Deciphering the UK's business investment performance

• ? Absent June 2016's Brexit vote, growth in business investment would have been much faster and the UK would be sharing in a global “investment boom”. Or so the Bank of England claims. But the reality is more complicated. What is striking is just how subdued investment growth has been across countries.
• ? Survey evidence presented by the Bank suggests that recent business investment growth has been less than a third of what might have been achieved absent Brexit. The UK has also been highlighted as an investment laggard among major economies.
• ? Headline investment growth has certainly been relatively weak since 2016. Uncertainty around future UK‐EU trading arrangements may have resulted in some investment being deferred or cancelled. And the Brexit‐related fall in sterling will have pushed up the cost of imported capital equipment, cutting demand.
• ? But a collapse in investment in the North Sea sector has had a significant effect on headline investment growth. On an excluding‐extraction basis, UK business investment rose at the same pace as the US (ex‐extraction) and faster than Japan in 2016 and 2017, while average annual growth rises from 1.0% to 2.4%.
• ? What is striking about the recent performance of business investment in the UK and other G7 members is how subdued growth has been across economies. Despite a favourable environment, no major advanced economy has seen investment rise at the type of rates that the Bank predicts the UK, but for Brexit, should be now enjoying.
• ? Sectoral shifts, the rise of intangible investment and the consequences of technooptimism offer some reasons as to why measured investment may have become less sensitive to economic upswings. These same factors suggest that 1990s‐style growth in private investment is unlikely in the UK (or elsewhere) even once Brexit uncertainty has cleared. Indeed, our own medium‐term forecasts see business investment growth across major economies continuing to run at a relatively subdued pace.

     

Legacy fundraising: a practical guide to the basics

• Remember a Charity, the public awareness campaign run by over 130 charities in the UK, has stated that donations in wills are the largest single source of voluntary income for charities—currently worth £1.3 billion per year (April 2005).
• So can legacies to charity still be described as just windfall money? Should charities spend precious funds on promoting legacy giving when it is difficult to monitor results? It so, what is the message? Who are the target audiences? What form should legacy promotional literature take? What part could or should solicitors and funeral directors play in legacy campaigns? Patrick Wise looks back on his twenty plus years of experience in the world of charitable legacies, and gives his views on the answers to these questions, and why he thinks all charities should take legacy promotion very seriously.

Copyright © 2005 John Wiley & Sons, Ltd.     

The MPC is on the verge,but a hike would be a mistake

• ? In light of the MPC's recent signalling, we now think that November's meeting will deliver a 25 basis points rise in Bank Rate. But the case for tighter monetary policy is weak even by the Committee's own criteria. This article sets out six reasons why we think that the MPC is on the verge of making an error.
• ? A chorus of hawkish comments from MPC members suggests that the Committee's next meeting on 2 November will announce a rise in Bank Rate, a 10‐year first. Granted, the MPC has ‘cried wolf’ before. But this time around the rhetoric has been much stronger. And the Committee has set the bar for a hike very low. Moreover, with inflation likely to peak soon and then decline through 2018, November would offer a good opportunity, presentationally at least, to go for a hike.
• ? But caution should temper the Committee. The MPC cites “a continued erosion of slack and a gradual rise in underlying inflationary pressure ” in support of its view. However, while the unemployment rate has fallen below the Bank's ‘equilibrium’ estimate, the Bank has history in being compelled to progressively cut that estimate. With the jobless rate still well above post‐war lows and worker power cowed, joblessness could fall further without threatening inflation.
• ? Meanwhile, the rise in underlying inflationary pressure that should follow from diminishing slack is absent. The MPC's claim that pay growth is picking up is tenuous and conflicts with recent survey evidence from the Bank's own regional Agents. In any case, the idea that faster pay growth threatens higher inflation has surprisingly weak foundations.
• ? Admittedly, a small rate rise, in itself, would slow growth only modestly. But the message sent by such an action risks pushing the economy further into a low growth expectations trap. And the Bank has alternative tools for dealing with the adverse side‐effects of ultra‐low rates. A rate rise in November would be a mistake.

