UK economy to grow by 2.5% this year, says NIESR

The think tank said the UK's economic recovery had become "entrenched".

The estimates are broadly in line with those of other forecasters, including the UK's Office for Budget Responsibility.

NIESR also said it expected the unemployment rate to fall below 7% before the end of the year.

Jobless figures released last month showed that the unemployment rate fell to 7.1% in the three months to November.

Last year, the Bank of England said it would consider raising interest rates from their current historic lows if the unemployment rate fell below the 7% threshold, though it has since played down expectations of rate rises in the near future.

NIESR's forecast follows similar raised UK growth forecasts from the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), which are also increasingly optimistic about the UK's economic prospects.

'Remarkable performance'

Falling unemployment and rising house prices have helped to encourage consumers to spend more, fuelling the recovery.

More sluggish sectors of the economy such as construction are also now showing signs of strengthening.

But concerns remain - particularly levels of business investment, which remain low, and stagnant wage growth which means prices are continuing to rise faster than many people's salaries.

"The UK's economic recovery is entrenched," the NIESR said in a statement. "Above trend growth returned in 2013, while the remarkable performance of the labour market persists."

"We expect consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market."

It added that the rapid fall in unemployment seen in recent months had "raised questions over the credibility" of the Bank of England's forward guidance, which saw 7% unemployment as an important threshold.

NIESR said it was forecasting a rise in interest rates as early as the second quarter of 2015, though this is expected to be a year after the 7% threshold is breached.

The Bank of England opted to keep its benchmark interest rate unchanged at 0.5% again on Thursday. The rate has been at the historic low since March 2009.

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Growing economy shows Britain is on the right track, ministers say

Coalition ministers say growth figures showing economy grew by 1.9 per cent in 2013 mean that the Government's economic plan is working

New figures showing that the economy is growing at the fastest rate since the financial crisis prove Britain is on the right course, coalition ministers have declared.

George Osborne said the numbers were a “boost for the economic security of hardworking people” with manufacturing growing fastest of all.

“It is more evidence that our long term economic plan is working," the Chancellor added.

Nick Clegg said the economy is moving in the “right direction” with unemployment down and growth up. However the deputy Prime Minister also warned that future growth must be achieved “fairly” with investment in jobs outside London.

Official figures released today show the economy grew by 0.7 per cent in the last quarter of 2013. Growth last year was 1.9 per cent in all, the biggest annual expansion since 2007, when the financial crisis began.

The UK economy is still smaller than it was when the crisis struck – and many households are poorer. But figures suggest that consumers and businesses alike are increasingly confident about the future.

Danny Alexander, the Chief Secretary to the Treasury, said the figures were further evidence that “the recovery is becoming established” with 2013 becoming the first year since 2007 to see economic growth in all four quarters.

However Ed Balls, the shadow chancellor, said that the growth figures are welcome and "long overdue" but warned that the recovery is not "built to last" as business investment is "weak" and construction output down.

Announcing the figures last night Vince Cable, the Business Secretary said the figures represented a “real recovery” with business leaders speaking of a "real upsurge.”

However, he also warned that there were significant risks to a sustained recovery, particularly the housing market.

In a speech to the Royal Economics Society at the Bank of England Mr Cable said: “There has been a positive change in economic sentiment over the last six months or so. A real recovery is taking place,” Mr Cable said on Monday night.

He added: “Despite a fall in real earnings, consumers have had the confidence to start spending again – dipping into their savings held for a rainy day and making use of rising house prices, at least in London and the South East, to borrow more easily,” he said. Improved jobs prospects have also “probably” helped boost the economy.

Joe Grice, chief economist at the Office for National Statistics said: ““We have now seen four successive quarters of significant growth and the economy does seem to be improving more consistently.

“Today's estimate suggests over four fifths of the fall in GDP during the recession has been recovered, although it still remains 1.3 per cent below the pre-recession peak.”

The CBI, Britain’s biggest business lobby, also said that more British companies are seeing their sales grow than at any time since the crisis began.

“A picture is unfolding of a real upsurge in output across much of the UK economy,” said Katja Hall, the CBI’s chief policy director.

“Many firms in many sectors are feeling brighter about their prospects than they have for a long time, showing the recovery is gaining traction. While some risks remain, we expect the economy to continue to strengthen through 2014.”

