Weekly economic briefing: 2018 Social Progress Index

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

2018 Social Progress Index

Since 2014, the Social Progress Index (SPI) has tracked human, social and environmental wellbeing. Deloitte Global is a strategic partner of Social Progress Imperative (SPI), the non-profit behind the Index, which recognises the importance of understanding more than just standard economic measures when it comes to calculating people’s wellbeing. This year’s index includes data from 146 countries on 51 indicators, covering 98% of the world population.

Global trends

Of those countries tracked over the last five years, 91% have improved their level of social progress, indicating a general improvement in quality of life across much of the globe. Over the same period, the world average score improved by 1.7 points, from 61.8 to 63.5 out of a possible 100. The world’s average social progress is around that seen in Botswana and the Philippines.

While we have seen global improvement, the rate of progress across countries is mixed and improvements in the score’s components are uneven. The largest improvements occurred in developing nations such as The Gambia, Nepal, and Ethiopia. Conversely, Yemen, Thailand and Turkey saw the largest declines in social progress. The United States is also one of only six countries that has seen a decline since 2014. In terms of the Index’s ‘components’, ‘access to advanced education’ is one of the fastest improving globally, along with ‘access to information and communications’, while ‘personal rights’ and ‘inclusiveness’ have declined.

Figure 1. World Average Social Progress Index and Component Scores

Australia’s performance

Australia has improved its Social Progress Index score by 0.6 points since 2014, helped by a modest increase in the ‘foundations of wellbeing’ category. However, despite Australia improving overall, our performance has still been in decline relative to other countries. After sitting in the top-ten rankings since 2014 (and consistently outperforming on the SPI relative to our GDP per capita), Australia has slipped six places to rank 15th in 2018. This means that we are no longer in the highest tier of social progress, with other countries making faster rates of improvement in key areas including ‘access to basic knowledge’, ‘environmental quality’ and ‘water and sanitation’.

That said, Australia continues to rate highly on several indicators, ranking first out of 146 countries for ‘political rights’, ‘basic sanitation’, ‘nourishment’, ‘perceived criminality’ and ‘mobile phone subscriptions’. Australia was marked down, however, for high greenhouse emissions and the refugees held on Manus Island and Nauru.

Figure 2. Australia’s comparative ranking on components of the SPI (out of 146)

Reaching 2030

Previous estimates by Deloitte have found that the world needs an SPI score of 75/100 by 2030 to meet the UN Global Goals for Sustainable Development.

On the current growth trajectory, the world is not on track to reach this target. This, however, does not mean the target is not achievable, and based on insights provided by SPI, at least in part, governments and business can identify strategies that prioritise the broad concepts of inclusive growth and improved well-being – here in Australia, as well as around the world.

 

For more information on the Australian brief, please contact co-authors David Rumbens and Rebecca King.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Is it time to control capital flows?