     

Technology Adoption with Multiple Alternative Designs and the Option to Wait

Technology adoption is one the most important elements of a firm's strategy. In this paper, we address an essential, yet largely overlooked, question: What should a firm do when faced with several alternative proprietary designs of a new technology? In our base case we assume there are two technology designs, each described by an independent stochastic process of technology evolution. We show that, in equilibrium, a buyer chooses the leading technology design as soon as the discounted payoff from doing so is positive. When the option value of waiting is very high, it is jointly optimal to delay adoption. But because sellers cannot commit not to extract all of the buyer's future rents, inefficiently early adoption takes place. Strategies that improve commitment to low future license fees, such as increasing the number of competitors or cross‐licensing, may alleviate the hold up problem. Although previous research stressed the benefit of such commitments in terms of increasing the rate of technology adoption, we present a class of cases when the benefit from commitment is efficiently to delay adoption.     

How robots change the world

• ? The global robotics revolution is rapidly accelerating, as fast‐paced technological advances converge. This will transform robots’ capabilities and their ability to replace human workers, including in services where robot use is also set to rise steeply.
• ? The global stock of industrial robots multiplied three‐fold over the past two decades, to 2.25 million. Trends suggest it will multiply even faster in the next 20 years, reaching as many as 20 million by 2030, with 14 million in China alone.
• ? The rise of the robots will boost productivity and growth, and create new jobs, some in yet‐to‐exist industries. We estimate a 30% rise in robot installations by 2030 would create around $5 trillion in additional global GDP in today's prices.
• ? But existing business models will be disrupted and jobs lost – we estimate up to 20 million manufacturing jobs by 2030. Each new industrial robot eliminates 1.6 manufacturing jobs on average and almost twice that in low‐skilled regions.
• ? Job losses will vary greatly across countries and regions, with the toll falling disproportionately on lower‐skilled workers and on poorer local economies, aggravating social and economic stresses. The challenges for governments and policy‐makers are daunting at a time of already growing political polarisation

     

Inflation Sensitivity To Monetary Policy: What Has Changed since the Early 1980s?

Have conventional monetary policy instruments maintained the same ability to accommodate undesirable effects of shocks throughout the postwar period? Or has the changed economic environment characterizing the last 30 years diminished the sensitivity of macroeconomic volatility to systematic changes in the conduct of monetary policy? The answer is no to the first question and, consequently, yes to the second question. We estimate a medium‐scale New‐Keynesian model in two subsamples, 1955–79 and 1984–2012, and find that the sensitivity of inflation variance to changes in conventional monetary policy has declined. We document that the changed properties of the labour market largely contributed to this decline.     

Assessing the social impact of charitable organizations—four alternative approaches

• There is increased societal pressure on charities to improve performance. The questions that they must ask are: (1) Who is our audience? (2) What evaluation measures are important to the organization? and (3) What evaluation measures are best for the organization? There are a number of different approaches available for assessing performance, ranging from social accounting to more informal qualitative assessments of whether the organization's mission is being achieved. This paper draws on the industry and academic discussion of evaluations of nonprofit organizations to develop a four‐category typology of alternative approaches for audiences. It then identifies the benefits and limitations of each. The goal is to identify the steps that charities should use to determine which approach is most suited to their specific circumstances. It is proposed that a collaborative development of evaluation criteria, of whichever type, may be most appropriate as will draw together the experiences and resources of multiple parties, and may have broader appeal than evaluations proposed by individual nonprofits.

Copyright © 2010 John Wiley & Sons, Ltd.     

