Aurelia Butler

Labour has a huge lead in the opinion polls and seems likely to win the next general election. A big part of the reason is that the economic record of the UK under the Conservatives has been dismal. But can Labour turn this round? Some improvement is no doubt possible. But it is essential to recognise the huge challenges any incoming government would confront. One might be tempted to argue that things have gone so badly they can only get better. Alas, that shows a lack of imagination.That things have gone badly is unquestionable. In April 2023, average real weekly pay was the same as in August 2007, just before the global financial crisis. According to the Conference Board, gross domestic product per employed person (measured at purchasing power) fell from 81 per cent of US levels in 2007 to 68 per cent in 2021. This is the second-largest relative decline in the G7, ahead only of Italy. A report from the Resolution Foundation published last year describes the UK as “stagnation nation”. Nobody could seriously disagree.Economic stagnation makes everything harder. It is harder to find the resources needed to improve public services. It is harder to meet the demands of an ageing society. It is harder to do much about regions that have fallen behind. It is harder to manage the distributional struggles triggered by negative shocks.

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A credible programme for restoring economic growth is therefore the most important priority for the UK. On this, Labour has quite understandably latched on to what is happening in the US. In a speech on May 24 during a visit, Rachel Reeves, shadow chancellor, declared that “I am here in Washington today because, while the old ‘Washington consensus’ might have been swept away, a new one is emerging. At its heart is what Treasury secretary [Janet] Yellen has called ‘modern supply side’ economics. The Biden administration is rebuilding America’s economic security, strength and resilience.” This view was elaborated further in “A New Business Model for Britain”, published at the same time.This justifies a far more active state. Reeves understands that what might work in the US (itself still open to question) will not do so in the UK. Thus, her plan states: “The aim is not to try and lead in every field . . . Labour’s ‘modern supply side’ approach in Britain will not seek to turn us into a British version of the US or Germany.” So far, so sensible. Nevertheless, its centrepiece is “The Green Prosperity Plan”, which “will see the state make public investments in industries that are vital to Britain’s future success, paving the way for significant further private investment. To make sure this delivers for British workers, as well as British businesses, policies that encourage investment will include minimum standards to ensure that well-paid and secure jobs are created as a result.”

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Alas, once just about every politician “knows” which industry of the future to promote, we can be quite sure the world will end up with chronic oversupply and failed investments. This is not to deny that the energy transition itself is vital. But the idea that it also offers the Holy Grail of renewed growth for every country is, to say the least, optimistic. In the UK in particular, a big part of what is needed, especially the transformation of home heating, will be expensive and unpopular. In most cases, moreover, the most efficient thing for the UK to do will be to buy cheap equipment abroad, definitely including from China. It may be good politics to sell the green transformation as a growth and jobs strategy. It is less likely to prove good economics.So, what might end the long period of economic stagnation? Here are two obvious hurdles on the way.

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First, the UK invests and saves far too little. According to the IMF, the UK’s average gross investment rate between 2010 and 2022 was just 17.4 per cent of GDP, the lowest in the G7. This has to be raised substantially. Yet, still worse, the UK’s gross national savings averaged 13.6 per cent of GDP, far below that of any other G7 country. Thus, despite having the lowest investment rate in the G7, the UK was also more dependent on foreign capital to finance the investment than any other G7 country. If the investment rate is to rise substantially, so then must savings. Where is this to come from?Second, British people are beginning to realise they were sold a pup on Brexit. In response, Reeves promises to “fix the Brexit deal”, while remaining outside “the EU, the single market and the customs union”. Progress can indeed be made on areas such as food standards and mutual recognition of qualifications. But the damage will, alas, endure.Labour deserves a chance. But it does not offer answers we need. Maybe, nobody can. If so, the future looks [email protected] More

