Tuesday, December 31, 2013

UK to surpass Germany - they're having a laugh

As we say goodbye to 2013 I think it's a good idea to see in the new year with a bit of a laugh. The right-wing economic think tank CEBR were obviously thinking along similar lines when they published an absurd piece of "research" which (via the process of churnalism) provided numerous corporate press headlines claiming that the UK economy would overtake Germany to become the largest in Europe within the next 20 years.

Before I get to picking apart their absurd claims, it's first important to give a bit of information on who the CEBR are. On their website they claim to be an organisation providing "independent economic forecasting and analysis". They also claim that they have a "
strong track record of forecasting accuracy".

Both of these claims are extremely dubious. The client list on their website reveals that they have a number of government contracts, meaning that their independence to freely criticise the UK government and their policies is severely curtailed. They also boast about providing services to many of the biggest banks and insurance companies in the UK as well as the nation's "largest property portfolio". Given their reliance upon the financial sector and the property market for income, it seems unlikely that this organisation has the "independence" to criticise structural flaws in the financial sector or even bonkers property price inflation subsidies like George Osborne's idiotic "Help to Buy" scheme.

When it comes to their
"strong track record of forecasting accuracy" perhaps it would be useful to consider what they were predicting at the back end of 2012 and judge how accurate they were?

In September 2012 the CEBR predicted that wages would exceed the rate of inflation in 2013. Not only did they predict that the campaign of wage repression would be reversed in 2013, they also predicted that the poorest would benefit the most, with the poor experiencing a 1.5% above inflation income gain, the middle classes bagging a 1% rise and the richest minority getting just 0.7%.

This prediction has been proven completely wrong because wages have continued to fall in real terms every single month throughout 2013, as they have ever since the Tory led coalition came to power. Not only was their prediction of rising wages completely wrong it also betrayed a shocking lack of political nous. Would anyone with the slightest understanding of what the Tory party is and how it is funded ever conclude that the Tory party would run the economy in a way that would benefit the poorest the most and the richest the least?

When we look at the facts, we find that the poor and ordinary suffered more real terms cuts in their incomes during 2013 (as well as bearing the brunt of harsh austerity measures like cuts in in-work benefits and the hated "Bedroom Tax" too) whilst the wealthiest minority bagged massive above income wage rises yet again (as well as benefiting from George Osborne's cut in the top rate of income tax which was worth an average £100,000 per year to the 13,000 income millionaires in the UK).

Here's my prediction: If this Tory campaign of wage repression is to end, it will happen around six to eight months before the 2015 General Election, in the hope that taking the boot of economic repression off the necks of the masses and allowing them to breathe properly for the first time in over four years will create an election winning feel good factor, even though people will still be significantly worse off than they were before the Tories came to power.

Returning to the CEBR and the "strong  track record" of predictions they like to brag about, one of my key tests is whether the individual or organisation managed to predict the 2007-08 financial sector meltdown. Economists like Steve Keen and Nouriel Roubini that successfully predicted the global economic crisis get the AAV seal of approval and the vast majority of economists that not only failed to see it coming, but also tried in vain to talk down the seriousness of the crisis once it had actually begun, get all their future predictions and forecasts buried in salt.

The fact is that the CEBR didn't see the 2007-08 financial crisis on the horizon, and on the eve of the meltdown they were still predicting huge rises in property values between 2007 and 2010 and claiming that "
The underlying fundamentals of the housing market continue to support prices". Well we all know what happened next. If they didn't see something as big as the global financial sector meltdown coming, just months before it happened, they certainly shouldn't be trusted on their predictions that span decades into the future.

So now they would have us believe that the UK economy is in such healthy shape that it will grow at an average 3.3% per year between 2014 and 2028 to surpass Germany as the biggest economy in Europe sometime around 2030.

The first and most obvious criticism is that they are using a number of critical assumptions to generate this prediction, most notably their refusal to consider the possibility that Scotland will depart the Union after the 2014 referendum on independence. Should this happen, and the UK declines in population by over five million and loses the massive North Sea oil revenues, there isn't a snowball's chance in Hell that the UK will rocket past Germany to become the most powerful economy in Europe.