The Urban Question under Planetary Urbanization

In Le Droit à la Ville (1968), Lefebvre projects the urban trajectory of his day into the sci‐fi imaginary of Isaac Asimov's remarkable Foundation series, recognizing the germ of ‘Trantor’ in our midst, the planet of 40 billion inhabitants where urbanization has reached its absolute maximum; all 75 million square miles of Trantor's land surface are a single city. In La Révolution Urbaine (1970), Lefebvre had already begun hinting at a new reality, not only an urban society, but of planetary urbanization. Today, four decades on, Asimov's extraterrestrial universe seems closer to home than ever, and closer to Lefebvre's own terrestrial prognostications: planetary urbanization is creating a whole new spatial world (dis)order. But how shall we reclaim the shapeless, formless and boundless metropolis as a theoretical object and political object of the progressive struggle? If the arena of politics has no discernible form, what would be the form of these politics? What, exactly, are urban politics? This article tries to rethink theoretically the urban question and the question of urban politics in our era of planetary urbanization, working through the political role of the urban in the light of recent ‘Occupy’ mobilizations.     

The Brexit Controversy; what light does evidence shed?

• ? There has been widespread misinformation in and outside Parliament about the economic case for Brexit. Outside Parliament, the rival groups – those with a negative assessment of Brexit and those with a positive one – have set out their arguments but these have huge differences in the factual and intellectual support they each bring to the debate. The group predicting a negative effect have published a wide set of empirical appraisals from academic and related research teams of the case for leaving and that against it. This, largely rigorous statistical analysis, finds strong and clear evidence of the large costs to leaving. The camp predicting a positive result for Brexit, in contrast, relies on one academic source for its case; the Cardiff University Macroeconomic Institute led by Patrick Minford. This has reported its predictions of the effects of Brexit which in contrast to the other camp, show large positive effects to growth and other key parts of the UK economy.
• ? We assess the empirical quality of these two cases and conclude that the economic modelling of the Cardiff group is insufficient for them to give an adequate empirical estimate of the costs and benefits of Brexit; the Liverpool model it uses has a sparse overseas sector and does not differentiate between EU and non‐EU trade for example, so is unsuited to analyse the effects of changes in these. Our verdict is that, based on the evidence, Brexit in almost any form would be damaging to the UK. ¹ 1 The views expressed in this article are those of the authors and may or may not be those of Oxford Economics
  

     

China‐commodity nexus at the heart of global upturn

• ? The China‐commodity nexus has been at the heart of the global upturn in trade and industry. It could directly and indirectly account for as much as 70% of the recovery since mid‐2016, based on our analysis. We think this nexus will continue to support world growth in the near term, but the global upturn is vulnerable to moderating Chinese growth and slippage in commodity prices.
• ? China has directly accounted for around a third of the upturn in world trade, similar to the contribution of G7 countries. But adding in indirect effects, China's influence is likely to have been much more significant. Stronger Chinese demand has contributed to an improvement in the trade performance of its Asian trading partners, commodity exporters and other advanced economies.
• ? Using a model simulation that introduces positive shocks to imports in “greater China” and to commodity prices (based on the scale we have seen since mid‐2016), our top‐end estimate for China's contribution to the upturn in world trade is around 70%.
• ? The simulation points to especially strong improvements in output and exports for economies such as South Korea, Japan, Malaysia and some commodity exporters. This broadly matches the pattern of performance seen over recent months, though commodity exporters' performance has been quite mixed.
• ? G7 investment growth is likely to have played only a modest role in the recent global upturn. But Japan is an exception, while upgrades to investment forecasts for South Korea, Taiwan and Hong Kong have also been large.
• ? A 1% rise in commodity prices could raise commodity exporters' investment by 0.3–0.6%, based on our analysis. As a result, there could be additional improvement in commodity exporters' investment this year, supporting world growth. However, with our forecasts suggesting that commodity prices are set to slip further over the coming quarters, this boost could prove short‐lived.

