Author: johnredwood

The forecasts could have been worse. The OBR has now raised its forecast for growth in 2016 to 2.1%. That’s a higher figure than prior to the referendum vote. The OBR has also confirmed that it does not expect a  recession this winter following the vote to leave the EU, despite the Treasury and Bank suggestions of an early recession should the public vote us out of the EU.  It is also good to see they now forecast the same rate of growth for 2019 as before the vote, though that is the year when we  might well actually leave. So far I find myself in complete agreement with the OBR and Treasury.

Where we still disagree is over their forecast for 2017. The OBR now says growth next year will fall to 1.4%. It is difficult to see why. All the current indicators suggest an economy that will continue to grow around the 2% rate, as they forecast last March. Consumer spending  and confidence are strong. New housebuilding is accelerating. New car output and sales are good. Money and credit are growing more quickly than before the vote.

The government has decided to ignore the increased borrowing thrown up by the lower growth forecast, which is sensible of them. It has also decided to boost total public spending. This Parliament it is adding £46.1bn to the spending total, averaging around £13bn a year after this year. Much of the increase goes on capital investment, with increased spending on new homes, on road and railway lines, broadband, and hi tec, R and D and venture capital activities.

The budget judgement adds a small fiscal stimulus to the larger monetary stimulus which was happening anyway before the Bank’s injection of more bond buying.

A fuel duty freeze is paid for by a 2% increase in Insurance Premium Tax.

This Statement seeks to boost UK productivity by government infrastructure provision and by direct investment and intervention. Its success will hinge on choosing good public investments that produce a return and boost productivity, and on removing transport and communications bottlenecks for the private sector. There needs to be substantially more infrastructure investment, which will require private capital on top of the public sums identified in this announcement.

The last polls allowed before the Italian referendum point to a defeat for Mr Renzi and the government he leads. He wishes to concentrate power in a single chamber of the Italian Parliament and make it easier for him to direct reform and keep a majority in place for his proposals. He has promised or threatened to resign if the public do not back him. The idea behind his reforms is to achieve supply changes to help the Italian economy wrestle with the adverse monetary and fiscal background the Euro has delivered. Youth unemployment remains at crisis levels and general unemployment is far too high.

Meanwhile Italian banks remain at the centre of the Euro areas banking problems, with arguments over how much of the losses the bondholders and shareholders need to absorb, and how quickly the balance sheets of the weakest banks can be rebuilt. The absence of a strong government authority with clear views on how to resolve the banking troubles holds back sorting out the issues that afflict the Italian economy.

In France the centre right is close to choosing its champion for the forthcoming Presidential election. Polls and commentators take the view that either Mr Fillon or Mr Juppe will emerge as the new President, depending on who wins the run off contest for their party nomination next week-end. Current betting favours Mr Fillon. Most people expect a re run of past elections when Mrs Le Pen does well in the first round, only to lose by a substantial margin in the run off against whichever establishment candidate has emerged as the best placed to take her on in the second round.

As always I do not intend to intervene in an election in another country, and have no personal preferences on who should win. By common agreement Mrs Le Pen is likely to be an important runner in the election so I will tomorrow look at the programme she is likely to adopt for her attack on the Presidency, as this has received little attention so far in the general press. Current polls show her losing to either Mr Fillon or Mr Juppe, but polls can shift during a campaign and polls in recent elections have not been very accurate.

There are general concerns in Brussels that the current wave of support for parties critical of international treaties and supranational government could garner more support in any EU country facing an election next year.

Today the Treasury will throw in the towel over its stupidly pessimistic forecasts for the UK economy this year. I expect them to come  round to my view-and their view in March – that the UK econony will grow at least 2% this year, the fastest of the G7.

They should also recognise that next year the UK is likely to grow by at least 2% in line with their forecast of 2.2% in March.

If they persevere in wanting to be wrong, and slash their March forecast, the Chancellor should ignore the bad figures for tax and the deficit that results from any such forecast. The media should ask why the Treasury wants to compound their errors for this year with another foolish forecast.

The left are keen to redefine the Brexit voters and the Trump voters as part of the world’s poor, left behind by the shiny new globalisation mainly left of centre governments like the US and France have brought them. They say they get it. Apparently the UK’s wish to be independent was no more than a protest vote by former steelworkers and low paid workers.If only we had left it to the civil servants, teachers and lawyers we would have got the right answer. The vote for Trump was a howl of anguish from the “Rustbelt”, a disobliging phrase used to describe swing states that voted the wrong way. Successful parts of the world were dismissed in a throw away description because one or two core industries had experienced a painful decline.

They extend this analysis to Brexit voters in the UK and AFD voters in Germany. Apparently we were all low skilled, down on our luck and uneducated. If only we had done as well at school and got to College as they did, we would not conceivably have voted the way we did.