John Longworth, the director general of the British Chambers of Commerce said that businesses across Britain are growing more "bullish" about their prospects.

He said: "Many companies are accelerating their pace for the first time in years, with others saying they're set to do the same. Our surveys now consistently show business confidence levels not seen for decades."

The figures from the Office for National Statistics and the CBI data are the latest signs that the UK economy is on the rebound.

Last week, the International Monetary Fund upgraded its forecast for UK growth by the biggest margin of any economy. It now expects the UK to grow by 2.4pc in 2014, in line with the Office for Budget Responsibility, the Government’s fiscal watchdog.

Conservative and Liberal Democrat ministers alike are keen to take credit for the recovery, claiming it vindicates Coalition economic policies.

However, there are still fears that the recovery will not last because it is too heavily reliant on consumer spending and rising house prices, while business investment remains subdued.

“Despite these encouraging signs, the shape of the recovery so far has not been all we might have hoped for,” Mr Cable said.

Echoing Sir Winston Churchill in 1942, he suggested that the UK economy is now at “the end of the beginning rather than the beginning of the end.”

The ONS figures show that output in the service sector – which makes up more than three quarters of GDP – rose by 0.8 per cent in the fourth quarter, maintaining its pace from the previous months.

But industrial output growth slowed to 0.7 percent from 0.8 per cent and construction – which accounts for less than 8 percent of GDP – fell by 0.3 per cent.

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Inflation finally falls to Bank of England's 2% target

Surprise drop in December hits mark for first time in four years, helped by a smaller rise in food prices and early sales discounts

Inflation unexpectedly fell in December, returning to the Bank of England's 2% target for the first time in four years.

A smaller rise in food prices compared with a year earlier offset a rise in petrol prices and the well publicised increases in gas and electricity bills. High-street discounting in the weeks before Christmas also helped lower the inflation rate, economists said, with toy and computer game prices falling .

The surprise fall drove the consumer prices index to its lowest level since November 2009, when it stood at 1.9%, the Office for National Statistics reported. Inflation has fallen sharply since June's high of 2.9%, and economists had expected it to remain unchanged last month at November's 2.1%.

Chris Williamson, chief economist at Markit, said inflation was likely to remain "close to, if not below, the 2% target for some time to come".

The fall in CPI inflation will be a source of relief for the Bank's monetary policy committee, under pressure to justify its ultra-loose policy stance despite economic growth and falling unemployment in recent months.Interest rates have been on hold at an all-time low of 0.5% since March 2009.

"Talk of higher rates has increased in recent weeks because the Bank of England has been wrong-footed by the strength of the economy," Williamson said.

A Treasury spokesman said the fall was "another sign that the government's long-term economic plan is working".

He added: "But the job is not done and times remain tough for many people. So an important part of the government's plan is helping hard-working people be more financially secure by increasing the tax-free personal allowance and freezing fuel duty and council tax."

Consumers will be hoping that lower inflation will raise the prospect of higher wages, which have been persistently outpaced by rising prices.

Catherine McKinnell, the shadow economic secretary to the Treasury, said that for now, household budgets in Britain remained under pressure: "This small fall in the inflation rate is welcome, but with prices still rising more than twice as fast as wages the cost of living crisis continues. After three damaging years of flatlining, working people are on average £1,600 a year worse off under the Tories."

Average annual wage growth, in the three months to October – the latest official data – was up 0.9%. The retail prices index, more broadly based than CPI and often used as a guide for wage bargaining, rose to 2.7% in December from 2.6% in November.

John Allan, national chairman of the Federation of Small Businesses, said December's fall in CPI inflation was a welcome relief for hard-pressed households and businesses. "With the economy now growing, our members will be pleased that pressures on the cost of doing business are easing, though some concerns over rising fuel and in particular energy costs remain," he said.

Consumer price inflation averaged 2.6% in 2013, the lowest since 2009 and down from 2.8% in 2012. The December inflation data confirmed the trend of easing food price inflation – driven by lower prices for food and meat – highlighted last week by the British Retail Consortium.

The BRC said food price inflation slipped to a three-year low in December, while overall shop prices fell for the eighth month running in December.

With deep discounting as shops battled for hard-pressed customers the drop in prices of 0.8% on a year earlier was the deepest deflation since the BRC's data began in December 2006.

Andrew Sentance, senior economic adviser at PwC, said the challenge was to keep inflation on target.

