Should Osborne be praying for the economy to stall?

After three quarters of economic growth, George Osborne has already transitioned from cautious optimism to full-on self congratulation. "The UK has been singled out as an example of the improvement and there is recognition that we have stuck to our economic plan", he said last month.

Let's leave aside that he hasn't stuck to his plan at all (the deficit was forecast in 2010 to be far lower today than it is, and as a result of two flatlining years he is borrowing over £200 billion more than planned). Let's even underplay that even today's public debt figures £8.1 billion this October, down from £8.2 billion for October last year, are hardly impressive.

Nevertheless the level of UK economic growth in the last three quarters (nine months) has surprised and exceeded most independent forecasts. The Bank of England declared earlier this week that
the UK is in "sustained recovery".

Three consecutive quarters of reasonable growth (by historical standards) is fairly hard to dismiss. What economists now disagree about is not whether recovery has been sustained, but whether it  is sustainable.

There's a good analysis of this question by the Independent's Ben Chu here. The key point is that the recovery is driven (largely) by debt, which has been both encouraged (through schemes like Help to Buy) and enforced (through declining real wages, benefits and high unemployment). As the chart below, personal debt remains at crisis-era highs

The question therefore is can growth continue with debt at high levels and real incomes declining?  The unstable retail sales figures - with October registering a fall that confounded predictions - are a warning sign to the optimists.

So the question is whether the recovery will stall - due to people reining in their spending without any compensating surge in government or corporate investment - or will it continue to grow as people take on ever greater debts?

If the latter is the case, then the ultimate result may be a sharp crash, caused by unsustainable levels of debt. That scenario should make George Osborne pray for the economy to stall (while he devises a sustainable growth strategy - something some of his opponents have been advocating and outlining since 2010).

Help to Buy 'will fail if housebuilding slows'

Sharpest house prices increase since June 2002 sparks housing bubble fear

by Luke James

The thatcherite Help-to-Buy scheme will explode into another housing crisis if "soaring" demand is not matched by building, surveyors told the government yesterday.

Home sales are at their highest in over five years, according to monthly research by the the Royal Institution of Chartered Surveyors (RICS).

But its members also reported the sharpest increase in house prices since June 2002 - sparking fears over a new housing bubble.

Help to Buy's first phase offered a 15 per cent mortgage guarantee on new-build homes when it was launched in April.

That was extended to existing housing stock last month and over 2,000 people have since taken advantage.

Some were used as props at a Downing Street press conference yesterday as David Cameron hailed the scheme's success. He boasted: "This is all about helping hardworking people get on the first rung of the property ladder - and helping them get on in life."

But RICS chief economist Simon Rubinsohn called for the government to "urgently" address the imbalance between supply and demand.

"Housebuilding starts have picked up recently but we are still well behind in terms of the amount of properties needed," he reminded Mr Cameron.

Part-nationalised banks RBS and Lloyds, along with HSBC, have signed up to offer 95 per cent mortgages as a result of the scheme.

The Left Economics Advisory Panel pointed out that it was a huge gamble to increase personal debt when wages are stagnant and jobs are at risk.

Co-ordinator Andrew Fisher said: "If the dangers of rising house prices, greater borrowing and suppressed incomes sound familiar, then that is because it was this combination that in large part contributed to the 2008 crash.

"Unless accompanied by a massive programme of housebuilding, Help to Buy will continue inflate house prices - making home ownership even more unaffordable for most families - and lead to another crash."

Mr Fisher added that the scheme could land taxpayers with huge liabilities if people default on loans as a result of austerity.

This article first appeared in the Morning Star

Nine million more struggle to pay bills

by Luke James

Austerity-Addicted Chancellor George Osborne has left nine million more people in financial difficulty compared with seven years ago, Money Advice Service revealed today.

The independent body found that 26 million people across Britain are now living on the brink of financial ruin - a massive 35 per cent rise since their last survey in 2006.

Failing Tory economic policies have sent hourly income plumetting by 6 per cent and sparked a "live for now" attitude to cash among the population.

For example, more than one in five of the 5,000 people surveyed would rather have £200 immediately than £400 in four months' times.

A Treasury spokesman claimed the government had helped households meet the rising cost of living by raising the personal tax allowance and freezing fuel duty.

He said: "We recognise that times are still tough for families, but Britain is holding its nerve, we are sticking to our plan and the British economy is on the mend."

