Policy Research in Macroeconomics

PRIME’s Economic Prospects for 2017 (as published in the Financial Times)

The Financial Times’s chief economist, Chris Giles and his colleague Gemma Tetlow invited PRIME to submit a forecast (below) to the FT’s annual review of economists’ expectations. All the forecasts can be reviewed online

at the FT here
, where responses are separated into different categories. PRIME’s full forecast is outlined below. 

1. Economic prospects

How much, if at all, do you expect UK economic growth to slow in 2017? Please explain your answer.

We at PRIME expect growth to slow by at least 0.5% next year. Government spending growth will be stronger than in 2016, and (with the exception of 2014 ahead of the election) will be second strongest since austerity began. Business investment has been fragile for over a year, and the London housing construction bubble is flagging. There may be a possible boost to exports from a weak £, but global demand is as limp as UK demand.

2. Brexit

Compared to what you thought 12 months ago about the UK’s long-term economic prospects outside the EU, are you now more optimistic or more pessimistic than you were?

More optimistic than 12 months ago Feel about the same as 12 months ago. More pessimistic than 12 months ago

Please explain your answer

Prospects for the UK economy outside of the EU depend on demand, which indirectly also depends on financial stability. The Leave agenda is for intensified financial and trade liberalisation, an agenda that will hit the buffers of weak global demand. There is little evidence of a material change in attitude to fiscal policy – what has happened will surely have happened anyway. Financial instability ($500bn QE pumped out each Qtr by G4 central banks, negative bond yields, effectively insolvent (absent public subsidies) global banks, low levels of lending, high real rates for risk-taking entrepreneurs, volatile FX) is the norm, inside or outside the EU. We have known this all along.

 3. Inflation

Inflation has started to increase in recent months. To what extent do you expect inflation to rise in 2017?

0.5 – 1.0 ppt increase in annual inflation rate compared to 2016’s 0.7. Policy-makers have repeatedly underestimated spare capacity in the UK economy, as we at PRIME have argued for some time (see The Economic Consequences of Mr Osborne). The evidence so far is that the £ is impacting on CPI only through fuel. There will probably be some wider effects next year, but pressures on retailers because of weak demand and intensified (web) competition will keep the lid on prices. Because of deflationary pressures, this year there has been more spending power, and a big increase in the volume of retail sales, but far less in value terms. The volume increase in 2017 is likely to be much lower, and in value terms the gains only modest.

4. Monetary policy

In December, the Monetary Policy Committee said the next interest rate move could as easily be up as down. Will there be a shift in this monetary policy stance by the end of 2017? Please explain your answer.

No, there will not be a shift in the Bank’s monetary stance next year. The Bank has been pragmatic in the face of weak demand, though the imbalance between monetary and fiscal policy is very wrong, and the new Chancellor seems to want it to remain so. In the meantime the reliance on the BoE’s balance sheet is extreme (via QE, FLS, TFS etc. and likewise throughout the world). All this points to the extent of the underlying malaise.

 5. Immigration

Immigration is likely to be central to the Brexit negotiations in 2017. How much do you think immigration will change and what effect do you think this will have on the UK economy?

Not much. And not much effect (in the short-term).

6. Fiscal policy

Philip Hammond is expecting government borrowing to fall in 2017. His new fiscal rules provide headroom for more borrowing than currently forecast. To what extent will he need to use it and why?

The idea of “headroom” conforms to the household budget fallacy, a fallacy which the FT’s economic analysis has helped entrench. The health or otherwise of the public finances depends entirely on the health of the economy. By focussing excessively on fiscal policy, and not on the creation of skilled, well-paid, tax-generating employment, policy-makers have repeatedly missed fiscal targets. Their approach can be compared to looking through the wrong end of a telescope. If deflation is to be avoided, this wrong-headedness must change. The Chancellor has ignored warnings from the OECD, IMF, BoE etc and is taking only baby steps. It is unlikely that he will go much further unless a) financial crisis intervenes b) the election is brought forward or c) war is declared.

7. Donald Trump

How do you think Donald Trump’s presidency will affect the UK economy in 2017?

One has to be sceptical of Trump’s allegiance to working people, given his eagerness to extend (and benefit from) tax cuts to the rich. To the extent that his promise of fiscal stimulus is material, and as long as Wall St and financial markets do not undermine his administration with higher bond yields, then a US stimulus will support the global economy and with it the UK economy. In other words, Trump’s economic achievements will ultimately be determined by his attitude to Wall St. We know that he is not a Roosevelt, who turned Wall St. from master to servant of the US economy. Instead he has placed critical government economic departments under the control of financiers. We doubt they will support the fiscal expansion needed to raise wages and create jobs in those states that so eagerly supported Trump. But who knows? Wall St. may allow him to follow in Reagan’s footsteps. As an aside, it is to be hoped that his administration will finally trigger a serious economic debate within the blind-sided Democrat party and liberal universities about the role of Wall St. in the economy, and of wider financial liberalisation (often characterised as globalisation).

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