"Stronger growth here in the UK could push up wage costs and a rebound in the global economy is likely to push up energy, food and commodity prices once again. So we cannot be sure that this return to the inflation target will be sustained through 2014," said Sentance, also a former member of the Bank of England's monetary policy committee.

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UK economy: Unemployment figures explained by ONS

The answers lie with the Labour Force Survey, the huge continuous survey that ONS uses to measure unemployment (along with employment and economic inactivity).

The unemployment figures use an internationally-agreed definition.

To count as unemployed, people have to say they are not working, are available for work and have either looked for work in the past four weeks or are waiting to start a new job they have already obtained. Someone who is out of work but doesn't meet these criteria counts as "economically inactive".

Each quarter the LFS covers 100,000 people in 40,000 households chosen randomly by postcode. That's about one in 600 of the total population.

The results are then weighted to give an estimate that reflects the entire population. Our survey has a very large sample size compared, for example, with opinion polls, which often sample around 1,000 people

Even so, in any survey there is always a margin of uncertainty, in this case around plus or minus 3% for the unemployment level.People sometimes ask why ONS doesn't increase the sample size to give monthly figures.Put simply, it's a matter of resources. Surveys on this scale take a great deal of work. The cost of doing it on a monthly basis was estimated as at least £7 million a year back in the mid-1990s. So a rolling three-monthly survey remains the best solution for efficiently producing accurate yet manageable data.Obviously it's possible to look at the number of people unemployed, for example, in January-March and compare that with the February-April figure to see what the change is. But it wouldn't be a good idea: the February and March data are in both sides of the comparison, so effectively you're looking at January compared with April.Quite apart from the smaller sample involved, the sample frame wasn't really designed for a monthly survey.Prior to 1998, the LFS results were only published once a quarter, and the sample frame was designed around this. The country was divided into 212 interviewer areas, each of which is subdivided into 13 weekly 'stints', each randomly allocated across one of the 13 weeks of the quarter.So while this means that across the entire three months we can be sure that the sample in each interviewer area is representative of the area as a whole, we would not necessarily expect it to be so with just one month's worth of interviews.ONS has in fact been publishing some single-month LFS employment, unemployment and inactivity estimates on our website since 2004.We did this in response to user requests for more information about the reasons behind movements in the three-month rolling figures. However, the monthly series are more volatile than the three-month ones - for the reasons noted - and so these are not of the quality to be designated National Statistics.The other measure of joblessness - the claimant count - is published for each single month. It doesn't suffer from the limitations of sample size and sampling frame, because it derives from the numbers of Jobseeker's Allowance (JSA) claimants recorded by Jobcentre Plus, so a monthly figure is possible right down to local level.But because many people who are out of work won't be eligible for JSA, it's a narrower measure than unemployment, typically about 1.5 million people recently, compared with about 2.5 million for unemployment.Azure Global’s vision is to be widely recognized as a reputed firm of financial business advisors, achieving real growth for ambitious companies and to become the first choice for F&A outsourcing for accountancy practices and businesses alike for more info visit our site Azure Global and join us also On Facebook

Inflation slows again in November to four-year low

British inflation edged down in November to its lowest level in four years, giving the Bank of England plenty of breathing space to keep interest rates at a record low even as the economy picks up speed.

Consumer prices rose 2.1 percent on the year in November, the slowest increase since November 2009, as the impact of higher gas and electricity prices had yet to be felt, the Office for national Statistics said. Economists taking part in a Reuters poll had expected inflation to stay at 2.2 percent, its rate in October.

Compared with the previous month, the consumer price index in November was up 0.1 percent, the ONS said. Separately, house prices in Britain rose at their fastest pace in October in just over three years. Annual inflation has exceeded the Bank of England's 2 percent target every month since December 2009, steadily eating into the pay of British workers and making living standards a big political issue ahead of the 2015 elections.

Despite above-target inflation, the BoE's focus remains on nurturing an economy which is growing more quickly than most other industrialized countries but remains smaller than before the financial crisis.

The BoE has said it will only think about raising record-low interest rates once unemployment falls to 7 percent, unless inflation expectations threaten to get out of control.

Figures due on Wednesday are expected to show unemployment stayed at 7.6 percent in the three months to October.

The ONS said on Tuesday that the slowdown in November's inflation figure was partly due to fruit and vegetable prices as well as the later introduction this year of hikes in power tariffs.