But Labour shadow Treasury minister Catherine McKinnell said the figures bust George Osborne's "out of touch claims that people are better off."

She said: "This government's failed economic policies mean prices are rising much faster than wages. And their unfair choices have seen hard-working people hit hard while millionaires get a huge tax cut."

Ms McKinnell said Labour would help families "with a lower 10p starting rate of tax, paid for by a mansion tax, and take action to tackle soaring rail fares and energy prices."

TUC general secretary Frances O'Grady added that only "strong growth underpinned by decent jobs and higher pay" would end the "longest real wage squeeze since Victorian Times."

Separate figures showed there had been a 3 per cent rise in the number of people being force to declare themselves bankrupt over the last three months.

And the Left Economic Advisory Panel's Andrew Fisher warned: "As personal debt starts rising again it is clear that the squeeze on living standards also creates a huge economic risk if loan and mortgage defaults rise, threatening the banking sector again."

This article first appeared in the Morning Star

Is the UK economy on the up?

In the 2013 Spending Round in June George Osborne said he was taking decisions to "secure the recovery". Yesterday talk of recovery increased when the IMF revised its prediction for UK growth for this year from 0.7% to 0.9%.

However the same upward adjustment in UK growth is not replicated globally. Last April the IMF was predicting 4.1% growth in 2013, now it says just 3.1% will be achieved. This may be reflected in the UK by another set of disastrous figures for manufacturing and industrial production (down 2.9% and down 2.3% respectively in the last year), and a widening of the UK's already substantial trade deficit. So much for the economic rebalancing Osborne promised in 2010 ...

The extra 0.2% growth the IMF is predicting is not much to get excited about - especially when in 2010 Osborne's newly formed Office for Budget Responsibility was predicting growth would be 2.9% this year. However, the IMF revision is among a number of positive signals about the UK economy.

Last week the Services PMI - a survey of purchasing managers in the services sector (which accounts for 75% of the UK economy) - indicated growth at its fastest rate for over 2 years. The respected and independent National Institute for Economic and Social Research predicts that growth in Q2 of 2013 will be 0.6% (while Markit suggests 0.5%).

The prospects for George Osborne therefore seem to be looking up. However, all may not be what it seems. With no let up in the decline of household income, what is supporting this stronger growth in the services sector? As Duncan Weldon shows clearly and insightfully, household income is  falling, but household spending is rising - eating into savings that recovered after the 2008 crash, but are now declining again (see graph below).

What does this mean for the sustainability of the nascent UK recovery and for households? Well, as Weldon concludes, "a falling savings ratio really is underpinning our recovery. The 'new economic model' looks increasingly like the old one". This is even more so the case with the increasingly unreality of rising house prices, underpinned by the bubble-inflating Help to Buy scheme.

The overall households savings ratio masks the reality that for many households they are not eating into their savings, but in fact sinking deeper into debt (good news for payday loan companies like Tory funders Wonga). For many people - including the 500,000 that are reliant on food banks - there is a real crisis emerging. Many are struggling to pay rents - especially with tax credit and housing benefit cuts to those in and out of work.

With pay continuing to rise below inflation, and benefits similarly capped and being cut in cash terms for hundreds of thousands of households, the recovery looks very fragile. There can be no sustainable recovery through increased consumer debt. That way paves a renewed round of loan, credit and mortgage defaults - and with the state lacking the capacity to perform the sort of bailouts that were necessary in 2008 and 2009.

The economy may well be on an upward trend at the present time and this could extend into the latter part of the year. But while economic growth in 2013 is likely to far outsrip the OBR's modest 0.6% prediction, in 2014 growth of 1.8% looks perilous, as does 2.3% in 2015.

The upturn in the UK economy is built (again) on an inflating debt bubble, and the longer it inflates the more damaging the final bang when it bursts. As the manufacturing figures show, there is no evidence of rebalancing, no prospect of a revival in workers' incomes (through pay or benefits), and no substantial investment that could at least stimulate medium term growth and create jobs (in fact unemployment remains stubbornly around 2.5 million).

So while Osborne will be cheering green shoots and patting himself on the back - most gratuitously at party conference in the autumn - the underlying problems of the UK economy remain unresolved, and any temporary respite may only be storing up greater problems for the future.

