As the FT noted yeseterday afternoon:
The IMF predicted that Britain's economy would increase by just 1.2 per cent in 2023 and that its inflation would be higher than every other G7 member and slower to return to its 2 per cent target.
As they added
Pierre-Olivier Gourinchas, IMF chief economist, said: “What we are seeing is that the UK is facing elevated inflation, and tight monetary policy is weighing down on economic activity this year and next.”
I have on problem with this observation, which is that I think that they are far too optimistic.
The IMF have themselves said there are downside risks that might mean that their forecasts are too optimistic. These include escalation in the war in Ukraine; inflation pressures building; the COVID 19 pandemic getting worse again; financial instability as interest rates rise and, crucially:
We have also the potential for social unrest given the increase in energy and food prices in many countries
I would say all those risks are significant for the reason the IMF ignore. That is that within the aggregates they like to deal in they are overlooking the real poverty being created around the world now.
In the U.K. we now have energy companies forecasting 40% fuel poverty, which is inability to keep a house warm next winter.
And still there appears to be no real political awareness of the crisis that we are hearing for. I really have no explanation in the face of the obvious truth that we are facing, which is that there really is a crisis now and we have to deal with it immediately.
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Over-optimism is the fuel of stupidity.
Richard and I discussed the possibility of serious UK inflation being triggered back in late 2019. This was in the context of a ‘No Deal’ Brexit being the external shock that is one of the standard causes of inflation. In the event it didn’t happen in 2020 as there was a deal of sorts and the UK also chose not to apply any controls to goods coming in from the EU. However it seems we were just two years or so out in the timing. Not only, though, have we got the delayed Brexit shock as full customs controls come into effect on both imports and exports, but we have another unnecessary energy price shock. There is already significant inflation and it may yet get worse before it subsides. This inflation is very unlikely to be like the 1970’s as this time it will just make most folk much poorer as wages, benefits and pensions do not keep up. Some folk, basically those with assets and companies able to enforce price rises will gain, and in many cases substantially. So in the total absence of any attempt to do anything about it by the State then it is likely the median person will find themselves maybe 10% worse off in real terms (the predicted loss due to Brexit), while inequality rises again. A major recession will probably bring down the curtain on most price rises. This does raise the question as to how long it will be before the present day ‘Aristos’ such as Rees Mogg face their comeuppance.
When reading about the bosses of the big energy companies talking to MPs yesterday it did seem that there was something missing. It is all very well to demand help for the customers and to say 40% will end up in fuel poverty. However, what is missing is the other side of the equation. If the customers are handing over a lot more cash for their energy, then clearly somebody else is receiving that. Since the costs of extracting North Sea gas, generating nuclear electricity or running a windfarm have not changed, this must surely appear as super-normal profits by the producers. So why can’t they be taxed and that recycled to the consumers? Or maybe just price controls on the producers? There is no reason, for example, why EDF should not be required to sell its electricity generated at its UK nuclear sites at the same price as last year. Of course we actually paid for these power stations (and will get them back as soon as the bill for decommissioning is imminent!). Same would apply to UK wind output, hydro, etc. It is surely the most idiotic system imaginable that sees UK consumers have to pay whatever is the highest marginal cost on the planet because some Tory thinks that is the ‘market rate’. EDF is, incidentally, required to do just this in France where the state has only permitted a 4% increase.
Tim, why not explicily nationalize the utility companies and run them properly, unlike the old days? What objection might you have for this?
No objection.
I attended a Charity Trustee meeting yesterday evening as their ‘investment adviser’ – the charity was set up 250 years ago and gives financial grants to ‘those in need in the Parish’. The trustees have seen a big uptick in applications and I understand that many of these are to help impoverished parish residents defray the rising costs of essentials, rather than to support, say, youngsters sporting activities. I pointed out that the generation of income from the investment portfolio is becoming ever-harder as there is very little return on capital available in the current energy-price-driven inflationary environment. With my tongue a little in cheek, I also pointed out that The “Default Bullish Case” for stocks and the economy was something like as follows (with full acknowledgment for the original idea to C S Smith).
