By John Redwood
In the last few weeks the worst fears of the markets have been forgotten. More investors have come round to the view that we face more months of slow growth in the advanced economies, with very low interest rates. It looks as if we can avoid talking ourselves into recession.
There are still some weak banks, and banks are finding it more difficult to earn a good return on capital, but it seems as if the main Central Banks support the principal commercial banks in their jurisdiction, and will if necessary make liquidity available to them. As we hoped, shares can make progress from the more depressed levels of mid-February, assuming the doomsday scenarios prove ill founded.
In the UK recent figures show the economy is still generating a good number of extra jobs. Pay is rising gently at around 2% per annum. With a backdrop of little or no inflation this means the consumer has a bit more take home pay to spend. As unemployment falls more people have an earned income which should be higher than their benefit levels. Markets now expect UK interest rates to stay down for longer. As a result the government can borrow at very advantageous rates to cover its deficit and finance some of the long term infrastructure projects it wishes to back.
The Centre for Cities has recently brought out its 2016 analysis of the economic strengths of UK cities. It defines a city as a primary urban area based on the built up area. This confirms the strong position of London, leading the way on wages at £675 a week on average, and well ahead on rates of business formation with 100 start-ups per 10,000 people. London also scores highly on the proportion of people with higher level qualifications, at almost half. On this measure only the university cities of Oxford and Cambridge along with Edinburgh do better. Out of the top ten cities ranked by average wages, most are in the south and east of the UK, with Derby and Aberdeen the ones furthest from London. London of course tops the house price table, though this creates problems as well as reflecting wealth.
All the successful cities enjoy high levels of employment. In Aldershot 83.4% of the adult population is in work. The richest urban areas tend to have more people with good levels of qualifications and skills, good rates of new business formation, and a good stock of businesses. More reliance on public sector jobs and spending has been a less reliable model for boosting incomes and overall employment levels, though the university cities of Oxford and Cambridge do well where the public sector component is oriented to top-end research and teaching.
Cities are the focus for much growth in the world economy. Chinese and Indian growth has been fuelled by large movements of people from lower value added activities in the countryside to higher value added jobs in the factories and offices of the big cities. In the advanced world with more heavily mechanised agriculture the dynamics are a bit different, but flexible cities with talented and enterprising populations are an important part of economic success. Recent figures from the UK show some healthy developments on jobs, real wages and city growth which should not be ignored amidst the market gloom over oils prices, banks and low interest rates.
John Redwood is global investment strategist at Charles Stanley