Left economists say low interest rates is right

From the Morning Star
Monday 10 May 2010
by Louise Nousratpour

Left-wing economists have welcomed the Bank of England's decision to hold interest rates at record lows as policymakers weigh up the impact of a eurozone bailout and a hung parliament.

The Bank's Monetary Policy Committee voted to hold rates at 0.5 per cent and left its £200 billion programme to boost the money supply unchanged.

The widely expected decision came as European leaders agreed to prop up the euro and prevent Greece's sovereign debt crisis from spreading - while talks over a possible coalition in Britain continued following last week's indecisive election.

Despite worries over inflation, the current political and economic uncertainty is expected to reinforce the MPC's "no change" stance as Britain makes a fragile recovery from recession.

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "With personal insolvencies and bankruptcies at record levels, and home repossessions continuing, the Bank of England was right to keep interest rates low.

"Raising interest rates now would hit the poorest hardest."

Mr Fisher warned against raising interest rates to combat inflation, arguing that the government should instead suppress gas and electricity prices, which would benefit the poorest members of society.

"This would be best achieved taking the utilities into public ownership to directly regulate prices," he said.

Rate-setters have not changed policy since November - and are unlikely to until the scale of government public-spending cuts can be felt and the economy shows signs of stronger growth.

Mr Fisher argued that the Bank "should not be looking to economic growth figures, eurozone fears or inflation spikes when judging interest rates, but at personal debt and mortgage defaults."

Payday mayday

All three political parties and all the bosses' organisations are uniting to ensure you won't get a pay rise this year. All of them are calling for pay freezes to differing extents: Labour, Conservative, Liberal Democrat, CBI, IoD, BCC.

The false divide created between public sector workers and private sector workers is nonsense. This is about making ordinary workers no matter which sector pay for the crisis. Meanwhile the bonus culture continues in the banking sector and the UK remains the most unequal its been for three generations.

Research published today by the Labour Research Department (LRD) shows that "a third of all pay deals now included a pay freeze - the largest proportion since the recession began".

This is very bad news. Inflation is currently 2.4%, expected to average over 3% this year and peak at over 4% in the summer. Therefore a pay freeze is a real terms pay cut. And as LEAP showed last year, in our Inflation Report 2009, inflation is often highest for the lowest paid.

The effect of the contraction in wages and rising unemployment last year is shown in the number of personal insolvencies, rising to 135,000 in 2009 - an increase of 26% on 2008.

Lewis Emery, LRD report author, says that "Maintaining jobs and business continuity is a greater concern, both in the private and public sectors, but with inflation at 2.4% pay will not be neglected either."

Unions and workers certainly cannot afford to ignore pay - especially for the lowest paid. And any Government wanting to address the crisis needs to move away from the rhetoric of pay freezes and start raising pay significantly to stimulate demand and avoid mass mortgage and loan defaults causing another bank collapse.

9 Feb Update: The Daily Telegraph reports that more than 1.4 million households were visited by bailiffs collecting unpaid council tax bills last year. This is a rise of 700,000 in just three years, and a 69% rise since 1997.

Summer's greenshoots, autumnal rain ahead

Forecasting the economy can be as unpredictable as forecasting the weather. Just ask Gordon Brown. In 2007 he told the City of London it was on the verge of "a new golden age".

Statistics released over the summer revealed the UK economy shrank by 0.7% in the second quarter - far less than the 2.4% drop in the first quarter of the year. Throughout the summer too, the stock market (both here and in the US) steadily rose, and the housing market rose.

However, there was bad news in the latest UK manufacturing figures and unemployment continues to rise - to nearly 2.5 million on the ILO measure.

One comforting statistic over the summer was the decline in the personal debt mountain which was responsible for a massive rise in personal bankruptcies, insolvencies and repossessions over the last few years. Oh yes, and such irresponsible lending by the banks also led to their collapse - nearly dragging the entire economy with it.

So how did the Bank of England and BBC react to people paying off their debts? With joy or just a prudent encouragement? No, the BBC's Hugh Pym stated "in theory, paying off some of the £1.4 trillion mountain of consumer debt is desirable. But a tendency for people to reduce debts rather than spending may not be helpful to an economy still in recession."

Quite right Hugh, more debt for the proles, that's the solution! Sadly the BBC doesn't say it's unhelpful when workers' pay, benefit levels, or pensions are cut in a recession . . .