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NEWS EXTRA: NMBS CONFERENCE


SMITH SKIPS TO ECONOMIC INDICATORS


Sunday Times economics editor David Smith gave the NMBS Conference a snap-shot of what’s happening in the economy.


IT’S REALLY BEEN one thing after another in economic terms for the past few years, according to Sunday Times economics editor David Smith.


“We had the global financial crisis followed by Brexit and the trade wars set in motion by Trump, then the pandemic and then Russia invaded Ukraine. The economic effects of the Covid- 19 pandemic were huge. At the start of this year growth prospects for the UK and the world looked pretty rosy. We were still in post- pandemic recovery then came the Russian invasion of Ukraine and everyone has started to pare down their economic forecasts on the back of that.”


Smith explained that the IMF has slashed its world economy growth forecast from about 4.5% in January to 3.5%. “And those growth forecasts were slashed everywhere. Particularly in the UK. The government used to argue that we were the fastest growing economy in the G7, the world’s biggest economies that was revised back by these latest forecasts to make us next year, unfortunately, the slowest growing economy in the G7 so a big negative effect on economic growth.”


The war in Ukraine has also affected the UK, Smith said, mainly through higher energy prices.“The impact of higher energy prices and higher food prices is equivalent to putting a big tax on an economy like the UK because suddenly people are spending more on oil and on domestic fuel so they have to spend less on other things,” he said. The higher and longer lasting


12


the oil price hike and the gas price hike, the longer the UK will have suffered a hit to economic growth as a result of this, he added. The broadest measure of economic activity is GDP gross domestic product and Smith showed how the impact of the first lockdown in the spring of 2020 was massive. “Lots of industries were affected by closures including merchants for a time. And the effect of that was to produce the biggest drop-in economic activity I think we will ever see in our lifetimes. In the second quarter of 2020, GDP fell by just under 20%. The biggest quarterly fall we’d ever had before that was during the three-day week in 1974. And then it was a fall of 2.7% in a quarter.” On the plus side, he added that there has been a pretty quick bounce-back. “This recession was unusual, because it was driven by lockdown restrictions and changes in behaviour. So normally it takes three years to get back to where you were before a recession. After the financial crisis it took five years. This time it took less than two.” Now, though, Smith said, comes the hard part. “We have the energy price shock, labour shortages, supply chain difficulties. We also have interest rates going up and the massive fiscal support from government - furlough, COVID-19 loans, bounce-back loans - are being withdrawn in most countries, replaced by cost- of-living support in some areas. “Early on in the pandemic, there were warnings that we could see unemployment going up to 13 or 14%, something we’ve


“The IMF has slashed its world economy growth forecast from about four and a half percent in January to three and a half percent.”


never had before, and there’s no doubt at the furlough scheme prevented that. But the last thing he expected was that we would come out of the pandemic after the furlough scheme and be faced with this kind of low level of unemployment. And the reason why the unemployment rate isn’t telling the kinds of story it normally does, is because we’ve lost so many people from the labour force.”


The story of labour shortages is essentially one of a shrunken workforce. Smith explained that this is partly due to fewer EU workers in the in the UK but also because so many people have left the workplace. “This is predominantly people over the age of 50. Perhaps people were furloughed. They thought they didn’t consider early retirement until furlough, and a great many of them have decided, not just to find other jobs, but to not work at all. So, this is another constraint on the economy.”


The thing that sets the UK apart from other economies, Smith said, is the scale of the tax increases announced by Rishi Sunak last year and still to come through. “Income Tax allowances and thresholds have been frozen for four years, which means more people are paying income tax at higher rates than they would have done before. No other countries are putting taxes up to the same extent and this is a big drag on the


UK economy going forward.” Inflation too, is having a negative effect, particularly on confidence, he said.“These are inflation rates we haven’t seen for 40 years. The cost of raw materials and fuel really surging at the moment and we’re back into that that pattern that we had in the past during high inflation. It’s no longer the case that manufacturers can leave prices unchanged.” The housing market, influenced by interest rates, hasn’t behaved the way many people thought it would either, Smith added. “When the pandemic struck people would have thought we’re heading to a big housing correction, instead of which we saw prices recover quite strongly. However, the stamp duty reduction was reversed last September, interest rates are going up quite sharply as a second. And so, I think we’re going from double figure house price inflation down to low single figures over the next few months. And housing activity will level off.“


“This is the silver lining. I do think inflation is going to come down because energy price spikes tend to be self-correcting. During the pandemic, there was a big expansion of the money supply through quantitative easing, that’s over and that should bear down on inflation in future. When that does happen, it will settle at a higher rate than we have been used to in recent years, say 4%. I don’t think higher interest rates are going to kill the economy. But it’s something we should expect.” Smith finished with an illustration of his favourite economic indicator, the Skip Index. No skips in the street means recession, two the economy is growing in line with what economists call chain growth. And when there are four, it’s an unsustainable boom.“I’ve been monitoring this for a number of years. It’s been all over the place during the pandemic. So, at certain times we’ve had none and more than four. It’s settled down now and I think this is reassuring that there are two skips in the street. I’m not saying that life has returned to normal, but it’s more normal than it’s been for a couple of years and that is reassuring.” BMJ


www.buildersmerchantsjournal.net August 2021 www.buildersmerchantsjournal.net July 2022


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