     

The effect of parental leave duration on early-career wage growth

Work–family policies are meant to support labor force participants, but they often result in lower rewards for those who use them. Based on the ideal worker norm framework and signalling theory, we hypothesise that parental leave duration will result in lower wage growth, above and beyond that of having children. The 1997 National Longitudinal Survey of Youth data from 2000 to 2015 are used to test the hypotheses with a longitudinal sample (14 waves) of individuals in the United States who worked before and after taking parental leave (n = 6723). Discontinuous growth models are used to predict the penalty for parental leave duration for men and women. We find that both men and women suffer from a lower hourly wage growth for taking longer parental leave and that there are more severe penalties for taking paid parental leave than taking unpaid parental leave. Practitioner notes What is currently known?

• utilization of parental leave is significantly related to the wellbeing of employees and their families.
• However, employees are penalized for taking parental leave.

What this study adds?

• Paid parental leave, which is mostly available to skilled, professional employees carries a noticeable early-career wage penalty, but the use of unpaid leave, does not.
• Both men and women are penalized for taking parental leave, but the longer parental leaves women take increase the gender pay gap.

Implications for practitioners:

• HR practitioners should monitor whether employees are penalized for taking parental leave.
• HR practitioners should try incentivizing male employees to take parental leave that is comparable to the one taken by their female employees.

     

G7 consumption: after the wealth rush

• ? In only one of 12 large advanced economies do we expect consumption to outstrip GDP growth in 2018. As key drivers rotate, the impact of a recovery in real incomes will be dampened by higher oil prices and waning wealth effects .
• ? Policy‐fuelled asset booms sustained the post‐crisis recovery in G7 consumption, though by historical standards the recovery was nothing special. Historically, the G7's average 5‐year recovery from troughs entailed consumption matching GDP growth, but in the five years from 2010 consumption was 0.2 ppt weaker. Its relative strength only picked up from 2015, when boosted by weak oil prices.
• ? Relatively weak G7 consumption growth is likely to continue as key drivers rotate. Strong employment growth and a modest pick‐up in wage inflation will offset waning equity and housing wealth effects.
• ? Near‐term risks are two‐way. An oil‐fuelled inflation surprise could hit consumers, wreck central bank gradualism and reveal balance sheet weaknesses. Currently, however, we see only limited pockets of credit risk and vulnerability to higher rates.
• ? Conversely, there is scope for a credit‐fuelled boost to consumption. G7 household borrowing relative to its trend is arguably close to 40‐year lows, so unless financial deepening has reached a limit, there is scope for increases in borrowing. Furthermore, G7 bank deleveraging could be over, boosting credit supply conditions.
• ? We see two positive longer‐term drivers of the global consumption share: (i) Asian economies will become more consumption‐driven; (ii) Household re‐leveraging offers scope for some debt‐fuelled consumption growth. Offsetting negatives are that demographics, interest rates and asset prices will provide little support

     

Blame the baby boomers for depressed wage growth

• ? While ‘blame’ may sound harsh, the reality is that in an ageing society, the over‐60s accounting for a bigger share of the workforce equals lower wage growth. This is particularly pertinent for the eurozone right now with the baby boomer generation entering the last phase of their working life. Our analysis shows that the very sizeable over‐60 cohort is depressing aggregate wage growth by up to 0.3 ppts annually. That may also help explain why inflation is still subdued .
• ? European policy makers are scratching their heads about why wage growth has not picked up in line with economic growth over the past two years. For the ECB this is relevant as it tries to understand why inflation remains low. While much of the debate centres around unemployment and the Phillips curve, this article looks at the impact of an ageing society on wage growth.
• ? Even though this is more of a structural, rather than a cyclical, perspective, it is particularly important for the eurozone economies right now, because the large post‐World War II baby boomer generation is strongly pushing up the elderly share of employment (measured as those aged 60 and above). As the share of the over 60s in total employment grows, so does their weight in aggregate wage growth.
• ? The crucial point is that wages increase with age, but at a decreasing rate, and stay essentially flat above 55. The main reasons are that the elderly invest much less in continued education and are less inclined to switch to better‐paying jobs.
• ? Our analysis shows how substantial the negative impact of an ageing workforce is on wage growth in the eurozone. By simulating an alternative demographic scenario, we estimate that wage growth in 2015–17 would have been 0.3 ppts per year higher had it not been for the ageing baby‐boomers. Similarly, forecasts for 2018–20 not accounting for the baby‐boomers may overstate wage growth by some 0.2 ppts or more annually.

