The Economy

Lord Northbrook Excerpts

Thursday 28th April 2016 Lords Chamber

[Lord Northbrook (Con)]

My Lords, I too would like to pay tribute to Lord Peston. I made my maiden speech in an economic debate shortly after we left the ERM in 1992—not the easiest time to make uncontroversial remarks. Lord Peston made his usual brilliant contribution just ahead of my speech. In a loud stage whisper, Lord Whitelaw then remarked, “That is the most intelligent person in the House”, which did not steady my nerves. I learned the truth of that remark over many years from Lord Peston’s contributions to our financial debates and committees.

As the Minister said in the Budget Statement debate on 23 March, there are many positive stories to tell about the UK economic situation. The OECD has forecast that the UK will be the fastest-growing major advanced economy in 2016. The investment bank Kleinwort Benson reports that, according to 50 of the most highly regarded economists, the economy is expected to grow by 2.1%. The highest forecast is 2.7% and the lowest is 1.5%. On unemployment, over the past three years the UK has seen the rate fall from around 8% to just over 5%.

Figures on the public finances are less negative when they are viewed in a historical context. In 2015-16, borrowing was 3.9% of GDP, the lowest ratio we have seen since 2007-08. According to Andrew Sentance, a former member of the MPC, the Government’s deficit is now within the range of 2% to 4% of GDP, which was the norm in the mid-1980s, mid-1990s and mid-2000s. We are now at a much safer level of government borrowing, and we do not really need a lecture from the noble Lord, Lord Tunnicliffe, about government borrowing. If a Labour Government had come back into office, goodness knows where borrowing would have gone, let alone what might happen if Jeremy Corbyn comes to power.

It will take much longer to repair the damage to public finances created by the financial crisis. However, care should be taken not to make short-term reactions to any OBR change or forecast by spending proposed windfalls that may not materialise or tinkering with the tax system, which can make matters more uncertain for business.

The latest GDP figures, published yesterday, showed, as expected, a slowdown in the UK economy, with the figure coming out at 0.4%, or an annual rate of 2.1%. The service sector played a major part in that figure. The slowdown had been anticipated by the OBR economic and fiscal outlook in March, but Capital Economics UK analyst Ruth Miller believes the expected slowdown to be temporary. She said:

“Many of the factors likely to be to blame for the first quarter’s weakness should prove short-lived. We would not be surprised if growth were to subsequently accelerate in the second half of the year, putting the economy back on track”.

Inflation remains under firm control, which certainly surprised me, as I thought that quantitative easing would lead to it rising sharply. However, we seem to be in a low-inflation climate for the time being, which has meant that interest rates have been able to stay low for a long time. As the Minister said in his opening remarks, the trade-weighted exchange rate has been sound. Although pensioners and savers have suffered, it has generally been good for the economic climate.

However, as the Minister said in the March debate, there are still significant economic issues that need to be addressed. He rightly focused on the delay in getting the deficit down in the next five years. This is due to lower forecast tax receipts, caused in the Government’s view by weaker productivity and the weaker outturn for nominal GDP. This reflects a common recent phenomenon of low productivity growth across western economies. Economic turbulence, such as in China, has also led to weaker growth forecasts for the global economy and global trade.

The Minister’s short-term cautious views are backed up by recent UK economic statistics since the March debate. Manufacturing production, which had appeared to stabilise in the second half of 2015, showed a further fall in February. It remains to be seen how long this weakness in the manufacturing sector continues, although it is not specific to the UK. We have seen a softening in industrial growth across many economies linked to the slowdown in China. More recently, figures last week pointed to slower employment growth and a very slight rise in unemployment, although the jobless rate remained stable at 5.1%. Retail sales were also disappointing in March, and government borrowing was slightly ahead of the Budget forecast.

As the Minister has already discussed, productivity has been a recurring problem. At the start of April, figures were published by the ONS indicating that productivity among UK workers during the last quarter of 2015 fell at the fastest rate since 2008. The figure for the manufacturing sector was particularly poor with a fall of 2%.

How worried should we be about these latest economic indicators? On the employment front, the good news is that the number of unfilled vacancies for businesses employing more than 250 workers is still at record levels. It is the smaller firms with fewer than 250 employees that are reporting fewer vacancies, and they have been doing so for a few months now. Is this a temporary problem, or is it an unforeseen consequence of the national living wage? Could this be having an impact on smaller firms with less financial resources and lower pay rates, making them more cautious about taking on new workers, at least in the short term?

I turn to retail sales. The figures on those in March and April are affected by the timing of Easter so need to be treated with caution. However, in the first three months of 2016, and adjusting for inflation, retail sales were still 3.7% up on a year ago. That compares favourably with the final quarter of 2015. It is also quite close to the 4% to 4.5% average retail sales growth in 2014 and 2015, which is strong by historical standards, although I still find yesterday’s figures on retail sales a bit disappointing.

On productivity, which the Minister has already covered well, the fall noted above in the last quarter has attracted the following comments. Howard Archer, an economist at IHS Global Insight, said:

“How productivity develops going forward is critical to the economy’s growth potential … The crucial question for the UK economy is, does the fourth quarter of 2015 mark a temporary relapse in productivity? Or is it evidence that the UK has an ongoing serious productivity problem?”.

Personally, I am unclear on this.

With the economy generally on a much sounder footing, I turn to the interesting report produced by the Treasury on the effect on the UK economy of a decision for Brexit in the EU referendum. As the Minister discussed, the headline figures envisage three separate Brexit scenarios. I am no expert on the basic trade equation that it has used as a background to its conclusions, but the FT assures readers that it is,

“not as complicated as it seems”.

To go into a bit more detail on the Minister’s opening remarks, the conclusions are based on three separate scenarios. In the Norway one, UK GDP would decline by nearly 4% by 2030. In the Canadian solution, where we negotiated a bilateral agreement, the figure would be over 6%. Finally, if we had WTO membership only, without any specific agreement with the EU, the figure would be 9.5%. The Financial Times of 19 April, among other publications, goes into further detail on each choice. In the Norway scenario, the Treasury estimates that the reduction in annual GDP per household by 2030 would be £2,600; in the Canadian scenario this would be £4,300; in the WTO scenario, £5,200.

In its editorial of the same day, the Financial Times says that the Treasury’s analysis,

“leaves little doubt that it is in Britain’s … economic interest to stay in”.

It says that the Chancellor’s department has,

“produced a credible and authoritative piece of work … unlike the Foreign Office, the Treasury has never been a Europhile institution … Most firmly—and correctly—they opposed the idea of Britain joining the single currency more than a decade ago”.

The FT continues:

“The Treasury’s conclusions about the economic consequences of Brexit are in line with … almost every reputable economic body from the International Monetary Fund down … The Out camp has failed to come down clearly on what post-Brexit … arrangement it favours”.

It continues that if the Brexit camp,

“cannot respond by addressing the issues it raises head on, they do not deserve to be taken seriously”.

In summary, the UK economy is making progress, but there are still considerable problems to overcome that a long-term view must be taken about, rather than short-term political temptation, which creates an uncertain climate for business and individuals.