Economists might not say it publicly, but privately, everyone is extremely appreciative of the UK right now.That’s because the UK has been a great laboratory of economic ideas in recent years.
For one thing, the Cameron government came in with a mandate to undergo austerity, and now people are talking about the country going into a triple-dip recession.
Furthermore, the Bank of England has hired Mark Carney (the former Bank of Canada) chief to be its next governor.
Carney is speaking today at Davos, taking the contrarian viewpoint that monetary policy is not maxed out in most countries.
So Carney’s strategy at the BOE should be interesting to watch, to see if he could conjure something up to reverse the UK’s slump.
And beyond that, the fact that the BOE poached its next governor is also fascinating, and possibly a lesson for the rest of the world.
So the UK is now a big stew of various ideas about monetary and fiscal policy that everyone in economics is eager to watch.
Meanwhile, in his latest note, GSAM’s Jim O’Neill has a lot of commentary about the sorry state of UK economic data.
We’ve pasted it below the dotted line.
The UK – Does Anyone Have a Clue What Is Going On?
As I write, the Office for National Statistics has just published their first Q4 2012 GDP estimate: It fell by a
shocking 0.3%, which means after a one-quarter hiatus post Olympics, according to our official GDP, the UK
is back in the doldrums. It is not the first time I have used the above title about the UK, but it is very difficult
to truly fathom what is going on here on most levels.
The reported GDP decline continues to contrast dramatically with the ongoing strength of the UK labour
market. If we are to believe all the reported data as being equally accurate, then the only conclusion can be
that post the 2008 crisis not only has the cycle persistently struggled, but our productivity has apparently
collapsed. An equally depressing conclusion would be that the apparent productivity beforehand wasn’t
really true – just like the credit-infused GDP growth which was false, too.
A much less bleak interpretation could be that the GDP data is badly missing something, and the labour
market data is a more accurate portrayal of the cycle, but, of course, this is just a plausible interpretation
rather than a fact.
Another interpretation – which doesn’t explain the employment strength, but would explain the weak GDP –
is that the UK is just, plain and simple, following the wrong policy mix. Trying to aggressively tighten fiscal
policy at the same time as persistently pressurizing UK banks to raise large amounts of capital is just the
wrong thing to do. And, of course, if you really believe that the weakness of the euro area is persistently bad
news for UK exports, then it is an even easier accusation.
And if all of this wasn’t enough, then we now have the issue of a 2017 EU referendum on the table. I am
really quite torn about this topic. Part of me – a growing part – thinks the UK needs a fresh referendum on
the topic as it persistently just hangs there as an ongoing constraint. We need to be either “in” or “out”, and if
we get a mandate to be “in”, maybe we should be more “in” than anyone currently really thinks. And if we
want to be “out”, then so be it. From a business perspective, one might even describe the issue as “Honda”
versus “Land Rover”. In the past fortnight, both companies announced equal-sized job cuts and job additions
– the cuts due to European weakness, and the additions due to Chinese strength. Furthermore, there is the
crux of the UK external trade issues ahead.
All this rather gloomy stuff said, there is one thing that is starting to make me have much deeper long-term
hope. About two weeks ago, various UK newspapers reported evidence that the standard of London’s
schools has improved markedly in the past decade. As some readers will be aware, I have spent quite a lot
of my time immersed in educational philanthropy the past 12 years or so, and this was particularly interestingto read.
By coincidence this past Thursday, I attended a musical production of “Oliver” at the Mossbourne Academy, one of the very first to have opened nine years ago, and one where I was quite close to those who
have driven its remarkable improvement. The quality and spirit of what was put on show was so heartening.
And if this anecdote really is an example of what is going on with London’s kids, then in a few years all this
doom will be gone. (One can only imagine that, while there is no evidence of similar educational
improvement elsewhere yet in the UK, if it is true in London, it is coming elsewhere, too. Or if not, there is a
template for how it can improve.)
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