     

A comment on Mendeş and Yiğit (2013), ‘Type I error and test power of different tests for testing interaction effects in factorial experiments’, Statistica Neerlandica, 67:1–26

In their advocacy of the rank‐transformation (RT) technique for analysis of data from factorial designs, Mende? and Yi?it (Statistica Neerlandica, 67, 2013, 1–26) missed important analytical studies identifying the statistical shortcomings of the RT technique, the recommendation that the RT technique not be used, and important advances that have been made for properly analyzing data in a non‐parametric setting. Applied data analysts are at risk of being misled by Mende? and Yi?it, when statistically sound techniques are available for the proper non‐parametric analysis of data from factorial designs. The appropriate methods express hypotheses in terms of normalized distribution functions, and the test statistics account for variance heterogeneity.     

Why we aren't predicting a global recession

• ? Fears that the global economy is heading into a recession are rising. But while we cannot ignore the risks that a recession could be brewing, our baseline assumption is still for a modest growth slowdown from here.
• ? The global economy is in a similar position to 2012 and 2015, as mounting uncertainties dampen growth. This time, trade tensions are a high‐profile culprit rather than the possible collapse of the eurozone or a China hard landing.
• ? In the previous two cases global growth fell to around 2.5% ‐ around the rates seen in Q2 this year ‐ only to then rebound. Our baseline forecasts assume a similar mini cycle, albeit with only a modest growth rebound.
• ? We also assume that further major adverse shocks won't materialise, and that insurance policy moves by central banks will stop a plunge in investment and households from panicking.
• ? Still, recession fears should be taken seriously ‐ slowdowns can become self‐perpetuating. Once annual GDP growth has fallen by over 1ppt from its peak, the eventual decline typically ends up being much larger ‐ of the seven growth slowdowns since the late 1970s where annual growth slowed by over 1ppt ‐ four resulted in either a global recession or only a narrow escape from one.
• ? With US‐China tensions unlikely to recede and factors like the US yield curve inversion adding to the air of gloom, the latest downturn could gain momentum.
• ? Although reduced macro volatility and anchored inflation have made it easier for policymakers to deliver soft landings, the effectiveness of monetary policy has waned. And with China no longer acting as spender of last resort, it's vital that governments in advanced economies stand ready to pick up the slack

     

UK inflation set to tumble below target by autumn

• ? We expect CPI inflation to slow markedly this year, dropping below the 2% target by the autumn. The inflationary impulse from the 2016 depreciation is fading and should partially reverse, while global food and energy prices are expected to stabilise. Base effects will become increasingly important.
• ? CPI inflation reached a five‐and‐a‐half‐year high of 3.1% in November, up from a little over 1% a year earlier. The 2017 pick‐up in inflation was the result of a perfect storm of a weaker pound, higher oil prices and sharp rises in domestic electricity bills. But inflation has subsequently slowed, reaching 2.5% in March. And, after a brief hiatus, we expect the downward trend to continue as we move through the year.
• ? The key driver of lower inflation will be weaker core pressures. In line with the literature, there is already evidence that the impact of sterling's depreciation is fading, and we think that the pressures could partially reverse if sterling continues to strengthen. We see little prospect of an offsetting escalation in domestic cost pressures. The recent pick‐up in wage growth has been muted and a further acceleration above 3% looks unlikely while there remains slack in the labour market.
• ? The food, petrol and energy categories contributed 0.8 ppt to CPI inflation last year, compared with a drag of 0.5 ppt in 2016, as stronger global pressures combined with the weaker pound. But as global prices have been more subdued of late, by the end of 2018, we expect these categories to be contributing 0.5 ppt to CPI inflation.
• ? The final element behind the expected slowdown in inflation is base effects. The comparison with last year's strong price pressures will depress the 2018 inflation rate, and we see the base effects being at their strongest mid‐year.
• ? We think it unlikely that such a slowdown in inflation would derail the MPC from hiking interest rates twice this year. But it could temper its hawkishness in 2019.