An ONS official said last year's increases in utility prices affected inflation in November but were only expected to impact the CPI in December this year.

An underlying measure of inflation, which strips out increases in energy, food, alcohol and tobacco, rose by 1.8 percent in November compared with the same month last year.

Data also released by the ONS on Tuesday showed that factory gate prices rose by 0.8 percent in annual terms, slower than economists' predictions of a 0.9 percent increase.

Some economists expect inflation pressure to grow in the coming months when the impact of the recently announced prices rises for household heating will be felt.

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UK manufacturing growth remains strong

The UK's manufacturing sector continued to see strong growth last month, according to a closely watched survey.

The latest Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) recorded a level of 57.3 for December.

While this was down slightly from November's near three-year high of 58.1, it was still well above the 50 mark that indicates expansion.

Markit said that the latest figure suggested the manufacturing recovery remained "on track".

"UK manufacturing's strong upsurge continued at the end of 2013, with rates of growth in production and new orders still among the highest in the 22-year PMI survey history," said Rob Dobson, senior economist at Markit.

"On its current track, the sector should achieve output growth of over 1% in the final quarter while filling around 10-15 thousand jobs, continuing its positive contributions to both the broader economic and labour market recoveries."

Recent official data and survey results have indicated that the UK economy is continuing to strengthen.

Last month, the latest unemployment figures showed that the jobless rate had fallen to 7.4%, the lowest rate since 2009.

Price pressures

Markit said that growth in manufacturing output and new orders remained "robust", helped by the strengthening UK economy and an increase in new export orders.

The research firm said manufacturers had seen increasing demand from Brazil, China, Ireland, Russia and the US.

The latest survey also showed signs of inflationary pressures building within the sector, with both average input costs and output charges rising at faster rates last month.

"With headline CPI inflation softening for a variety of reasons, this trend in manufacturing price pressures is not likely imminently to trouble the Bank of England," said David Tinsley, UK economist at BNP Paribas.

"But it does underline that inflation is not dead in the UK, and the economy is likely to sustain a materially higher inflation rate than its peers in 2014."

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UK manufacturing sector to grow faster than economy next year

Industry report gives buoyant forecast for UK manufacturing, predicting 2.7% growth compared with 2.4% for economy

Manufacturing will grow faster than the overall UK economy next year but much-needed business from overseas markets is looking shakier, according to an industry report published on Monday.

The buoyant forecast from UK manufacturers' organisation EEF marks a turnaround for a sector the government has repeatedly championed as an engine for growth, but which has struggled to emerge from recession.

News that orders and output are now rising and that UK factories plan to ramp up hiring and investment will be welcomed by George Osborne as he prepares to outline his latest plans to boost the recovery in his autumn statement this week.

But EEF's latest survey with accountants BDO showed exports were weaker than expected in recent months on the back of slower growth from some emerging markets and sluggishness in the eurozone, the UK's most important market.

EEF chief economist Lee Hopley said: "Over the course of the year we have seen a definite turnaround in prospects for manufacturing and this looks set to continue into next year. This increased confidence is evident in companies looking to increase their headcount and, most importantly for balanced growth, step up their investment.

"However, uncertainties in the global economy remain and a sustained recovery is not secure. As a result, growth must remain a priority for government over the remainder of this parliament, starting with the autumn statement this week."

The group, which has 6,000 member companies, says the risk comes from an uncertain export outlook. But it still thinks the sector will grow by 2.7% in 2014 compared with 2.4% for the economy overall. EEF thinks that this year the manufacturing sector will have contracted 0.1% while the wider economy grows 1.4%.

While that still puts that manufacturing sector in recession this year, the prediction marks a significant upgrade from the last estimate of a 0.5% decline. The group said that reflected a run of improving news. Its own quarterly survey showed a majority of firms reporting growth in both output and orders, though these measures slipped back from highs seen over the summer. Within the sector, the strongest results came from motor vehicle and electronics companies.

A separate report on Monday echoes recent optimism about new jobs being created by the private sector. Business lobby group the CBI says medium-sized businesses are helping to drive the recovery but that the government must do more to help them access finance, find skilled workers and get support to export.

Despite accounting for less than 2% of the private sector, medium-sized businesses have created jobs at twice the pace of large companies, the CBI said. They added 185,000 jobs between March 2010 and March 2013, a rise of 4.1%, and now employ 16% of the UK's total workforce.