Will US inflation fall further? Headline US consumer price inflation is expected to have slowed meaningfully in June but core inflation is likely to have remained robust, giving the Federal Reserve further incentive to resume raising interest rates at its July meeting. The Bureau of Labor Statistics on Wednesday will release its latest US consumer price index report, which is expected to show that headline inflation was 3.1 per cent in June, year over year, according to economists surveyed by Bloomberg. That would mark a significant improvement from May’s figure of 4 per cent, and would be the lowest rate since March 2021. But core CPI, a measure that strips out the volatile food and energy sectors, is expected to be 5 per cent year over year, just below the previous month’s rate of 5.3 per cent. Core inflation has remained stubbornly high, even as the headline figure has come down, and is likely to be more important to the Fed when it meets in late July. A core reading that is higher than — or falls in line with — economists’ expectations could cement the view that the Fed will resume raising interest rates again this month, after having paused in June for the first time since its historic rate increase campaign began in March last year. In the futures market, traders are pricing in an 89 per cent chance that the Fed will raise interest rates by a quarter point in July. Kate DuguidHow strong is the UK labour market?In a busy week for UK economic data, investors are likely to be focused on Tuesday’s wage growth numbers.That figure was unexpectedly strong last month, confounding expectations after a run of weaker data that indicated the labour market was slowing. As a result, markets and economists have pencilled in further interest rate rises.Economists polled by Reuters forecast the annual growth rate of weekly earnings excluding bonuses was 7.1 per cent in the three months to May, just below the pace of 7.2 per cent in the previous period.Ellie Henderson, an economist at Investec, also forecasts an uptick in overall earnings growth and said that “although vacancies are falling, they are still historically extremely elevated, giving employers more incentive to provide high pay awards to retain staff”.She also expects a smaller rise in employment and a small gain in the single-month measure for the participation rate, based on the expectation that “the tougher financial conditions for households enticed even more people back to the labour market”. However, until job vacancies “return to more normal levels, the labour market will remain tight”, she said.Samuel Tombs, an economist at Pantheon Macroeconomics, expects that growth in both employment and wages slowed in May, but that the trend “won’t be severe enough to stop the Monetary Policy Committee in its tracks”.Markets are pricing in the Bank of England raising its bank rate from the current level of 5 per cent, the highest in 15 years, to 6.5 per cent by the end of December. Valentina RomeiIs Germany heading for a deeper recession?Investors will be watching closely for signs of further deterioration of market confidence in Germany with the Leibniz Centre for European Economic Research, or ZEW, poised to publish its investor sentiment survey on Tuesday. Last month the gauge dropped 21.7 points to minus 56.5, a much bigger fall than economists had expected, and the biggest monthly fall since April 2020, at the start of the coronavirus pandemic. Economists polled by Reuters are expecting a further decline to minus 60. “If current conditions remain around these levels Germany could go into a deeper recession,” said George Buckley, a European economist at Nomura. Buckley said there had been encouraging signs this week with manufacturing orders stronger than economists had expected, up 6.4 per cent in May from a month earlier, but analysts said the number was driven by one-off items, with vehicle orders for ships and trains rising sharply.The German economy has contracted for the past two consecutive quarters. In June, economists polled by Consensus Economics expected German gross domestic product to contract 0.2 per cent this year, a downward revision from the marginal expansion forecast in the previous month.Germany will also publish June’s final inflation figures on Thursday. Flash figures showed German consumer prices rising 6.8 per cent for the year to June, slightly ahead of the 6.7 per cent forecast in a Reuters poll of economists. Mary McDougall More