1. The economy and equities can grow forever (also known as infinite growth on a finite planet in a waste-is-growth “Landfill Economy”).
2. Higher energy costs have a near-zero effect on the economy and stocks.
3. The Federal Reserve, ECB, Bank of England, and other Central Banks will deliver a soft landing which reduces inflation back to near-zero while the economy and stocks continue to rise ever higher.
4. Higher food costs and global food scarcities have near-zero effect on the economy and stocks.
5. Supply chains unravelling has a near-zero effect on the economy and stocks.
6. De-globalization has a near-zero effect on the economy and stocks.
7. Higher interest rates have a near-zero effect on the economy and stocks.
8. The continual evolution of more contagious variants of Covid-19 has a near-zero effect on the economy and stocks.
9. There are no speculative bubbles in housing, stocks, or other assets.
10. Even if a speculative bubble in stocks dis arise, it will never pop because a) the Central Banks will ‘do what it takes’ to prop-up markets b) sentiment is bearish so stocks can only go higher c) stock buy-backs will continue expanding forever d) Merchant banks and investment businesses issue ‘buy’ recommendations.
I’m afraid that these points are becoming fantastical, and we need to watch our step in returning to reality, where extremes have a tendency to unravel energetically, and magical thinking fails to actually change the real world.
These points, as they come to pass, will have a profound effect o the value of investments,
critically, defined contribution pension funds, and I could argue, I think with some justification, that the current deeply negative real returns on cash are now the only prop standing in the way of a market slump.
You may well be right
‘There is no reason, for example, why EDF should not be required to sell its electricity generated at its UK nuclear sites at the same price as last year. Of course we actually paid for these power stations (and will get them back as soon as the bill for decommissioning is imminent!). Same would apply to UK wind output, hydro, etc. It is surely the most idiotic system imaginable that sees UK consumers have to pay whatever is the highest marginal cost on the planet because some Tory thinks that is the ‘market rate’. EDF is, incidentally, required to do just this in France where the state has only permitted a 4% increase.’
I totally agree with Tim Rideout but this section in particular. We can talk all day as Richard has said about knocking the Tories about but there are deeper questions as to why the Tories don’t do the same as France.
What could these be?
1. They are free market extremists who think that energy is being currently priced correctly by the market (their adherence to the myth of the infallibility of markets and it’s only Governments that cause markets to fail).
2. The are beholden to those with skin in the game – party donations from energy companies where they have been paid to produce policies friendly to donator profits – profits that can be shared with the Tory party through donations.
3. As a tactic to further carbon extraction/agendas and hold back green technology (probably influenced by (2) above, thus preventing new entrants to the markets/new markets and looking after and propping up carbon.
4. Carbon extraction (fracking, new coalmines etc.,) as an expression of the rampant nationalism as part of the ‘fortress Britain’ mentality of BREXIT taking us back to this mythical time of ‘self reliance’.
5. The Tories – as good Neo-liberals – see nothing wrong with monopolies – indeed they are intent on being a political monopoly themselves. Having a narrow band of domestic so called ‘self reliant’ carbon suppliers exploiting markets chimes with their Neo-liberal instincts and of course means that they have a campaign cash point through which to harvest donations because the only way they can keep winning elections is to outspend the opposition.
6. The Tories are led by perhaps the most lazy and indolent man ever to be a Prime Minister. The propping up of carbon is just that Johnson cannot be arsed to form a new energy market in the UK as he could not be bothered to deal initially with Covid . Johnson – and I am being serious here – is not about hard work. As his previous work record shows, its about using his education and its social networks to get on by force of skin deep personality, even thinner intelligence, japes, lies, shagging, delusions of grandeur (hello Winston) and lashings of other people’s money.