Medium-sized firms, classed as having 50-499 staff and a turnover of £10m-£100m, have also grown their turnover by 7% – more than double that of smaller firms and large companies. They now contribute more than £300bn to the economy, but the lobby group says government support could boost that significantly.

"This hugely positive picture is reflected up and down the country where medium-sized businesses are major local employers, in many cases helping to offset public sector job losses during the downturn," said CBI director general John Cridland.

"With better access to a range of growth finance options, improved training and research support, and help to break into new export markets – these firms could be worth an extra £20bn to our economy by 2020."

Article Source : http://www.guardian.co.uk
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UK property taxes highest in developed world, says thinktank

Policy Exchange calls for at least one new 'garden city' and changes to planning rules to deliver 300,000 houses a year

British people pay the highest levels of property taxes in the developed world and more than twice the average for the 34 rich countries in the Organisation of Economic Co-operation and Development (OECD), according to a thinktank report.

The right-of-centre Policy Exchange said politicians should reject new levies on property – such as the "mansion tax" on residences worth over £2m favoured by the Liberal Democrats and Labour – and instead pledge to bring down housing costs by building 1.5m new homes by the end of the decade.

The report called for at least one new "garden city" and changes to planning rules to deliver 300,000 new houses a year.

Councils that fail to hit their own housing targets should be forced to release land to local people who want to design and build their own homes, said the thinktank.

The report calculated that property taxes including council tax, stamp duty, inheritance tax and capital gains tax amount to 4.1% of GDP in the UK – the highest in the OECD and well above the average 1.8%.

By comparison, Canada levies 3.5% of national income in property taxes, the US 3%, Japan 2.8% and Germany 0.9%.

Alex Morton, head of housing and planning at Policy Exchange, said: "No other developed country taxes property more heavily than the UK. Yet rising house prices and falling levels of home ownership have led to many calling for an increase to land and property taxes.

"But these issues will only be solved by genuine reform of the outdated planning system, not a tax raid on peoples' homes. Politicians cannot try to do everything at once and must focus on the most crucial issues.

"The evidence shows where excess credit and under-supply exist, taxation or subsidy can only have a limited impact. That is why policymakers should ignore calls for a new round of property taxes and instead commit to spreading the benefits of home ownership and stabilising the UK economy by building at least 1.5m new homes over the course of the next parliament.

"This means serious reform of the planning system and creating new ways to deliver housing."

Article Source : http://www.guardian.co.uk
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US unemployment little changed at 7.2% as recovery remains sluggish

Report delayed by shutdown shows American economy fell short of forecasts in September, adding just 148,000 jobs

The US added just 148,000 new jobs in September as employers appear to have cut back on hiring ahead of Washington's budget battle.

The report, delayed by the government shutdown, fell short of forecasts but the unemployment rate dipped to 7.2%. Economists surveyed by Dow Jones Newswires expected a payroll gain of 180,000 jobs for the month – up from 169,000 jobs added in August – and for the unemployment rate to stay at 7.3%.

In previous months drops in the unemployment rate have been driven by people leaving the workforce. September's fall appears to be driven by employment growth, one bright spark in an otherwise lacklustre report. The largest job gains were in construction, wholesale trade, and transportation and warehousing.

Employers have now added an average of 185,000 positions each month over the last year as of September, but gains have slowed in recent months. The number of long-term unemployed (those jobless for 27 weeks or more) has remained high and was little changed in September at 4.1 million. These individuals accounted for 36.9% of the unemployed. The unemployment rates for teenagers (21.4%), black people (12.9%) and Hispanics (9%) also remained high and unchanged.

The 16-day government shutdown began just days before the job report's originally scheduled 4 October release date. The Labor Department's Bureau of Labor Statistics, which produces the monthly snapshot, had collected the data but was unable to finish its analysis after the shutdown.

The change in total nonfarm payroll employment for July was cut from 104,000 to 89,000, and the change for August was revised up from 169,000 to 193,000.

Earlier this month ADP, a payroll company, said US businesses had added 166,000 new jobs in September and warned that the job recovery appeared to be "softening". August's ADP jobs growth number was revised down to 159,000 from 176,000.

According to ADP's closely watched survey, the service industry once again led the jobs growth number, contributing 149,000 new jobs over the month.