  • Free market capitalism has faced intense criticism in recent years. Even that most basic tenet of the post-‘70s era, the free movement of capital and floating exchange rates, has its critics. Some on the left believe that a government set on fundamentally reforming capitalism might need to bring in controls to prevent capital leaving the country and a sharp currency devaluation.
  • I know of no major Western political party that advocates such controls. But, as we’ve seen in recent years, the unthinkable can become reality. It is in this spirit that we tackle the issue of capital controls.
  • In the West we take for granted the right to change our national currency into a foreign currency and spend overseas or buy foreign assets.
  • It was not always so. For most of the twentieth century Western governments imposed restrictions on the buying and selling of foreign currency or caps on the sale or purchase of financial assets.
  • War was the catalyst for Britain’s adoption of exchange controls. At the outset of the First World War in 1914 the UK government banned residents from buying foreign securities and raising foreign loans to prevent a panic-induced outflows of capital. These regulations were eased in the inter-war period. At the outbreak of war in 1939 the UK severely restricted the ability of residents and businesses to convert sterling into foreign currencies.
  • These powers were formalised after the war, in 1947, and a limit put on the amount of currency that could be taken out of the country. In the late 1970s if you were heading overseas on holiday you could buy up to a maximum of £50 worth of foreign currency.
  • To finance a hitch-hiking trip around France in the late ‘70s I went to the local bank which sold me the prescribed number of francs and recorded the purchase on the “Exchange Control Act” page of my passport. In today’s world of holiday spending using Revolut, Monzo and the rest, it sounds Soviet. But for much of the last century such controls, which aimed to keep money in the UK and bolster the value of the pound, were the norm.
  • It all changed in 1979. One of the first policy decisions of the incoming Conservative government under Mrs Thatcher was to abolish capital and exchange controls. Overturning a near 70 year consensus, the new Chancellor of the Exchequer, Sir Geoffrey Howe, said: “The essential condition for maintaining confidence in our currency is a Government determined to maintain the right monetary and fiscal policies. That we shall do. It is right to give an additional degree of freedom to allow the pound to operate in the world unrestricted by restraints of this kind”.
  • The argument that the free movement of capital boosts growth by channelling investment to where it is most productive proved attractive. In the wake of Britain’s abolition of exchange controls numerous other countries followed suite.
  • The free movement of capital has been a key driver, along with trade liberalisation and technological change, in the rapid globalisation of the last 40 years. Foreign exchange turnover, cross border capital flows and foreign direct investment have grown at a dizzying pace. The ownership of assets, from equities, to government bonds to prime housing, is increasingly international. Investors take for granted the ability to buy Chinese equities, Spanish property or US government bonds. Global supply chains have flourished. Multinationals operate treasury operations seamlessly across borders.
  • But the case for the free movement of capital is not absolute. The International Monetary Fund (IMF), a staunch advocate of the free movement of capital, has also described situations in which capital controls would be appropriate – in response to a crisis and as part of a broader set of measures to tackle the causes of the capital flight. Their purpose should be to buy time to allow other policies to work, not as a solution in themselves.
  • It was to buy time that Greece implemented capital controls in 2015. They included limiting withdrawals from banks to 60 euros per day to prevent bank runs. Reduced cash withdrawals depressed Greek spending and growth. But the controls also prevented a full-scale run on the banks and a collapse in the financial system, which would have been far worse.
  • There may also be a case for controls on capital flows in small, open, emerging economies. They are susceptible to large swings in short-term, or ‘hot’ money flowing into and out of their domestic capital markets. A sudden loss of confidence and withdrawal of foreign capital causes a currency devaluation and inflation. In response the authorities need to raise interest rates, hitting growth. Such a chain of events caused the Asian financial crisis of 1997, pushing a number of East Asian economies into recession.
  • China is in a special category. It applies capital controls because it wishes to maintain a fixed exchange-rate and an independent monetary policy. An open economy can have only two of the following three: free movement of capital, a fixed exchange rate or independent monetary policy. China has opted for the last two. Western countries have overwhelmingly opted for free capital movement and independent monetary policy. These countries let their currencies float.
  • China proves that a large trading country can control capital flows. But applying them in politically liberal, open Western economies is another matter.
  • In 2017 John McDonnell, the UK Shadow Chancellor, said his team had been “war gaming” the responses of an incoming Labour government to a run on the pound. Some commentators interpreted this as hinting at the possible introduction of exchange controls (To be absolutely clear Mr McDonnell did not mention capital controls and they are not Labour policy).
  • Still, it is interesting to consider the hypothetical. Could controls stem capital flight and a plunging pound caused by the prospect of root and branch reform of the economic system?
  • The IMF view is that capital controls might work as a fix to buy time for other policies to address the cause of the crisis. Yet in our imagined situation government policy is the cause of the capital flight. To make things worse the act of imposing capital controls could exacerbate the crisis by underscoring the government’s willingness to apply drastic, unconventional policies. In our hypothetical UK situation capital controls would struggle to meet the IMF’s test.
  • Capital controls are more easily applied in an autocratic state such as China or in less sophisticated financial markets such as Greece than in the UK’s deep and developed financial markets. Creating the systems to monitor and control vast capital movements across a myriad of transactions would be a huge task.
  • But let’s assume controls do stick. The question then is about second round effects. Today’s economic system has developed over 40 years on the basis that capital can move freely in and out of the UK. Trade, businesses, investments, supply chains and much else rely on this assumption. Controlling the movement of capital would represent a hugely disruptive shock for business and households. Everyday consumer activity – using Paypal to make overseas transfers and purchases, buying holiday money, using a Revolut card abroad or buying foreign equities – all count on the free movement of capital.
  • There’s a further snag. The UK runs a large current account deficit, largely because imports of goods and services exceed exports. This deficit is financed by inflows of capital investing in UK assets, what Mark Carney strikingly, though not accurately, characterised as the “kindness of strangers” (Foreign investors don’t build factories in the UK or buy London real estate out of kindness. They buy them because they think they are good assets which will make them money). If the UK restricted or deterred capital inflows it would have to cut back on import spending which, given the UK’s appetite for imports, could be traumatic.
  • I find it hard to disagree with Sir Geoffrey Howe’s judgement that the best defence against a weak currency is policies which command the confidence of markets. Capital controls can be the right solution in some circumstances – but they are the sort of extreme circumstances such as Greece experienced in 2015 that no Western country would want to be in. As the IMF has noted, restrictions on capital leaving an economy are associated with “autocratic regimes, failed macroeconomic policies and financial crises”.

