were worse off during the period in question. If you compare wage growth with inflation as measured by the RPI index, the picture looks even worse. Inflation by this index was 3.1 per cent in December, and has, in fact, been greater than wage inflation every month since March 2010.

RPI inflation versus average wages

But that is just half of the UK’s problem. The other half relates to productivity. That too has been awful. According to the ONS, output per hour in the UK is 21 percentage points below the average for the G7. Look at the big picture. The UK economy is either in recession or very close, yet employment is rising. How can that be? Answer: because productivity is declining.

In other words, in the UK we have the precise opposite of the ideal world. We have falling wages and falling productivity. Sure employment is at a record high, unemployment at 7.8 per cent is surprisingly high considering where we are with the economy, and yet the price we seem to be paying for jobs is a declining economy.

In the troubled regions of the Eurozone, the problems at face value are quite different. But perhaps the end result is very similar. The story for the Eurozone takes a slightly different view. The focus this time is on unit labour costs. That is to say the cost of labour for every unit produced.

First let’s look at some history. From the moment the Euro was launched to the point when things went pear shaped in 2008/09 the so called peripheral economies – that’s  Portugal, Ireland, Italy, Greece and Spain – saw their growth in unit labour costs race ahead of the growth seen in France, and even more so relative to Germany.

Since 2009/09 the gap has closed. In fact with Ireland and Portugal, the gap with France has closed and gone into reverse, so much so that growth in unit labour costs in Ireland and Portugal since 1999 is now lower than the equivalent for France. Spain is not far behind. Greece has a bit more work to do. Look at the figures and official data indicates that since 2008/09 unit labour costs have fallen by 14.7 per cent in Greece, 14.1 per cent in Ireland, 7.6 per cent in Spain, and 2.4 per cent in Portugal. They have risen 1.1 per cent in Italy, however. There are doubts over the accuracy of this official data, but you get the point. The gap has been closing.

The markets are chuffed. They see falling unit labour costs in these countries as evidence that the slow march to recovery is well on its way.

But is that right? As you know, unemployment in these countries is much higher than in the UK, and indeed in Greece and Spain – where more than a quarter of the working population is out of work – this is at a level one can only call terrifying.

Sure unit labour costs are falling, but given the massive level of unemployment, is that surprising?

The Eurozone really needs exactly the same development we require in the UK: rising productivity and rising wages. Perhaps, because of their lack of competiveness with Germany, and because – unlike the UK – they are not tied into a fixed exchange rate with Germany, they need productivity growth to slightly exceed wage growth.

This is just not happening.

The markets may love the data, but just like a bad marriage, when truth dawns, things may unravel badly.

©2012 Investment and Business News.

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A lot of economists don’t get it. Why oh why, oh why? The UK economy has been contracting of late, but employment rising. In Q1 of this year UK labour productivity, measured as output per hour, fell by 1.3 per cent, and UK unit labour costs increased by 1.4 per cent. According to stats out last week, labour productivity in the UK was no less than 15 per cent below the G7 average.

The poor level of UK productivity is not news.  It has been a permanent problem for the UK for decades.

Since the start of the recession in 2007, growth of UK output per hour has trailed that of the US, and the UK’s  productivity has been lagging behind Germany, France and Italy for decades. Since the recession the gap has not grown, but it is still there.

If you give UK productivity per hour a score of 100, then US productivity is 127, French productivity is 125, German 122, Italy’s only marginally higher, Canada’s is the same, and Japan’s is less.

Then there is the riddle of how the UK’s employment rises while GDP falls. Some of the explanation lies in the rise in numbers of part-time workers, but on its own this explanation is insufficient.

Another theory, put forward by the Bank of England’s Ben Broadbent, is that financial markets are broken, and capital is being allocated inefficiently, and therefore business, starved of the necessary funding, is putting cash flow before investment. So rather than investing in new equipment that requires a big up front outlay, businesses are employing more staff. Extending that argument, maybe business lacks confidence. Its lack of certainty means it is reluctant to invest, and therefore hires more staff to meet outputs targets.

Martin Wolf took a look at these problems in the ‘FT’ a few days ago. He also speculated that falling wages may encourage businesses to take on staff, even when the extra productivity generated is not that great.

But then the issue of why the UK lags behind the other major economies has been troubling economists and politicians alike for years. Take this article in the ‘Economist’, from 1998:  The British disease revisited

You may recall that solving the UK’s poor productivity was considered to be something of a priority for the Blair government. One theory doing the rounds at the time when Tony Blair moved into number 10 was that the UK’s poor productivity was down to low investment, and that was down to the erratic nature of the UK economy, drifting from boom to bust. It is quite interesting to look back at Gordon Brown’s claim that he had put an end to boom and bust; it now seems daft. Indeed, his preoccupation with steady growth may have hidden underlying problems. It is just that in 1998, the idea made an awful lot of sense.