Trade and transportation added 54,000 posts, professional and business services added 27,000 jobs and construction added 16,000 posts. Some 4,000 jobs were lost in financial activities.

Mark Zandi, chief economist of Moody's Analytics, ADP's partner on the report, said: "The job market appears to have softened in recent months. Fiscal austerity has begun to take a toll on job creation."

The long-term impact, if any, of the government shutdown is unlikely to be fully reflected in September's figures although a recent report from Macroeconomic Advisers calculated that fiscal uncertainty since 2009 had slowed economic growth by a third of a percentage point per year, equivalent to a loss of 900,000 jobs.

Article Source : http://www.guardian.co.uk

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We must invest in high-speed rail or new motorways, warns HS2 chairman

Outgoing HS2 chair Douglas Oakervee says poor capacity and infrastructure calls for investment over entire transport system

Britain will have to choose between building a high-speed rail line or a new motorway network, the outgoing chairman of HS2 has warned, as the government struggles to hold together a political consensus over the £42.6bn project.

Douglas Oakervee said that the problem of scant capacity and creaking infrastructure was not just one affecting railways but the entire national transport system.

In the annual George Bradshaw address, Oakervee told an audience at the Institution of Civil Engineers on Tuesday that their predecessors "would be turning in their graves if they knew how much we had allowed their infrastructure to decay".

Oakervee, one of the transport industry's most respected and long-serving figures, compared the current capacity crunch with the choices that faced governments in the 1950s when the go-ahead was given to build motorways across Britain.

"We have once again reached a similar point in the cycle of transport planning with a choice to be made. Either we build another similar-sized network of roads or we invest in HS2."

He added: "The stark truth is that our railway network has been allowed to decay for more than 60 years, I would argue that we are already late in acting. In 2010 we published demand forecasts for HS2. Since then the actual growth we have experienced is already outstripping the predicted demand for HS2."

Oakervee warned: "It is clear that all the main transport arteries both road and rail are rapidly becoming congested and are already constraining our ability to grow the economy to allow us to maintain our position in world trade and commerce.

"If we do not wish our standards of living to deteriorate and our world status eroded it is absolutely essential that we develop all our transport arteries and links as quickly as possible."

Oakervee said that without HS2 the key rail routes connecting London, the Midlands and the north would be overwhelmed. He said that on morning peak trains on the West Coast main line, there were already 115 passengers for every 100 seats on arrival in London and Birmingham, and that forecasts pointed to 200 passengers for every 100 seats by 2030 without additional capacity.

He added: "We must stop prevaricating over the rights and wrongs of each individual project and develop an integrated transport and infrastructure plan."

Oakervee, whose previous roles have included overseeing the passage of parliamentary legislation for the Crossrail line currently under construction in London, is stepping down as chairman of HS2 at the end of the year to be replaced by Network Rail chief executive David Higgins.

The first line linking London and Birmingham is due to open in 2026. The full £42.6bn network linking those cities with Manchester and Leeds is scheduled for completion by 2033.

Opposition to the scheme has intensified in recent months with a succession of studies and reports questioning the cost and value for money, especially after the government announced in June that the overall budget, including contingencies, had risen by almost £10bn. The economic case published by the Department for Transport has been revised downwards on several occasions.

Oakervee suggested that trying to calculate exact figures for its eventual value was futile. "Rooms full of economists are vying with each other to gain kudos for their competing models and analysis while we are battling with public opinion to nail a number to the basic fact that investing in HS2 will deliver good, or even very good economic benefits and the jobs the Midlands and north desperately need."

One supportive review of HS2 came on Monday from the Independent Transport Commission, which said that it would provide a catalyst for better connectivity and growth in the UK's regions if it was planned correctly. The study said that a new high-speed rail line would cost not much more than 10% more than a conventional rail line.

Article Source : http://www.guardian.co.uk

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Nobel prize in economics: will financial crisis adjustment theory win the day?

Those in the know hope Nobel committee makes choice in 2013 that reflects the seismic changes of the past five years

After five years in which many of the pillars of economic theory have been swept away by a financial hurricane that went largely unpredicted by the majority of practitioners of the dismal science, it may be hard to believe anyone deserves to crowned with a Nobel prize in the subject.

But the winner of the Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel, as it is officially called, is due to be announced on Monday, and bookmakers have come up with a packed field of runners and riders.

