Deloitte senior economist comments on today’s inflation figures

Commenting on this morning’s inflation figures, Debapratim De, senior economist at Deloitte, said: “The rise in both core and headline measures of inflation vindicates the Bank of England’s decision to keep interest rates on hold in January. Further rises would significantly reduce the chances of a rate cut in the near future.”

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Britain’s economy isn’t in freefall and that worries business

The false prophecies of an economic collapse, aired loudly before and in the days after last year’s referendum on EU membership, have boosted the confidence of hard Brexiteers. A group of them even says a “no deal” with the EU on future relations after the 2019 exit date isn’t a bad thing.

Others, including many in British business, are quietly sorry the economy hasn’t taken a hit – if only because to them a hard shock seems the one thing that can sway the politics around Brexit and push the government to strike a favorable trade deal with Europe. If a shock comes, it’ll now probably come “too late,” in the words of one former government insider. The likelier course, economists now believe, is a long-term economic slowdown.

With Brexit, “we didn’t drop the frog in a pot of boiling water,” Commerzbank chief UK economist Peter Dixon said. “It won’t be the big one-off hit that tipped the economy into recession like 2008, but it will be a slow strangling of the economy as activity that might have taken place otherwise does not.”

Fuzzy Numbers:

The evidence to support that pessimistic view isn’t always clear-cut. With inflation rising and employment strong, the Bank of England last week hiked rates for the first time in a decade, reversing the 0.25 basis point cut in August 2016 made on the back of their gloomy post-referendum forecast. But, and here’s the catch, instead of a sharp drop in economic activity, the BoE sees Brexit as a long-term drag that Governor Mark Carney said will bring a new, lower “speed limit” for growth.

“The short, sharp shock has simply not materialized and unless there is some incredibly destructive news, it’s very unlikely to,” said Amit Kara, head of macroeconomic forecasting at the the National Institute for Economic and Social Research (NIESR). The institute last Wednesday projected the economy over the next five years would slow by an average of a quarter percentage point annually – and only partly due to Brexit. Britain’s main problem is weak productivity growth.

There has been more worrying data. The CBI’s quarterly Industrial Trends Survey covering the three months before October found that optimism about business conditions fell for the first time in a year, investment intentions have deteriorated and spending plans for buildings are at their lowest since July 2009. Retail sales have slumped at their fastest rate since 2009. Household income is £600 lower than it would have been had Britain voted to remain in the European Union, according to the NIESR report.

“Growth will be 1.5 percent rather than 2 percent, that kind of thing. Over 25 years this will have quite a big effect on Britain’s living standards, but day-to-day it won’t be very dramatic,” said Nick Macpherson, the former head of the Treasury under Chancellor George Osborne. “The only thing which could change that is a very hard Brexit indeed. Lorry queues round the M25, planes grounded, that sort of thing. The problem then is it will be too late to do anything about it.”

No Doom Or Gloom:

So to most people today, Brexit has been an economic non-event. Growth in the third quarter of 2017 – the three months through September – was up slightly to 0.4 percent, beating expectations, but part of a trend in 2017 of slower growth than the long-term average of around 2 percent a year. Wages were up 2.2 percent – the highest since 2012 – but with inflation at 3 percent real incomes fell.

“Individuals don’t really notice the difference between an economy growing at 2 percent to an economy growing at 1.8 percent,” said a senior economic expert in one of the major business groups opposed to Brexit. “People notice when the economy goes into recession, but we are not in that territory.”

The absence of something closer to apocalypse is making it harder for proponents of a “soft” Brexit with Europe to get heard.

It’s “undeniable that the projections of doom and gloom have not materialized,” said Nicky Morgan, the Conservative chair of the treasury select committee who opposed Brexit, and argued the avoidance of recession doesn’t mean Britain’s out of the woods.

“There are two costs to Brexit,” she said. “There’s the economic cost – and there will be one. Businesses are clearly not investing as much at the moment because of the uncertainty. But there is also the long-term opportunity cost – the cost of lost opportunities. This will be hard for people to feel in their bank accounts. It’s the business which decides to invest but not in the UK That is hard to quantify.”

Morgan warned the government not to let the lack of a crisis allow them to become complacent about the dangers of a mishandled Brexit. “We must not undermine our economy and the last seven years of extremely hard work,” she said.

Morgan and the other Tory soft Brexiteers are in a minority in the party, but have strong allies in government, foremost Chancellor Philip Hammond, who is pushing to maintain as much access to European markets as possible. However, the Brexiteers, led by Boris Johnson, Liam Fox and Michael Gove, hold the power to bring down the government should the prime minister stray too far off their preferred course.

Theresa May is trapped in the middle, forced to find compromise between the two camps at every turn.

Business Political Calculus:

The big “downside risk” for the UK economy – acting as the caveat in all the forecasts of economic growth – is the uncertainty around the final Brexit package, according to the Bank of England chief Carney.

The main UK business groups, which meet the Brexit department, business department and Treasury every two weeks, are united in their demand for a time-limited transition period to be agreed with the EU by the end of this year so companies can plan for subsequent years with certainty.

Yet, the government has sent mixed signals. The prime minister and Brexit Secretary David Davis have raised the prospect of a transition deal on the same trade terms as Britain currently enjoys but that’s politically toxic for many backbenchers and some of May’s Cabinet, as it implies that Britain will de facto remain part of the EU beyond 2019. What is more, the EU side is yet to agree to even discuss these future arrangements.