Here are some theories.

Part of the reason why labour productivity has fallen in recent years is down to the smaller slice given over to the City in the UK economic cake. You may argue that much of the City’s productivity was illusionary, but the fact is that, on paper at least, it is highly productive. As it cuts jobs, overall productivity falls.

As for why the UK lags behind most of the G7, maybe we need to rewind the clock back to 1997, and ask what the problems were then.

To an extent the comparison with France and Italy was clouded by the fact that employment is much lower in these two countries. Labour laws are so tough, that employers only take on more staff if the productivity gains that result are very significant. There is also anecdotal evidence that workers, and in particular management, work longer hours than they are declaring. So they have certain targets they wish to meet, but there is a limit to how many hours they are allowed to work, so they work longer to meet those targets and lie on their time sheets.

But that does not explain Germany and the US. German unemployment is lower than in the UK. Output per worker is higher. It doesn’t explain higher productivity in the US, where labour laws are of course much looser.

Well, in 1998 McKinsey came up with a theory. So, quoting the ‘Economist’ quoting McKinsey, ”[the problem partly] lies in the effect of regulations governing product markets and land use on competitive behaviour, investment and pricing.” The ‘Economist’ piece continued: “Although British food retailers are world leaders, says McKinsey, they would do better still if planning restrictions did not stop the building of stores on the scale of America and France. Hoteliers are hobbled, say the consultants, because not only are almost half of the country’s hotels more than 100 years old, compared with 3 per cent in America and 14 per cent in France, but they are constrained by planning restrictions. And until recently telecoms regulators kept call charges too high relative to line rentals, discouraging greater use of telecoms.”

And if that sounds like déjà vu, maybe there is a good reason. After all, David Cameron’s call for less dither, and to make it easier to build, is very much targeting this same issue.

It just goes to show that 15 years later, we have completed the longest ever run of economic growth, but we are in the midst of the worse downturn ever, and yet peek beneath the surface and some of the challenges haven’t changed at all.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

This is no wind up. The last week or so has seen hints. The green shoots may not be big, peeking above the surface like scared mice, but they have been there all the same. So is this for real? Has the recovery begun?

Yesterday on the Andrew Marr Show former Prime Minister John Major said: “Recovery begins from the darkest moment. I’m not certain, but I think we have passed the darkest moment.”

So what’s the evidence?

Earlier this month, data from the ONS revealed another rise in employment – this time up 236,000 in the three months to July. Elsewhere, data on July’s industrial production indicated the biggest jump in this sector for 25 years. The OECD took a look at the G7 and the four big emerging economies (BRICs) and saved its most bullish words for the UK and Brazil, which were the only countries that it said were due to see a pick-up next year.

The round of good news was completed by the Centre of Economics and Business Research (CEBR), which has forecast that 2013 will see the first rise in real incomes for UK households since 2009.

Looking beyond the UK’s borders, markets were c*ck-a-whoop. Both the US Fed and the Euro regions’ central bank – the ECB – have announced QE (or in the case of the ECB QE ish), and at last they are saying central bankers are taking decisive action. A report from ‘Financial Times Deutschland’ suggested that unit labour costs have fallen by 15 per cent in Greece since 2010, with significant falls also seen in Spain and Ireland. Greece saw its current account deficit fall by 54 per cent between 2007 and 2011.

Finally maybe policy makers are learning lessons. Vince Cable is agreeing to relax labour laws in the UK. David Cameron wants to cut down on red tape, and make it easier to gain planning permission. He wants to see an end to dithering.

Then there is the funding for lending scheme.  This is an idea that really seems to have struck a chord across the world, so much so that some economists in the US are now urging the Fed to announce a similar idea.

And finally, the World Economic Forum has released its latest league table showing the world’s most competitive countries. And guess which country moved from number ten on the chart to number eight? Yes, that’s right the UK. The usual suspects did better: Switzerland, Singapore, Finland, Sweden and the Netherlands. But of the G7 only Germany in sixth spot and the US in seventh scored higher.

Recessions are bad, of course they are, but they can have a cleansing effect. They can correct bad habits, get rid of bad ideas, and create economies that are more focused on ideas that work. The UK has had a torrid few years, but maybe it is now set to benefit from the correction.

Well is it? Read on…