Among all the election coverage, something which has escaped any real attention is the economy which has limped along almost unseen under the radar. I have always thought it's the economic impact of Brexit that would bring the truth home to leavers and I admit to being surprised at how long we have gone with so little effect. The Sunday Times business section and the columns of the economics editor David Smith over the last two weeks have an interesting commentary about how the economy is faring.
Last week (8th) Smith raised the spectre of the economy contracting. The Purchasing Managers Index for November, a sort of early warning system for economists, shows a figure of 49.3. Anything below 50 indicates contraction and there is now a real fear that we may be entering a technical recession.
More than that, he also pointed to the current account deficit (the difference between the total amount we spend on imports compared to what we receive for exports, including both goods and services):
"There are other concerns, highlighted by official data. Britain’s external position is pretty poor. The size of the current account deficit, £109bn over the last 12 months, roughly 5% of gross domestic product, would in the past have been enough for a run on the pound.
"The seeds of further balance of payments difficulties are being sown. In the past, service-sector earnings and investment income from abroad were enough to keep us afloat. That is no longer the case. Since 2016, the stock of investment abroad by British companies has been exceeded by the stock of foreign investment in the UK, as overseas buyers have snapped up commercial properties and businesses at what for them are bargain basement prices because of the pound's weakness. Britain’s net negative investment position is now almost £112bn. That will be reflected in future in more investment income leaving the country than coming into it."
The inward 'investment' that the government boasts about is the buying up of our companies by foreign owners. I fail to see that this is a good thing but recognise British buyers can also purchase foreign companies abroad. Up to 2016, the balance of investments was in our favour with British businesses having more investment overseas than vice versa. Thanks to Brexit and the fall in the value of sterling we will now have a negative position in investment income in the future. This will only add to the current account deficit.
Note also the value of the pound has jumped significantly which makes imports cheaper and exports more expensive, another factor which will increase the deficit.
This week (15th) he points to the massive deficit in goods alone (we have a surplus on services) that we are running. Recent statistics show this was £155 billion in the year to October:
"Since [last week] we have had statistics showing that, in the 12 months to October, the trade deficit in goods was a whopping £155bn, compared with £136bn in the previous 12 months. Of this, about two-thirds is in manufactures. Until 1982, Britain had never had a trade deficit in manufactured goods. Now it is roughly £100bn a year.
"An economy overly dependent on consumer spending does not have to run eyewateringly large trade deficits. Thanks to the peculiarity of the UK industry – we export most of the cars we make here, while importing most of those we buy – trade in cars was roughly in balance in 2017 and 2018. But the writing is on the wall for the model that UK-based carmakers have relied on, frictionless trade with the EU by virtue of the single market, allowing integrated supply chains, which has enabled that peculiarity. UK car production in the first 10 months of the year was down by 14.4% on a year earlier."
I assume because industrial investment is well down and the pound is up, the trade gap in goods is only going to grow.
And two figures jump out of his article. Firstly, actual GDP growth in the 12 months to October was just 0.7%. This is sclerotic and is probably going to get worse next year. And this:
"The other [way] to measure growth is through the year; in other words where GDP is at the end of the year compared with the beginning. On this, the figures tell us that monthly GDP in October was exactly the same as in February, and only a smidgeon, 0.3%, above January’s level."
Several times during the campaign Johnson, when questioned about NHS funding, fell back on the Tories usual mantra about the only way funding can be assured is by a growing economy. As we enter 2020 this might not be the case.
Governments usually stimulate economies by lowering interest rates but these are already at record lows and personal unsecured debt (excluding mortgages) is at crisis levels. Britons have the lowest savings and the highest debt level of any OECD country. Encouraging demand using monetary policy looks mighty difficult. The only other way is by borrowing for infrastructure but government debt is already at record levels for peacetime (£1,821.9 billion at the end of the financial year ending March 2019). If stimulus becomes necessary borrowing will rise further and faster. Raising taxes when the economy is slowing is not an option since it causes a further slowdown.
So, Johnson's government will be faced next year with Brexit, the Irish sea border issue and the beginning of tough trade talks against a background of a slowing economy, possibly a recession and even a mini sterling crisis as the trade gap widens. All of which will put pressure on the UK to agree whatever terms the EU propose.
I hope Johnson is celebrating in style as 2019 comes to an end. There will not be much for him to celebrate next year.