PS: Last week Deloitte launched its latest ‘State of the State’ report, including a survey on UK public attitudes to government spending. The survey shows a marked shift in public opinion against further cuts in spending. The report also looks at views about charging for public services. Most people support fines for the misuse of public sector time, such as wrongly calling 999 or missing GP appointments. See the full report at www.deloitte.co.uk/stateofthestate

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 4.4% at 6,998 as global equity markets fell sharply due to worries over higher interest rates in the US and slowing global growth.

International economic briefing by Ian Stewart

Economics and business

  • The UK economy grew by 0.7% in the three months to August according to the ONS, suggesting a continued rebound in activity in the second half of the year
  • The International Monetary Fund (IMF) cut its global growth forecast by 0.2% to 3.7% for 2018 and 2019 as trade tensions between the US and others begins to slow economic activity
  • The IMF warns that “dangerous undercurrents” are a rising threat to the world economy
  • The UK was ranked near the bottom of the IMF’s latest public finances league table due to mounting levels of public debt
  • China’s central bank cut the reserve requirement for commercial banks in order to stimulate the economy following weaker than expected growth
  • Chinese debt levels increased in Q1, reversing half of the deleveraging which has taken place since 2016
  • Chinese car sales fell by 11.6% in the year to September putting further pressure on Western car makers
  • Bank of England chief economist Andy Haldane said there is “compelling evidence of a new dawn breaking for pay growth”
  • EU ministers agreed to cut vehicle carbon dioxide emissions by 35% by 2030
  • The UK saw its biggest fall in foreign visitors in nearly a decade in the three months to June
  • The yield on Italian sovereign debt rose again following comments by the country’s finance minister on the populist government’s anti-austerity budget
  • UK banks are set to tighten mortgage lending over the next three months by the greatest amount since 2008, according to the Bank of England’s (BoE) latest credit conditions survey
  • London’s status as a hub for technology and financial services is helping drive a strong flow of deals between the US and the UK
  • The UK Treasury is reportedly finalising plans to overhaul tax rules which allow self-employed people to avoid paying national insurance contributions

Brexit and European politics

  • Brexit negotiators held unscheduled talks on Sunday to try to resolve major issues, including Northern Ireland, ahead of a key summit of EU leaders this week.
  • The Office for Budget Responsibility (OBR), the UK government’s independent budget watchdog, said the impact of Brexit on future growth forecasts is “likely to be relatively small”
  • The OBR also warned that a no-deal Brexit could prompt a wave of stockpiling and a slump in asset prices and domestic demand
  • EU chief Brexit negotiator, Michel Barnier, said that under the EU’s proposal to avoid a hard Northern Irish border, customs and VAT checks would be carried out “in the least intrusive way possible” using existing arrangements
  • Reuters reports that the Bank of England has asked UK lenders to prepare to provide six-hourly checks on their balance sheets in the immediate aftermath of a ‘no-deal’ Brexit to prevent a sudden squeeze in credit supply
  • Dominic Raab, the UK Brexit secretary, said that any extension of Britain’s participation in the customs union beyond the end of the transition period should be “temporary, limited and finite”
  • The Irish government has set aside €110 million in its 2019 budget to address Brexit “challenges”
  • A no-deal Brexit could reduce UK-EU trade by “up to 50%” in the long run according to the German Economic Institute, a free market think tank

And finally…

  • Two women smeared themselves in jam and sat naked on a bench in Manchester city centre “in the name of art”. Crowds gathered as the women wiped bread on each other to eat the strawberry preserve – Victoria sandwich

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