After decades of showing promise, Vietnam’s economic moment may have finally arrived. It was the fastest-growing economy in Asia last year (8 per cent growth) and one of only a handful globally to achieve two consecutive years of growth since the Covid-19 pandemic. The south-east Asian nation has become a major beneficiary of manufacturers’ efforts to “de-risk” their exposure to China as geopolitical tensions between Beijing and the west mount. Foreign direct investment soared to a decade high in 2022. Big names including Dell, Google, Microsoft and Apple have all shifted parts of their supply chain to the country in recent years, and are looking to do more as part of a “China plus one” strategy.The allure is obvious. Since the late 1980s, its communist government has overseen a transition from a controlled economy to a more open and capitalist model. In turn, its proximity to China and vast young, cheap and well-educated workforce has attracted manufacturers. Though “Made in Vietnam” was initially synonymous with apparel such as Nike shoes, it is now increasingly associated with higher-end electronics such as Apple’s AirPods.Businesses have grasped the opportunity to diversify their supply chains, as rising labour costs and political risks erode China’s relative advantage as a business destination. Over $20bn in FDI flowed in last year mainly from Japan, Singapore, and China. The US share of imports from Vietnam has also risen almost 2 percentage points since US-China trade tensions began to flare in 2018.Rapid export-led growth has pulled millions out of poverty in recent decades, but Vietnam’s economy is now at a crossroads. In the near-term, to continue riding the wave of investor attention, it needs to bolster its business environment. In the long run, to meet the government’s ambitious goal of becoming a high-income economy by 2045, it must also leverage the manufacturing growth boon to diversify its economy.Over the next decade, Vietnam must raise its productive capacity to meet the growing demands of manufacturers investment plans. Youthful demographics provide a large pool of workers to choose from, yet competition for technical skills is growing. Vietnam’s schools outperform globally, but vocational training and universities need a leg-up. A decentralised political structure means numerous signatures are needed to obtain investment approvals. Red-tape needs to be slashed. Above all, the country’s infrastructure needs upgrading — its electricity grid is straining under the weight of rising industrial demand.The country’s onward march to high-income status is not preordained, however. Malaysia and Thailand were on a similar trajectory to Vietnam’s now in the late 1990s. But they succumbed to the so-called “middle-income trap” — when countries are unable to transition from a low-cost to a high-value economy, making it difficult to compete with both low- and high-income countries. As Vietnam’s economy grows, wages will rise too. It cannot rely on its low-cost model forever. Dependence on export-led growth would leave it vulnerable to the volatile global trading environment.Over time, Vietnam will need to reinvest its current growth dividend to support the development of more productive, knowledge-rich sectors, to meet its 2045 goal. Backbone services like finance, logistics, and legal services create high-skilled jobs and add value to existing industries. The World Bank recommends greater support for tech adoption, strengthening management skills, and further reduction to restrictions on FDI in services.The business excitement around Vietnam is justified. But there is much work to be done to convert today’s “de-risking” trend into long-term prosperity. More

Villeroy, who sits on the ECB’s governing council, also said that its interest rate hikes were close to topping out and that rates would be kept at elevated levels long enough for the impact to feed through the economy.The aim is to bring inflation down to the 2% target by 2025, Villeroy said at an economics conference in the southern French city of Aix-en-Province.Former IMF chief economist, Frenchman Olivier Blanchard, has long called for a higher inflation target than the 2% shared by most major central banks, arguing that the increased flexibility that would provide would outweigh the costs.Veteran French economist Patrick Artus also called for a higher target at the conference on Saturday and French Finance Minister Bruno Le Maire said that if economists were opening the debate there should be “no taboos about transgression”.In response, Villeroy said that a higher inflation target was a “false good idea” and would lead to higher rather than lower borrowing costs.”If we announced our inflation target is no longer 2% but 3%, lenders would immediately demand higher interest rates, at least 1% (more)” in anticipation of higher inflation and uncertainty Villeroy said. Bank of England Governor Andrew Bailey said on the same panel that the 2% target was a good balance because it is low enough that people do not have to take inflation into account in their everyday economic decisions, while zero would be too low to allow for relative changes in prices.”If we change it, we will unpick not only that definition, we will unpick expectations,” he said. More

The new rules, signed by Premier Li Qiang and effective on Sept. 1, create a chapter specifically for venture capital funds, as policymakers encourage investment into innovative technology start-ups, said a statement from China’s securities regulator and the justice ministry.The statement addressed media questions on the new rules.The wide-ranging rules apply to private investment funds with different organisational forms such as contract, company and partnership. Private investment funds in China can invest in private equity or publicly traded securities. Core rules cover the obligations of fund managers and custodians, fund raising, identifying risk levels, supervision of venture capital funds, and overall supervision and management.The regulations have 62 items in seven chapters, the State Council said in a statement, according to state-run Xinhua news agency.As of May, 22,000 private investment managers had registered with the Asset Management Association of China, managing around 21 trillion yuan in 153,000 funds, the statement said. ($1 = 7.2205 Chinese yuan renminbi) More