Ben Gummer MP writes about the number of small businesses starting up in and around his offices in Fore Street, using this to illustrate his vision of a healing economy, with rising growth and falling unemployment, record employment and falling inflation.
He highlights the welcome news that claimants of Job Seekers Allowance have fallen below 4,000 people again, and is only 148 claimants above where it was at the time of the General Election back in 2010. He mentions that long term unemployment, whilst still far too high, has fallen for the last couple of months. And he says that youth unemployment is marginally lower than when he was elected, and has been falling for a year.
Almost as an aside he mentions one of the biggest threats to the long term health of the economy, that “most people are being squeezed between rising prices and incomes that have not kept pace.” He writes that inflation is falling again, and millions are being taken out of tax altogether, implying this will stop the fall in real-terms wages.
This, he says, is the reason that the stock market is at an all time high. Well maybe. But that is even more doubtful than his vision on real-term wages. Firstly, the stock market hit the highest level in thirteen years this week, on Wednesday, not it’s all time high. Secondly, the boost in the bourses around the world has not been driven by the great economic data but by central banks buying up billions of pounds of assets. And lastly, perhaps indicating the dangers of writing about the great stock market figures, it has fallen for the last two days, including the largest fall this year, after poor performance by HSBC and a hint that the US Treasury might cut back on the stimulus.
Taking real-term wages first, though, it is clear that with inflation outperforming wage rises people will have less and less money to spend. It is also clear that many of those burned in the 2008 crash will be more circumspect about their spending, preferring to save rather than use credit. Actually that isn’t a bad thing, the Government wants to reduce the amount of reckless borrowing that became a feature of the last boom. Continued falls in real-term wages will mean that people have less money to spend on anything beyond essentials. So far this hasn’t shown up in consumer spending, which has risen for the last six months, but it will do eventually if the Government doesn’t tackle it.
Action like that taken by Ipswich Borough Council, introducing a living wage, can help, as would a rise in the basic level of the national minimum wage. The Tory led Government doesn’t seem to see this though, instead many Tory MPs have fallen back on the old rhetoric that the national minimum wage destroys jobs, without any evidence for this whatsoever – it didn’t destroy jobs when it came in, and employment is now at record levels despite the NMW and an economically turbulent period.
Further work to pull down inflation will help, as would some easing of pay restraint by businesses – maybe some fiscal loosening on employment taxes like national insurance, especially at the lower end of the pay scales. Cutting the taxes of those earning between ten thousand pounds and fifteen thousand pounds to ten percent would also make a big difference, but that would be horrendously expensive in the short term.
As for the stock market, is it any wonder that it has been booming recently, along with just about every other stock market around the world. They are benefiting from what looks like a win-win situation, for the moment at least. Share prices gain when economic news is good, because that means companies should do better. But they can also gain when the news is not so good, because that increases the likelihood central banks will engage in further asset purchases – quantitative easing – thus boosting markets via that route.
Johannes Jooste of Merrill Lynch Wealth Management notes that even when economic data has disappointed, as some recent numbers from America and China have, “continued easy monetary policy supported global equity markets”.
The Bank of England’s monetary policy committee stayed its hand on Thursday but other central banks are engaging in plenty of unconventional activity in the form of asset purchases, including America’s Federal Reserve, $85bn (£55bn) a month, and the Bank of Japan with a monthly $79bn (£51bn).
The European Central Bank, which cut interest rates earlier this month, is contemplating purchases of asset-backed securities made up of loans to small firms. The Bank, with Mark Carney set to arrive within weeks, may not have done yet. This month has seen a slew of interest rate cuts, from central banks in India, Poland, Denmark, Korea, Vietnam and Australia, amongst others.
Some people will see this as a good thing. Mr Gummer included, if his Ipswich Star column is anything to go by. Conventional wisdom says that booming markets boost wealth, increase business confidence and make it easier for firms – larger ones at least – to finance expansion.
But you can have too much of a good thing. When does the rise in stock markets, given that much of it is driven by the actions of central banks, become dangerous? When does it become a bubble whose bursting would be very damaging?
The risks are there, and they are present in the fact that markets have moved well ahead of real economic activity. Markets that are mainly driven by monetary policy are, by their nature, unsustainable.
Just weeks ago, David Smith, Economics Editor of the Sunday Times, suggested that “any sign central banks were ready to start tightening policy, by raising rates or selling back some of the assets they have purchased, would send markets diving.”
Well it’s happening. The FTSE hit near 13-year highs this week but that rally stalled on Thursday over concerns that the U.S. may soon scale back a stimulus measure known as quantitative easing (QE) due to increasing signs of a recovery in the U.S. economy.
“Investors are now worried about the end of QE, and no-one wants to be left without a chair when the music stops,” said IG chief market strategist David Jones.
With falling real-term wages, an unsustainably bullish FTSE stuttering as gravity sets in, and unemployment a constant worry for many in jobs across Ipswich, maybe it is too early for Mr Gummer to be looking for green shoots.