The UK economy: the imbalances continue

workersA useful piece by Geoff Tily, senior economist at the UK’s Trades Union Congress, on the persistent imbalances in the economy. In brief, growth remains too reliant on debt-fueled consumer spending, and private investment has been very weak, and even declined overall in 2016. If these trends continue, productivity growth will also continue to be weak, as it is productive investment that drives it.

While the employment performance has been impressive since the end of the recession, wages have largely stagnated. The prospects for a growing economy seem to rest on rising employment, and since the employment rate is already high, this will ultimately require continued substantial net immigration. Continue reading

How to fix a load of economic problems: the case of the UK’s exchange rate

Money-poundsLarry Elliott’s economics opinion piece from today’s Guardian discusses the issue of the UK’s large current account deficit and how to reduce it. He refers to a paper by Roger Bootle and John Mills, two authors spanning the political divide (the paper is free to download here). Bootle is a free-market Keynesian economist who runs his own consultancy, Capital Economics, and generally favours light regulation and low taxes, but also attaches importance to the Keynesian emphasis on aggregate demand. Mills studied economics at Oxford, is a successful businessman and a major Labour party donor. On the issue of the UK’s exchange rate, they seem to agree.

The pound fell sharply following the result of the UK’s referendum on EU membership. Economic theory teaches that a lower exchange rate, by reducing the price of a country’s exports and increasing that of its imports, all else equal, should boost sales of the former and reduce those of the latter. In the UK’s case, this should reduce the current account deficit. At 7%, the latter is at the highest level since records began. The financial markets don’t seem to mind financing it for now, but there are a number of reasons why it makes sense to maintain the current lower level of the pound. Continue reading