     

Management as a professional discipline*

The nature of management as a discipline is problematic. Drawing on Aristotle’s concepts of poiesis and techne, it can however be seen as one of a class of professional disciplines such as medicine, law, engineering or teaching which are characterized by their instrumentality, contingency and processuality. These three attributes suggest three basic questions (What do managers do? What affects what they do? How do they do it?) which in turn yield a three‐dimensional model. While the contents of the model must be regarded as tentative, its form offers one way in which management can constitute itself as a discipline and re‐position itself within higher education. Questions arise in relation to the nature and status of the model, the segmented nature of management work, its varying internal/external focus and the locus of management decisions. However the model appears to provide a useful, heuristic framework within which practitioners can address specific, concrete problems and decisions.     

A long dollar fall: likelihood and consequences

• ? The dollar has tended to move in long swings over the last forty years, raising the risk that the recent decline could extend considerably further. This is not our base case, but risks do look skewed towards additional dollar weakness. Our modelling work suggests that a large further dollar slide would have significant effects on the pattern of world growth – the US and some emerging markets would gain, with other advanced economies the main losers.
• ? There have been several large multi‐year swings in the dollar over the last four decades. We identify seven such episodes since 1971 including three long declines averaging 31%, the last being in 2002‐08. Since 2017 the dollar has fallen 10%, implying a possible further considerable drop.
• ? Our dollar strength indicator, which covers a range of economic variables associated with dollar moves in the past, does not currently point to a re‐run of the dollar weakness of the 2000s. But we do expect some further near‐term dollar losses and risks to our baseline forecast look skewed to the downside, especially given the emergence of large twin deficits in the US.
• ? Should a further large dollar slump nevertheless occur, our modelling suggests large effects on the pattern of world growth. The main gainers would be commodity‐producing emerging markets (EM) benefitting from improved terms of trade, positive balance sheet and external liquidity effects and scope to ease local interest rates. Rising US yields would erode some of these gains in later years.
• ? The main initial losers would be advanced economies outside the US which would lose competitiveness. In the case of the Eurozone and Japan, undershoots of inflation targets would be likely. There could also be some other negative consequences such as stoking protectionism and creating financial bubbles in some EMs.

     

Over the cliff edge and on to the rocks below

• ? If Brexit negotiations were to break down, the UK would face a significant increase in trade disruption from March 2019, even if it were able to put some basic trading arrangements in place. In a scenario where key sectors face extra friction, we find that the level of UK GDP would be 2.0% – or £16bn in cash terms – lower at the end of 2020 compared with our baseline. The impact on the remaining EU countries, including Ireland, would be much smaller .
• ? This article focuses on what a cliff‐edge Brexit means for trade costs and prices. This is only part of the equation – such a scenario would also influence supply chains and migration, while there is also potential for policymakers to mitigate some of the negative effects via looser policy.
• ? The notion that the UK could simply walk away from Brexit negotiations and rely on WTO rules to trade with the world is deeply flawed. The UK would need to re‐establish more than 750 very complex international arrangements just to maintain the status quo. We expect only the most critical issues – such as air travel – to be resolved by March 2019. Exporters also face a substantial increase in non‐tariff barriers.
• ? A breakdown in talks would also see both sides levying tariffs on imports from each other from March 2019, raising the cost of importing UK goods into the EU by 3.5% and by 3.1% for goods imported into the UK from the EU. For the UK, this will apply to roughly 60% of its goods exports and imports, but for all EU countries except Ireland the share would be less than 10%.
• ? The additional trade frictions would knock around 1pp a year off UK GDP growth in 2019 and 2020, resulting in a period of very weak growth. And the risks to this scenario are skewed to the downside – a slump in confidence or failure to establish the necessary customs infrastructure in time could easily generate a worse outcome