First of all, a small signal of our Government's priorities nowadays. We have the Autumn Statement on Thursday, not Wednesday as planned – because David Cameron is on a huge trade visit to China and would not be back in time. Diplomatic relations with the world's second largest economy have been scratchy ever since our Prime Minister met the Dalai Lama 18 months ago, and postponing the second most important financial statement in the UK calendar to suit the Chinese shows appropriate deference. You might say a mini-kowtow.
There will, however, be a certain swagger from George Osborne in the Autumn Statement: for the first time since he took office, the numbers will be better than previously billed. Growth is better; revenues are better; employment, always strong, is better still. The deficit reduction programme, which was basically stuck because we had not made any significant progress for two years, is on the move again. If that should seem a relief for the coalition, it should actually be a relief for us, since we as taxpayers are responsible in one way or another for that debt. The national debt, of course, is still climbing; it is only the annual deficit that is coming down. We will get the detailed projections, both for growth and for the deficit, from the Office for Budget Responsibility, but while our growth is the fastest of the G7 countries, our fiscal deficit remains the highest.
There is also a concern about the nature of the growth, right now running at annual rate of above 3 per cent. It is billed as "the wrong sort of growth", in that it is driven by consumption and a recovery in house prices rather than investment and exports. My own reaction is that we should not be too sniffy about this. Given how far we have to go, any growth will do. Besides, there are serious doubts about the quality of our economic statistics, particularly about the supposedly low investment numbers, as Mark Carney, the new Governor, acknowledged last week. Also as Andrew Sentance, the former MPC member now at PwC, notes, while manufacturing output is still down on its 2008 peak, the service sector is growing strongly and its exports are probably being undercounted in the official figures. Our service exports are 12 per cent of GDP, the highest proportion of any G7 country. So while the balance of growth may not be ideal, it may be more sustainable than the current official figures suggest.
So when will interest rates go up? The immediate question this Thursday will be what George Osborne decides to do with the modest fiscal leeway that is accruing. Do we get sweeteners this year or next? But much more fundamental will be what happens to monetary policy. The forward guidance in the summer was that we don't get any increase in interest rates until unemployment gets down to 7 per cent, the aim being to persuade people that monetary tightening was a long way off. (Yes, I know it was more nuanced than that, but let's keep things simple.)
That is all out of the window. Not only have the Bank of England's projections for that magic 7 per cent figure come forward by at least a year, but last week we had the first tightening of monetary policy with the ending of the scheme for funding home loans. It carries on for company lending, not for property. Mortgage rates have already started to nudge up.
You could say that the Bank is simply being pragmatic, and obviously if the facts change, then policy should change. But this raises the possibility of interest rates starting to go up next year. That is not yet the market view; this you can derive by looking at what is happening on the money markets, which see the first rise in mid-2015. Nor is it yet the view of most financial economists. But intuitively it would make sense to me, and I notice just a few commentators, including Harry Colvin at Longview Economics, are also looking at an increase next year.
A lot does depend on the rate of decline in unemployment. At the present rate of progress, we get to 7 per cent in May. Let's suppose the decline eases off, partly because the country's strong demand for labour is attracting large numbers of job-seekers from Europe and elsewhere. Even so, it is quite plausible that we get down to 7 per cent by the autumn.
Immigration affects policy in another way. It is must be holding wages down. I have not seen a detailed study of this, but certainly one of the present puzzles is the way in which increased demand for labour, which has been picking up since the middle of last year, has coincided with a continuing fall in real-terms pay. If demand for labour rises and pay goes on down, the explanation must be an increase in supply. Not all of that is immigration, for older workers staying on in work is important too, but immigration must be part of it.
This is, of course, a social and political issue as well as an economic one, but it does affect economic policy. So let us hope for some thoughtful analysis of the state of the UK economy on Thursday, about the undoubted progress but also the strains caused by a burst of growth. And no bombast please; there is a long way to go.Reuse content