In short he’s what we used to call a ‘Cad’. But policy in British politics always has had the hallmarks of the PM’s character on it – the driving force so to speak. Tory policy under Cameron & Osbourne was driven by a venal, knowing cruelty – only Patel seems to have taken that forward at the moment. What Tory policy is under Johnson has all the hallmarks of a man who could just not be arsed.
7. I honestly think that the Tory party either (1) thinks it can get away with anything – because its all sewn up in the media and in their illicit funding or (2) they really don’t care because (i) they’ve had tremendous fun over the last 12 years and it will take ages to undo the damage they have wrought and (ii) they will be back after some other party has a go at ruling anyway and is brought down by the next market failure that will happen.
In short therefore I think all 7 points above are in play in the Tory party at the moment and why we cannot expect much. When you are as wealthy as many of them are, politics is immense fun and beats working.
Superb summary, PSR, of present Tory failings. It should be widely shared.
Addendum: I would only alter the final clause of your final sentence, adding ‘politics, as they practice it’. I think it is fair to say, and is consistent with what you have said yourself, that the present group of Tories don’t do politics as it could, and should, be done. Too much hard work.
I do not think that “Cad” quite works for Johnson.
As Joe Biden correctly said, Johnson is a shape-shifting creep, but I doubt that phrase has much chance of cutting through in Britain.
I think the answer is in plain sight, Johnson is a classic snob. As Sybil Fawlty said of Basil, If they are rich you are crawling all over them but everybody else you spit venom at like a benzedrine puff-adder.
However, growing up in the fifties and sixties, everybody understood useful the words like snob and snobbery. After decades of popular culture being dominated by Murdoch and the Mail I am not sure if that is true any more.
So in practical terms what is the panel of readers to this blog proposing? Accepting IMF? Minus 2%? Our central case at present is minus 2.7% for 2023 (for UK, Europe better), but all thoughts welcome.
The World Bank’s proposal is more realistic than that of the IMF, which consistency indicates it is out to lunch.
‘Consistently’ is what I meant.
The point for me Alan is that do we really need the IMF to tell us how bad things are here?
Just look at the foodbanks; look at the bedroom tax; look at BREXIT; look at the lying; look at the withdrawal of cash from the economy and its unequal distribution.
Whether it is ‘forecasting’ profits or forecasting recession, economics is once again falling into the realms of trying to predict the future just in order to send signals to investment markets. This is why an increasing number now see it as a ‘dismal science’.
It also shows us why contemporary orthodox economics is so useless. So addicted is it to its ‘predictive’ nature that it has stopped looking at and analysing what is happening and then coming up with innovative ideas and interventions about how to deal with economic crises in the real lives of people.
We don’t need the IMF – just like we don’t really need the IFS either. They’re both just mouthpieces for faulty thinking whose credibility is non-existent to marginal in my view at least.
Sorry – I have to disagree
We badly need the IMF and the World Bank to finance the solutions to the crisis we are in
They may have terrible p[asts, but right now they get poverty more than anyone
The IMF still has issues – I know – but let’s not permit perfection to be the enemy of the good now
The IMF can help solve world poverty right now
I’d rather they did than did not
The IFS is good on numbers — they can add up, something the government itself fails to do. But it is when they venture into policy that their neoliberal prejudices emerge. They should shut up about policy.
Agree that forecasters are a sad lot, only rivalled by management consultants. The worst are business planners like me, who do not dream of electric sheep but spreadsheets.
The problem I have is the practical need to allocate scarce resources to maximise employment, productivity, etc, etc. This requires some fix on price trends. We have a good fix on many key areas such a suppliers, wages, but demand in many operations is driven by overall inflation. So… all that is left is the idea that in the country of the blind, the one-eyed man is king.
Like you Richard I’m astonished that there’s so little response from opposition leaders and commentators. It’s not so much that our economy will fall 2 or 4 points but that millions will fall into absolute poverty. I think Martin Lewis has it right.
We will be in deep shit by mid year with areal possibility that Labours failure to tell a convincing story will open the way to fascism.
There are now too many echoes of the 30s.