This is of course self justifying nonsense. For every out of work steelworker who voted for Brexit there was a well qualified professional also voting for it. And why are they so scornful of the out of work steelworker, whose vote is worth the same as the lawyer and whose judgement may be better? For every low paid worker backing the AFD there is also a wide range of people who are far from struggling voting the same way. In order to get to 52% in the UK and to 48% in the USA for Mr Trump you need to do far more than mobilise the people who have lost out from globalisation.

Nor is it true to say all Brexit or Trump voters are anti all features of globalisation. Many of us are happy to work alongside talented people from other cultures, to have open borders for tourism, student exchange and business travel, to enjoy the benefits of good imports and to share technology around the world. We do not want to put the clock back to a world where there is little international trade in ideas and services.

The main features of globalisation which many dislike are the result of supra national government. There is a widespread feeling that too much is now dictated by the EU and by international Treaty. This prevents democratic engagement over our laws, and stops elected governments making changes people want.

There is also a widely held view that allowing in too many migrants year by year drives down wages, creates shortages of homes and public facilities, and changes communities too rapidly. This feeling is strong in many parts of the USA and Europe. Taking too many talented and skilled people from developing countries into unskilled work in the west also makes the economic progress of developing countries more difficult to achieve. It is related to the excessive international government, which insists on free movement to the higher paid places.

Most of the people who want a slower pace of inward migration to the US or UK are far from being racist. They do not wish to pick and choose people based on race or origins. They simply want fewer people overall. The extraordinary thing is how tenacious the elites are in trying to keep government away from people, by doing more and more through unaccountable global institutions and by treaty. As Labour implied in the UK, if the politicians do not like the way people vote in elections and referendums, then they set out to change the people. That is why both sides get so angry with each other.

I have often tried to explain that the Fed, Bank of England and ECB made two grave errors over the last decade or so. Most commentators now agree that they were too lax in their requirements for cash and capital for the commercial banks in the period up to 2008. Quite a few of us said so at the time, most now say so with hindsight. Their laxity allowed or encouraged commercial banks to overexpand, lending too much. We saw property, commodity and financial asset bubbles as a result.

Most still fail to agree that from 2008 onwards the Central Banks made the reverse mistake. They demanded too much cash and capital reserve of the banks, so there was too little cash and credit available for jobs and growth. The Central Banks helped bring down a few of the large banks by their precipitate action. Since then their constant pressure for stronger bank balance sheets has meant slow growth generally.

Tim Congdon is one of the few economists to explain all this. He has done so again recently. He also points out that Quantitative Easaing, a policy he recommended, was sufficient to prevent the Great Recession the Central Banks created from becoming a Great Depression. The artificial created money did enough to offset the worst of the money destruction from their approach to commercial banks.

My view throughout has been that the authorities should not have undermined the banks in the first place, and having done so they should have acted as midwife to new stronger banks more quickly to resume normal money and credit growth. In UK terms I argued for faster and more effective measures to get RBS and HBOS lending more again as a preferable answer to QE.

Whilst I accept Tim Congdon’s argument that QE was better than doing nothing when they visited the Great recession on us, QE has had unfortunate side effects. It has created a new price bubble in bonds and other financial assets. As the Prime Minister has pointed out, it has helped the rich with financial assets more than the rest of the population.

Today we see the dangers of the price bubble in bonds. The US authorities, wedded to ultra low interest rates all the time there was a Democratic President, look as if they now want to put interest rates up. Markets have decided that Mr Trump’s reflationary policies will require higher interest rates, and have sold bonds to raise the longer term rate of interest. As a result the dollar has started to strengthen some more.

Mr Trump’s reflation will take time, as he will need to fight through the tax cuts and spending rises he wants.In the meantime the USA is experiencing a monetary tightening. Tougher language from the Fed is pushing up expectations of short rates, and unwinding some part of the bond bubble is pushing up longer rates. The world economy does not need a monetary tightening in the USA all the time so many banks around the world remain prisoners of the tougher regulatory system that has given us slow growth. Nor does Mr Trump wish to see the modest rate of growth in the USA interrupted by the wrong monetary tightening. The Central Banks can mess it up again.

The Pope this year has made clear his dislike of border walls and fences. He has urged politicians to build bridges, not walls. He has never named individual countries or politicians that he has in mind.

Looking at what is going on, this has been a big past year for new wall and fence building. The main centre of this activity has been the European Union, along with Turkey acting with EU encouragement and money.

The EU has substantial border fences and walls. There are the fences around Melilla and Ceuta to prevent people entering Spain. There are now long fortifications of the Austrian borders with Slovenia and Hungary. There are fences and walls between Bulgaria and Turkey, Hungary and Slovakia, Hungary and Croatia, and Slovenia and Croatia. There is the large construction along the Macedonia/Greek border.

The EU as a whole is helping fund a huge border protection between Turkey and Syria. Along the 70 km stretch from Kilis to Karkamis a ten foot high wall is being added to the existing razor wire, and watch towers built. The West is helping with cash, surveillance balloons and anti tunnelling equipment. When the EU signed the Turkey/EU Association Agreement giving Turkish people more rights of movement into the Schengen area, one of the conditions was better border defences for Turkey along its Middle Eastern southern border.