Yales's Robert Shiller has been high up the list for some years. He wrote a prescient book, Irrational Exuberance, published in 2000, about the stock market bubble, and followed it up with a second edition in 2005, which took the then unfashionable view that US housing looked dangerously overvalued. "If I was a betting man, I would think it had to be Shiller," said TUC economist Duncan Weldon.

Sir Tony Atkinson, of Nuffield College, Oxford, who has long worked on inequality and income distribution – seen as increasingly relevant in recent years – is also frequently mentioned. Inequality has also been a consistent concern of another much-mentioned Brit, Angus Deaton.

A more mainstream choice for the judges might be Robert Barro, of Harvard, who is in the mould of classic, free market, anti-big state economics.

But those who have been fighting for a revolution in the way economics is taught in schools and universities would like to see the Nobel committee make a choice that reflects the seismic changes of the past five years.

Wendy Carlin, of University College London, who is working on a project to shake up the economics curriculum in Britain, favours South Korean-born Hyun Song Shin, of Princeton, for example. Even before the crisis, Shin was studying the importance of leverage in the global financial system.

Carlin said there were encouraging signs that economists were adjusting to changing times. "There's a feeling that at least the occasion of the crisis has led people to think that we should be teaching economics differently," she said.

While physicists can pelt particles around the Large Hadron Collider in search of the Higgs boson, economists have to test their theories by watching messy events and unpredictable human beings in the real world.

Diane Coyle, of consultancy Enlightenment Economics, said in the light of the battering many of their prized theories have taken over the past five years or so, economists needed to switch from building big, mathematical models, to "microeconomics", which studies how firms, individuals and particular markets behave. "Let's confess that we just don't know how the macroeconomy works, and we need to have a bit of a think about that," she said.

Article Source : http://www.guardian.co.uk

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IMF urges George Osborne to spend on infrastructure

Fund triggers fresh dispute between chancellor and Ed Balls about impact of austerity programme on recovery

The International Monetary Fund is urging George Osborne to boost spending on Britain's infrastructure despite revising upwards its forecast for UK growth by more than for any other developed country.

In a generally downbeat assessment of the state of the global economy, the Washington-based fund said it now expected the pace of expansion to be significantly higher than three months ago.

But it triggered a fresh dispute between Osborne and his Labour shadow Ed Balls over whether the government's austerity programme had helped or hindered recovery from Britain's deepest recession of the postwar era.

The fund's half yearly world economic outlook cut its forecast for global growth in 2013 and 2014, blaming the impact of ham-fisted attempts to cut the budget deficit in the US and a slowdown in top emerging market economies. But it said the UK had bucked the trend, revising its estimates of growth up by 0.5 points to 1.4% in 2013 and by 0.4 points to 1.9% in 2014.

The IMF embarrassed the chancellor in its WEO in April this year, when it called on the UK to ease up on its austerity plans in order to boost the recovery prospects. Although theCity expects growth of about 1% in the third quarter, the fund repeated its call for higher public spending.

"In the UK, recent data have shown welcome signs of an improving economy, consistent with increasing consumer and business confidence, but output remains well below its pre-crisis peak", the fund said.

It encouraged Osborne to take advantage of cheap borrowing to improve the UK's infrastructure, something it said could be done without jeopardising the government's budget plans, saying: "In an environment of still-low interest rates and underutilisation of resources, public investment can also be brought forward to offset the drag from planned near-term fiscal tightening, while staying within the medium-term fiscal framework."

A spokesperson for the Treasury said: "The IMF has confirmed that the UK economy is turning a corner, by revising up its forecast for growth over the next two years by more than for any other G7 economy. But risks to the global economy remain high, and the recovery cannot be taken for granted. That is why the government will not let up in implementing its economic plan, which has cut the deficit by a third, kept interest rates near record lows and created over a million and a quarter jobs."

Olivier Blanchard, the fund's economic counsellor and chief economist was challenged at a press conference about his comment six months ago that the chancellor was "playing with fire" by pressing ahead with deficit-cutting plans. Blanchard said he had been "pleasantly surprised", by the stronger-than-expected growth in the UK. However, he insisted that the recovery had not, "settled the debate" over the right fiscal policy. "It doesn't tell us if the pace of fiscal consolidation was wrong, or if growth could have come back earlier with a different fiscal framework".

Balls said Britain was experiencing the slowest recovery for 100 years and called on the government to take action to boost growth.

