Each New Year the Financial Times surveys a select group of policymakers, academics and commentators to gauge views on some important questions for the economy for the coming year. Volterra associate Nick Bosanquet took part in the survey again in 2014. Take a look at Nick’s responses below:
1. Economy: To what extent will the UK maintain its recent pace of economic growth in 2014? Will households start to feel better off?
The pace of economic growth will increase to 3 per cent driven by rising consumer confidence. There will be a wealth effect, from rising house prices. Households will also react positively to falling inflation rates. Once the energy price increases are over in this autumn inflation should fall towards 1 % in 2014-15. The Bank has already underestimated the recent fall and further falls are likely. This will be helped by supply side competition as companies seek to raise market share in an expanding market. The UK will benefit from having a competitive, open economy. Oligopolies seek to raise prices in a rising market while competitive firms seek to increase market share and improve margins through unit cost reductions. We are already seeing this in the supermarkets.
2. Sustainability: Is the recovery set fair, or will this upswing end in tears? Why?
The recovery is set fair. By end 2014 the misery index will have fallen sharply. Upswings are brought to a halt either by rising inflation of confidence collapse. Rising inflation reflects (1) world inflation rates—the BRIC countries now have a surplus of manufactures and falling exchange rates so their export prices will fall (2) Domestic cost pressures. These will be weak. The open labour market with high immigration together with rising activity rates will be very important here in containing wage increases (3) Demand pull. Here the competitive forces will work to raise supply rather than price . There is no reasons to expect confidence collapse with rising employment wealth effects for home owners , and low inflation. Households are also showing greater effort in getting value for money not lest by a 25 % reduction in energy consumption.
3. Monetary Policy: Will the Bank of England change its forward guidance in the coming year? Should it?
It should move to a regime of positive rates in 2015 to provide an incentive to save and financial discipline for borrowers. Such a move would raise confidence as a sign of real recovery.
4. Fiscal policy Has George Osborne’s “plan A” been vindicated by the recovery in 2013 and should the planned pace of deficit reduction continue unaltered?
There are good chances of faster debt reduction than expected as a result of rising indirect tax and stamp duty revenues. He should set a .longer term target of moving to 40 per cent of GDP in public spending partly as a lever or a more effective public services.
5. Labour market and productivity By the end of next year, what are we most likely to be saying about the productivity puzzle?
The private sector had a labour shortage forced on it outside London by the growth of public sector employment. We are now seeing that able people in the regions are seeking careers in the private sector. This rebalancing is highly positive for reducing the North–South divide.
6. Housing. To what extent does the housing market need to be restrained? If so, what policies might work?
The housing bubble exists in about 20 postcodes on 124. The house price figures reflect the prices achieved in sales in these areas. –not the stagnation elsewhere. There has been some rise in transactions everywhere but quite slow outside the golden 20. Even in the South East there are areas like Bedford and Hythe Kent with many houses on sale for under £150 K and flats or under £100 K—and they are not selling. .The current incentives should be re-orientated towards new and converted housing but in general no further action is required.
7. Scotland How would a yes vote for independence affect the Scottish economy and the rest of the UK in 2014?
There would be great concern that a notably stable group in the UK had taken leave of its senses. Such a vote would leave the UK on the edge of a new spiral of falling confidence. It would raise concerns about the EU referendum. This uncertainty would be the biggest threat to UK economic stability. The Yes vote would be a disaster for the UK as a whole not just for Scotland.