It is difficult to escape the conclusion that the Pope must have in mind the EU and those member states busily adding to their walls and fences, and assisting Turkey with its massive construction. If Mr Trump goes ahead with adding to the border fence the US already has along parts of its Mexican frontier, he will be adopting an EU policy which has been actively pursued over the last year.

When he was first elected President Obama had huge political goodwill around the world. Many wished him well and were excited by his personal story. I liked the promise of a new approach to international relations. I particularly liked his pledge to close Guantanamo Bay, a blot on the Western conscience, and his wish to disengage from Middle Eastern wars. He carried with him the hope of diplomacy, a new language about reconciling differences and tying to overcome old enmities with new approaches.

Like many I feel badly let down. He never closed Guantanamo. The war in Iraq dragged on, as did the war in Afghanistan. The President often dithered, then added to the military forces involved. He went along with intervention in Libya which removed a bad government, to replace it with a rolling civil war. He bombed some of the time in Syria, as the West sought to create a third force of moderate democrats who either did not exist or who were overwhelmed by both sides in the violent conflict. It is difficult to say the Middle East is a better place today than eight years ago, though Americans have shed much blood and spent much treasure on trying to remodel several countries.

For me the worst moment of his Presidency was when he dared to come to the UK to back the Remain campaign. It was a catastrophic error for the Leader of the Free world to involve himself in a referendum in a friendly country on the wrong side, arguing with those who wanted to argue the British/EU colonial government case rather than the case of the Independence seeking Americans/UK citizens. He communicated a sense of a man who did not particularly like our country. His eviction of Churchill’s bust from the Oval Office was in itself unimportant. I understand his wish to surround himself with his own choice of greats and mentors. It did however, speak eloquently to us that he did not consider the shared crusade to rid Europe of fascism in the 1940s as an important story worthy of recollection close to his desk.

He started his Presidency with the banking crisis in full flow. The US responded more vigorously and more successfully to it than Japan had done to its crisis in the late 1980s, or the Euro area did in 2008-16. During his term the US economy has experienced a sustained but moderate recovery from the collapse it felt in the early days of his tenure. He spent much of his political capital in pushing through Obamacare, which badly divided his nation and led to the collapse of the Democrat vote in subsequent elections. In his later months in office he has seemed strangely detached from the job, surviving in it by touring the world and espousing all the establishment causes he can find.

It is perhaps a fitting end to his tenure that he spends time in Europe with a series of continental politicians that have themselves lost touch with their voters, to make common cause to be tougher against Russia. This is one farewell tour where I will not be buying the soundtrack. Whatever happened to the hopes of a more peaceful world?

UK consumers have given the best possible answer to all the experts, media pundits and BBC guests invited on to show after show daily since the Brexit vote to talk the UK economy down. We have gone out and shopped for Britain, buying things made here, enjoying services provided by UK businesses, and creating jobs galore in the process. As producers the UK has worked harder and produced more to meet the demand.

I do hand it to all the run down merchants. They are clever and persistent. If at first they don’t succeed – and they didn’t – they try again. Here are some of their favourite scares:

1. Consumer confidence will be badly hit by the Brexit vote, so sales will fall, leading to job losses and further sales declines as people lose income.(result – record levels of spending growth)
2. Companies confidence will be badly hit by the Brexit vote, so they will put off investment. This in turn will mean fewer jobs, hitting incomes, and will of itself slash the growth rate. (Result Many good examples of major new investments being committed to UK)
3. Foreign investors will be put off coming here, so inward investment will be badly damaged (Tell that to Google, Wells Fargo, Tata etc)
4. The pound will go down (well they did get one right!) This will boost prices, which will slash real incomes, which will cut consumption which will lead to a recession.(that hasn’t happened)
5. People will stop buying new homes, so there will be price falls and a cut in new homes built .(Instead people went out and bought more new homes, and housebuilders are stepping up output by double figure percentages)
6. Commercial property values will tumble, undermining the construction industry and reducing landlord incomes (Instead commercial property values pretty stable with rents increasing and good flow of new developments and lettings)
7. Some big companies will take their business elsewhere. (Name them)

Everyone of these forecasts save the fall in the pound have been proved wrong in 2016. The original forecasts were for early disasters on the back of the immediate shock of the vote. Now they are regrouping and saying this all might happen later – say after Article 50 is triggered. Why?

It is wicked that some want to talk the pound down to spark the inflation that they think will result in the recession they forecast. It is bad that some want to talk large companies out of investing here to prove themselves right, despite the evidence of their own eyes that the UK is a large and growing market in need of more capacity to supply more goods and services at home.

No wonder experts were given a tough time in the referendum. To many of them look as if they bent their views and estimates to their political views, and now look like bad losers.