"Despite these welcome changes to its forecasts, the IMF rightly warns that the UK economy will remain below potential for many years. That's why the IMF has repeated its view that the government should bring forward infrastructure investment now, which could be used to build thousands of affordable homes," he said.

The IMF now expects the global economy to expand by 2.9% in 2013 and 3.6% in 2014 – down by 0.3 and 0.2 points respectively on its last predictions, made in July – despite stronger growth in the UK and signs of recovery in the euro area.

"Global growth is still weak, its underlying dynamics are changing, and the risks to the forecast remain to the downside," the fund said in its World Economic Outlook (WEO). It pointed out that growth had slowed markedly in the bigger developing economies, cutting its 2014 forecasts from 7.7% to 7.3% in China, from 6.2% to 5.1% in India and from 3.2% to 2.5% in Brazil.

The fund warned that the budget row in Washington would have dire consequences if it escalated and resulted in America defaulting on its debts.

Blanchard said growth had been "hobbled" by excessive deficit-reduction action and described across-the-board spending cuts as a "bad way" to improve the US public finances.

"If there was a problem lifting the debt ceiling, it could well be that what is now a recovery could turn into a recession, or even worse."

Article Source : http://www.guardian.co.uk

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George Osborne's credibility gap

The chancellor claims he'll balance the books and avoid tax rises. But his record so far is of failure

The party conference season doesn't always change the political weather. This year it has. Ed Miliband's decision to stand up to the power companies in the face of market failure struck a loud chord with the public. And no, it's not anti-business to challenge such failures.

His jibe that the rising economic tide would lift only yachts, struck a raw nerve with the Tories. So they rushed out measures to help home buyers, despite real fears of a housing bubble. They announced a married couples' allowance worth less than £4 a week. They promised to freeze fuel duty. The funding of these promises, costing more than £2bn, is to be met from some unidentified source. Strange that when Labour makes promises, the Tories claim it will mean more borrowing, yet it's fine for them to make unfunded promises.

The Tories have also changed their tune on the economy. In September George Osborne claimed to have slain the dragon of downturn. Many economists have their doubts. It was also bad politics. A dead dragon poses no political threat. So this week the beast has been resurrected: it's not over, after all.

The chancellor promises another six or seven years of austerity. After that, he claims he will balance the books. This raises questions about both the credibility and the desirability of his promise. On credibility, consider the facts: in 2010 the economy was growing and we still had ourtriple-A rating – yet at the time Osborne claimed we were like Greece. More than that, he said he would balance the books by 2015.

Today, having moved considerably from his original plans, he is borrowing 68% more than he promised. He will borrow £96bn in election year alone. The deficit, far from being eradicated, is still at £120bn. Osborne's debt reduction target has been kicked into the far distance, and the effect of many of the cuts pencilled in for the next few years has yet to be felt.

So the chancellor's record is not good.

Is it really credible to deliver the scale of the cuts needed to balance the books and avoid tax rises, as Osborne now says it is? Not without economic growth it isn't – something that the prime minister seemed to concede in his speech yesterday. Is it credible to deliver a 20% real cut in the police budget, both in this parliament and the next?

There are two issues here. First, what sort of services will the public get if they are hacked back on this scale? The Tories need to tell us. Second, the Conservatives' rhetoric often implies that the public sector is bad and the private sector the only good. Yet, for example, this country's future depends on the quality of our education, not just for the few but for the many. And what price do we put on good quality health care, let alone the increasing costs of caring for a growing elderly population?

This is a debate we must have. It is essential to bring down our borrowing and debt. It's worth remembering that in 1997 Britain's debt was the second highest in the G7. A decade on, it was the second lowest. But these reductions must be delivered both credibly and in a way that does not damage the UK's economic and social fabric. The best way of doing that is to get sustainable growth. To promise a balanced budget, come what may, carries the risk of damaging cuts and unacceptable tax rises.

Although economic growth seems to be returning, it is still lagging way below what was expected by now. What we produce as a country, our GDP, is not likely to return to its pre-crisis levels until 2018. This government is not on strong ground, either in blaming the crisis on the spending it supported in opposition, or on the credibility of its performance since the election.

The Labour party will stay in the middle ground, promoting enterprise and growth and never afraid to challenge market failures. Nor should we be scared to make the case that the public and a thriving private sector need each other. We need them both.

Article Source : http://www.guardian.co.uk

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