Even if the massive uncertainty over the Scottish independence referendum and a potential 2017 referendum on membership of the EU are discounted - the "research" still doesn't seem to have taken any account of hugely important issues such as:

The balance of trade: Soaring trade deficits in the UK and huge trade surpluses in Germany provide strong indicators that Germany is a far healthier economy from a long-term perspective.

Short-term analysis
: From a short-term perspective the prediction of a 15 year period of sustained economic growth more rapid than anything seen since the "golden age of capitalism" in the 50s and 60s looks like some kind of absurd fantasy. The idea that such a robust and prolonged period of growth is going to propel the UK above France and Germany is ludicrous given that the UK still hasn't even managed to rebuild to the size it was before the 2007-08 economic meltdown (the one that the CEBR failed to predict) but both Germany and France have recovered and exceeded pre-crisis levels. The idea that the most sluggish economic recovery in UK history is suddenly going to transform into the most rapid and sustained period of growth in over 50 years is more than wishful thinking, it's absolutely crackers.

Capital flight: The German economy is benefiting as capital flows from struggling Eurozone economies (Spain, Greece, Portugal, Italy and Ireland) into Germany. It is true that the UK (mainly London) is also benefiting from capital flight as foreign money flows into the City of London and the London property market, however this still isn't enough to counterbalance the enormous trade deficits the UK is running. The main point is that it is unwise to omit the effect of capital flight from the periphery Eurozone economies into Germany in order to make sweeping statements that Germany is going to be surpassed by the UK and would be better off out of the Euro - as the CEBR report clearly did.
The effects of Quantitative Easing mania across the major economies: Currency devaluation was hardly a success when Japan tried it in isolation through the 1990s (the Japanese "lost decade") - now that all the major economies are simultaneously trying the same fiat currency devaluation trick it's hardly likely to work any better for the UK. If magicking up hundreds of billions and holding interest rates at the all-time record low of 0.5% for five long years hasn't produced 3.3% growth yet, when and how is this remarkable period of growth going to begin?

Uncertainty: Economies are extremely complicated things which are almost impossible to predict with any degree of accuracy. Just a tiny miscalculation (of say 0.01%) in one of your parameters is more than enough to completely wreck your predictions over the course of 15 years. Then there's the uncertainty of events. Given that they couldn't predict the 2007-08 crisis, who is to say that there isn't another enormous economic catastrophe just around the corner that the CEBR are totally (or willfuly) blind to?

The idea that the UK is going to ride a wave of almost unprecedented prosperity for the next 15 years to soar past Germany and become the biggest economy in Europe is as assumption laden as it is laughable. This brings us to the question of why they have produced such a ludicrously over-optimistic report.

The answer is quite simple: The CEBR see it as in their best interests to produce reports that their clients approve of, and they clearly consider the Tory party to be valuable clients.

The over-optimistic endorsements of Tory policy from the CEBR have been through many stages, all of them closely matching the economic narratives being pushed by the Tory party at the time.

After initially endorsing George Osborne's catastrophic ideological austerity experiment, the CEBR changed tune to claim that a further decade of austerity would be necessary (a move expanded upon by David Cameron in his "austerity to infinity" speech at the Lord Mayor's Banquet in November 2013). Now the CEBR are determined to help bolster the Conservative's utterly misleading "economic recovery" narratives with absurdly optimistic projections seemingly designed to provide the right-wing press with feel-good "UK to be better than Germany" headlines.

If that's not enough to convince you that the CEBR busy themselves producing reports that are little more than propaganda for the Tory party, then perhaps their ludicrous 2011 report clearly designed to help George Osborne justify cutting the top rate of income tax might be enough?

With this wildly optimistic report and their claims that Britian will soon surpass Germany as the most important economy in Europe, the CEBR are clearly attempting to reinforce the Tory narrative that the UK economy has recovered and that we are on the brink of economic utopia. The most obvious problems with this are that only 2% of the UK public believe that the economy is recovering and that they are feeling the benefit; and that their growth predictions for the next 15 years are so ludicrously over-optimistic that nobody in their right mind would take them seriously.

The problem for the rest of us is that there are an awful lot of delusional Tory tribalists that believe the economy is in great shape after three years of ideological Osbornomics and that we are on the verge of utopia, meaning they will continue voting Tory.

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