Predictions for 2013: my answers to the FT Survey
Here are my answers to the Financial Times' annual economists' survey (the survey is reported in full here):
Here are my answers to the Financial Times’ annual economists’ survey (the survey is reported in full here):
Q1. Economy To what extent will the UK see a sustained economic recovery in 2013?
Last year I wrote: “One is tempted to say – to paraphrase an old Soviet joke – that 2011 was an average year for the British economy. Not as good as 2010, but better than 2012.” This was supposed to be a joke. Unfortunately, the joke was on us, because it was spot on. 2012 was indeed dismal. But just as talk about a “double-dip recession” after the unusually bad second quarter growth figures was overdone, so was the euphoria about Britain “surging out of recession” after the third quarter figures. Speculation about a “triple-dip” is equally pointless.What matters is the broader picture, which remains one of persistent economic weakness. GDP is little higher than it was two years ago, and remains more than 3 percent below the 2008 peak. This period of depressed output is now significantly longer than that experienced during the Great Depression, and is not likely to end any time soon; we do not expect output to pass its early 2008 peak until 2014 at the earliest. We don’t predict growth significantly above potential – a necessary condition for a sustained recovery and a meaningful fall in unemployment back towards the natural rate – until perhaps 2015.
Q2. Credit How realistic are concerns that a credit crunch can explain the UK’s plight since 2010? Do the banks need to be recapitalised? And will taxpayers need to pay?
There are a number of factors underlying the UK’s poor economic performance since 2010: domestic mistakes, especially premature fiscal consolidation, similar mistakes by other governments, especially in the eurozone, and the rise in commodity prices. But there is no doubt that the failure to resolve the current dysfunctionality of the UK financial sector has played a major part. It would be much better to support new frameworks for lending rather than rely, as at present, on cheap financing to a concentrated banking sector.
Q3. Fiscal policy To what extent will George Osborne be able to keep “Plan A” in operation for another year? Should he?
What is Plan A? Eliminating the structural budget deficit by the end of the Parliament? That was abandoned in 2011. Reducing the debt-GDP ratio in 2015-16? That went in the Autumn Statement. Setting DEL spending targets but allowing the “automatic stabilisers” which the Chancellor once described as a “key part of the flexibility built in to our plan” to function? The Autumn Statement dropped them too. So there is no “Plan A” anymore; the UK no longer has a credible medium-term fiscal framework, and it would be sensible for the government to consult on a more credible replacement.
What should the stance of macroeconomic policy be in the short term? A year ago the Chancellor claimed that those who argued that premature fiscal consolidation would not boost confidence but the opposite, would not stimulate private demand and investment but reduce it, and that increased government borrowing would have little or no impact on long-term interest rates were “on the outer fringes of the international debate.” This has been NIESR’s consistent position for the last three years – along, of course, with Martin Wolf in these pages. Our analysis has proved accurate. It remains the case that in the short term fiscal policy is too tight, and a temporary loosening would improve prospects for output and employment with little or no negative effect on fiscal credibility.
Q4. Monetary Policy Will the Treasury change the Bank of England monetary policy remit? Should it?
Changing the remit certainly should not be out of bounds – particularly since, in practice, the Bank has shown, very sensibly, that it is prepared to accept long periods of above target inflation. However, we should not delude itself that changing the remit alone will be a panacea for the UK’s macroeconomic problems. Unless the change of remit leads to a meaningful change in policy – and in particular to a move on the part of the Bank beyond quantitative easing simply in the form of Bank purchases of gilts – it is not obvious that it will make a significant difference in practice.
Q5. Labour market and productivity For how long can rising employment remain consistent with stagnant output. What might give in 2013?
We believe that there is a substantial degree of spare capacity within firms; the constraint is not the potential productive capacity of workers, but rather demand. So a healthy recovery in demand could lead to quite sharp increases in productivity, although we don’t expect that to happen in 2013. Over the medium term, however, the prolonged depressed level of demand is in turn likely to have negative impacts on the supply side and hence productivity growth.
Q6. Europe As far as the economics are concerned, how much should people worry that Britain might leave the European Union in the years ahead?
The economic impact of any UK exit from the EU would depend critically on the manner in which it took place and the economic relationship between the UK and the EU post-exit. It is not inconceivable that this could theoretically happen in a way which had a relatively small direct economic impact: but, given the inevitable political turmoil and uncertainty involved, that seems highly unlikely in practice.
Q7. Housing To what extent are house prices still too high?
There are two possible meanings to this question: are prices “too high” taking into account current levels of supply, demand and household incomes, implying that they are likely to fall over the next few years; and are they “too high” for the long-term health of the economy, suggesting that government policy should aim to increase supply. On the former, we expect prices to fall somewhat in real terms over the next few years. On the latter, it would be sensible for policy to aim to increase supply (and hence reduce prices) over the medium to long term, although there is no particular optimal level.