Immigration is down. So are exports.

[This article originally appeared in City AM on Friday 1 March]

Wednesday's GDP figures confirmed that the UK economy shrank in the last quarter of 2012 – in large part because of the weakness of exports. So the government’s strategy of generating growth by rebalancing the economy towards investment (which is also weak) and exports is far from on track. But the government is at least making progress towards its objective of reducing immigration to the “tens of thousands,” with Wednesday’s figures showing net migration is down to the lowest level in four years. It was duly trumpeted as a policy success.

Immigration and the UK labour market

Tomorrow's immigration statistics (Thursday 28 February) will be pored over for evidence of whether the government is making progress towards its "target" of reducing net migration to the "tens of thousands". The contradiction between the government's claims that the UK is "open for business" and the policy measures required to meet the target - essentially, measures to reduce the number of skilled workers from outside the EU and foreign students - has been highlighted elsewhere (for example, by the Conservative MP Gavin Barwell in the Telegraph).  For a longer explanation of why a flexible immigration policy is an essential part of any serious growth strategy, see my article here. 

No debate please, we're Europeans

[Updated March 6, 2013.  Mr Rehn's letter and this post sparked a lot of further debate/comment, in particular Karl Whelan's excellent Forbes piece here and Paul Krugman here and here. Apparently Krugman's comments, in particular, have irritated the Commission considerably, as the FT describes here. Mr O'Connor - Mr Rehn's spokesperson - doesn't exactly put up a strong defence, appearing to confuse the 1930s and the 1940s (I've asked him via twitter to explain what he meant). On the substance, I think Kevin O'Rourke says all that's needed.]

I pointed out late last year that European Commission Vice President Olli Rehn has been predicting for at least two years that, thanks to the excellent policies recommended by the Commission and the European Central Bank, economic recovery in the crisis economies of the eurozone is imminent.  However, this week - perhaps noting that outside the financial markets, the light at the end of the tunnel that he is fond of referring to appears to be receding - he's tried a different tack. Blame the economists - and in particular, economists who want actually to use proper, theoretically based and empirically grounded analysis to critique the Commission's policies.  Mr Rehn, in a letter to European Finance Ministers, copied to other international financial luminaries like Christine Lagarde, says:

"I would like to make a few points about a debate which has not been helpful and which has risked to erode the confidence we have painstakingly built up over the last years in late night meetings. I refer to the debate about fiscal multipliers, ie the marginal impact that a change in fiscal policy has on economic growth.  The debate in general has not brought us much new insight."

Reflections on the Green Budget

The IFS Green Budget - the 2013 version of which was published last week - is as ever essential reading for anyone interested in UK macroeconomic and fiscal policy.  Catching up with it a little after the event, the following passages jumped out at me:

"Domestic demand is now rising. Although this is not the first time that "green shoots" have been observed, it nevertheless remains likely that the economy will begin to recover this year...The main threat to this outcome is the recession in continental Europe, where German monetary influences are still forcing policy to be unsuitably tight for domestic purposes.  A substantial portion of Britain's trade is with this bloc, and we could still suffer an unpleasant backwash from Europe's problems."

"The public finances are in a substantially worse state than anyone expected this year. This was because GDP growth did not emerge, leaving the economy smaller than it was expected to be.  We anticipate borrowing for this year will be about 7 per cent of GDP. .."

Since the government has already announced its public spending plans, and since it is likely to have considerable difficulties in hitting these plans, most of this budgetary tightening will almost certainly have to come from higher taxation...Our view is that significant tax increases will be necessary if the public finances are to be brought under control."

China at the Crossroads?

[This blog, by NIESR Principal Research Fellow Alex Bryson, summarises the articles published in the February 2013 special issue of the National Institute Economic Review on China's economy]. 

China’s political future has been settled – for the time-being – with a new cadre of political leaders taking over nearly 3 months ago. But its economic future appears less certain.  With annual GDP growth projected to remain below 8 per cent some commentators are revisiting debates about the sustainability of China’s economic growth.  Here we point to a number of factors that suggest China's economy remains in pretty good shape to face many of the new challenges it faces.

Prospects for the global economy: NIESR's February 2013 forecast

Global Economic Forecast

• World growth remains below trend at 3.3 per cent in 2013 and 3.7 per cent in 2013, little changed from our previous forecast.
• World trade will only grow slightly faster, and again below trend.
• The Euro Area will grow only slightly next year, while Japan is forecast to grow by 1.4 per cent, the US by 2.4 per cent, and China by 7.3 per cent.
• Interest rates will remain extremely low by historical standards, and inflationary pressures will remain subdued.

Prospects for the UK economy: NIESR's February 2013 forecast

Prospects for the UK economy

• The economy, after seeing zero growth in 2012, will grow by 0.7 per cent in 2013 and 1.5 per cent in 2014.
• Consumer price inflation will average 2.4 per cent this year and 2.3 per cent in 2014.
• Unemployment will stabilise at about 8 per cent, and to begin a sustained fall in 2015.
• We expect public sector net debt to peak in 2016–17, at about 85 per cent of GDP.
• GDP will regain its 2008 peak in 2015, but real per capita GDP will not recover its peak until 2018