May’s recent suggestion that this transition arrangement is dependent on settling Britain’s future trading terms with the bloc increased anxiety for British business, who want a legally-binding agreement within months to allow them to plan. To leave a transition deal to much later, business leaders warn in public and in private, would undermine the benefits of any such arrangement as they will have triggered contingency plans for a hard Brexit a long time before the final cut-off date.

In a statement, Catherine McGuinness from the City of London Corporation – one of the main lobbying organizations for the UK financial sector – said: “Clarification around a transition so late in the day will be like closing the stable doors once the horse has bolted.” Chancellor Hammond himself told MPs at a select committee meeting that the transition period was “a depreciating asset,” of increasingly limited value to business the longer it takes to agree.

The financial community in the City of London, in the meantime, has felt increasingly abandoned by the May government, City insiders said. Although a Brexit position paper on financial services was expected in September, it never emerged. And those position papers that have been published refrain from saying much about financial services.

“The UK services industry accounts for 80 percent of the British economy, serving customers across the country, the EU and globally,” said Miles Celic, CEO of the lobby group TheCityUK. “Financial and related professional services are a significant part of that. Regardless of how or when it is done, it is critical for both the UK and the EU to agree how this vital trade can continue and to do so as soon as possible.”

Without a transition agreed early next year there was “a chance” of a recession, one chief economist at one of the major business organizations said on condition of anonymity for fear of wading too far into the political row over Brexit, which has driven a wedge between big business and parts of the Conservative Party, it’s traditional backer. “If it happened very suddenly it would have a big impact. If there was a fundamental breakdown and there was no transition agreed by the summer or autumn then the financial markets could turn.”

‘No Deal’ No Big Deal:

Brexiteers in parliament sound emboldened, choosing to focus on the half full glass of Britain’s current economic picture.

Buoyed by record employment levels and continued economic growth, Cabinet ministers have in recent weeks begun talking down the problems associated with a “WTO Brexit,” the scenario in which Britain falls back onto the standard international trading rules set by the World Trade Organization.

Members of the Conservative Party’s hard-line European Research Group in parliament are privately lobbying British industry groups pushing the merits of a “no deal,” one business leader said. “They are trying to convince us that WTO is not bad, but that’s not what our members think,” said the business leader.

They’re also downplaying the threat to the City of London’s dominant position in European finance. “Do you know how many banks have left for Paris?” one Cabinet minister asked in private recently. “None. It isn’t going to happen.”

Another said: “I’m more confident that we made the right decision today than I was when I campaigned for Brexit in the first place.”

India’s $100bn road building gamble to boost economy

The Indian government is planning to kickstart economic growth by building a huge road network. The idea sounds bulletproof – but is it? Economic analyst Vivek Kaul examines the idea.

When in trouble, some politicians and countries return to the influential British economist John Maynard Keynes.

Keynes believed that governments must be ready to borrow more and invest in public works in order to restart growth.

India’s economy grew at its slowest pace for three years in the last quarter. Growth has declined for six quarters in a row.

On Tuesday, the government took a leaf out of Keynes’s book and announced a $107bn (£80bn) programme to build tens of thousands of kilometres of road, connecting the north-western state of Rajasthan to the north-eastern state of Arunachal Pradesh.

In total, it’s planning to build precisely 83,677km (51,994 miles) of roads over the next five years.

The majority of the money will be spent in a 34,800km highway-building programme which, according to economist Mihir Swarup Sharma, is “basically a reworked and updated form” of a two-decade-long government programme.

This is not surprising because Narendra Modi’s government has shown a tendency to portray old schemes as new ones.

Let’s leave that aside and concentrate on how this programme will be implemented.

The government said that substantial delegation of powers has been provided to the National Highways Authority of India and other authorities and government departments.

India has one of the largest road networks in the world, already standing at more than 5.4 million km (3.3 million miles) comprising national highways, state highways, and district, rural and village roads. National highways account for less than 2% of the network.

The project should help a significant portion of the one million Indians entering the workforce every month find jobs. According to the government, it is expected to create more than 140 million working days.

A large portion of India’s workforce is either unskilled or semi-skilled; road-building projects cater to them.

The government plans to raise money for the roads through debt from the financial market, private investments through the public-private partnerships, highway toll collections and a federal road fund, among other things.

Spurring growth

On paper it sounds like a fool-proof idea.

The government will build roads. It will employ many people in the process and pay them. This income when spent will spur businesses as well as the economy.

If only things were as simple as that.

To build 83,677 km of roads over five years, the project would need to keep up a pace: It would need to build on average 16,735.4 km of roads a year.

Is that possible?

According to the government’s own data, 4,410km of roads were built in India during 2014-15. That was followed by 6,061km in 2015-16 and 4,699km up to December 2016 for the 2016-2017 financial year.

Clearly, the government must tremendously increase the speed of building roads – a tall order.

Over and above this, acquiring land to build roads will not be easy, as many are opposed to new land acquisition rules.

Nitin Gadkari, the federal roads and highways minister, has said landowners are “making a beeline to offer their land for the highway projects after enhanced compensation”.

But it is not going to be anywhere as easy as the minister made it sound.

Take the case of the an industrial corridor linking the cities of Delhi and Mumbai. It was announced nearly a decade ago but most of the corridor is still plagued by the issue that the authorities are unable to acquire the land.

Building roads to drive economic growth is an old idea. In fact, it was put in action even before Keynes wrote about it – in Hitler-era Germany, in Italy and in Japan.

How well will things work out in the Indian context? That will depend on how well the government is able to execute the building of roads.

The good news is that Nitin Gadkari, one of the better performing ministers in Mr Modi’s government, is in charge.

The bad news is that good execution is not something India is known for.