While both Germany and Japan have reported bad news on trade in recent days, the UK’s export performance has picked up. New figures released today undermine George Osborne’s claims that the Eurozone was to blame for the contracting British economy.

Trade figures released this morning by the Office for National Stastics show that the UK’s trade deficit was £1.1 billion in December compared with a deficit of £2.8 billion in November. This is the smallest deficit in nine years.

The deficit in traded goods to the European Union fell from £3.9 billion to £3.4 billion while the deficit in goods to the rest of the world fell from £5.0 billion to £3.7 billion. These changes were primarily driven by a drop in imports but exports were up by £200 million – with an equal contribution to the EU and elsewhere.

Last month’s figures for growth in the fourth quarter of 2011 showed that overall economic activity had fallen by 0.2 per cent. At the time, George Osborne blamed the Eurozone crisis for the decline but figures released by the House of Commons library a few days earlier had shown that over the course of 2011, growth in trade was all that kept Britain growing.

As Guido Fawkes has noted,

“It is a myth that the decline in GDP has anything to do with the €uro-crisis leading to a decline in exports to the €urozone. The barriers to growth are a domestic problem.”

The Bank of England remain sufficiently worried about the economy to announce a further £50 billion of quantitative easing. According to the Telegraph, the ONS indicated today that the positive trade figures and a boost for manufacturing were not enough to change the first GDP estimate for the fourth quarter of 2011, which showed the economy shrank by 0.2 per cent.

But they do make it less likely that Britain has avoided a technical recession by growing in the first quarter of 2011. For once, the OBR may find that their predicted rise in GDP of 0.1 per cent in this quarter is accurate. The chancellor will certainly hope so.

See also:

• Economic Update – February 2012: Double dipped – Tony Dolphin, February 7th 2012

• US grew almost twice as fast as UK in 2011 – Will Straw, January 27th 2012

• The double-dip begins – Tony Dolphin, January 25th 2012

• Hopes of an export and manufacturing-led recovery recede – Tony Dolphin, August 9th 2011

• What an export-led recovery may mean for the world – Nick Dearden, January 25th 2011

Ed Miliband’s speech this morning will be overshadowed by the events surrounding Chris Huhne and any coverage that he does get will focus on his banker bashing. But the more interesting section of his statement at the Thomson Reuters building is on potential reforms to the banking sector.

In a section of his speech outlining how small and medium sized firms are still struggling to get credit, Miliband puts Britain’s banking sector in international context:

“There are two reasons why not enough capital currently reaches the small and medium sized enterprises in this country which are crying out for it. The first is that it’s always hardest to get credit when the economy is in a downturn, even though that’s when small and medium-sized firms need finance the most.

“And the second is that it is cheaper for banks to lend to big companies than small ones. Particularly when credit is already being rationed, lending to small firms is often deemed not worthwhile for banks. The market on its own does not work for small businesses.

“All the most successful economies around the world recognise this: from Asian capitalist states like Singapore, through active industrial states like Germany, to supposedly free market states like the USA.

“And they make sure that the state helps finance to reach the small and medium sized enterprises which need it.

“This isn’t about picking winners.  It is about the state getting the market moving, like our most successful competitors have been doing since the fifties. It’s no coincidence that in Britain we haven’t done as much to develop a Mittelstand like Germany.

“Or fast-growing young companies like Apple and Intel – both of which got growth funding from the US government’s Small Business Investment Company programme.

“When it comes to competing internationally, our small and medium sized companies are fighting with one hand tied behind their back. One nation banking means the private sector and the state need to work together in partnership to get the system working for small business.

“It means we will need a much more diverse and competitive banking system which is more rooted in our communities. And it means looking at the case for a British Investment Bank which would provide government backing for entrepreneurs when the market fails.”

IPPR’s recent report (pdf) with Lord Mandelson on globalisation advocates a National Investment Bank. The remit we suggest is narrower than Miliband’s. Building on an idea (pdf) developed by venture capitalist Gerald Holtham, we suggest that the bank should invest in ‘marketable services’ which would develop a rate of return for the Exchequer.

This would include big infrastructure projects in the energy and transport sectors but could also cover house building and the roll out of superfast broadband. The policy would turn the much derided Private Finance Initiative on its head by having the public sector lease profitable services to the private sector rather than the other way around.

With the UK potentially already in a double dip recession and yields on government bonds at historically low levels, currently 2.03 per cent, there has never been a better time for this idea.

See also:

• Mandelson weighs in behind National Investment Bank – Alex Hern, January 27th 2012

• The economy is crying out for more investment; we need a British Investment Bank – Will Straw, January 14th 2012

• George Osborne is the downgraded chancellor of a deflationary government – William Bain MP, December 8th 2011

• The coalition could end up borrowing more than Labour – Cormac Hollingsworth, July 27th 2011

• A middle way for economic recovery – Gerald Holtham, September 16th 2010

New figures out today show that the US economy grew by 0.7 per cent in the last quarter compared to a contraction of 0.2 per cent in the UK. The final figures for 2011 put to bed Treasury spin from the autumn that the UK was doing as well as the US.

On the morning of the last US GDP figures in November, ITN’s Laura Kuenssberg tweeted:

“Treasury sources say UK grown at same rate as US so far in 2011″

As I blogged at the time, this was only true because of the boost to GDP in Q1 caused by the added economic activity following heavy snow at the end of 2010. With full 2011 figures out for both countries, we now know that while the UK grew 0.9 per cent last year, the US grew by 1.7 per cent.

Indeed, while the UK economy has contracted in three of the last five quarters and may already be in a double-dip recession, the US economy has not contracted since the second quarter of 2009.

The US has taken a slower approach to deficit reduction than the UK with cuts only starting to bite in 2013.

And while George Osborne has blamed the eurozone for the latest downturn, research by the House of Commons library has shown that it was only trade that ensured the economy was growing at all in 2011. Surely now it’s time for Osborne to accept the need for a Plan B.

See also:

• Growth revision shows economic recovery is off track - Tony Dolphin, January 9th 2012

• UK growth – bottom of the table, wallowing with the PIGS - Daniel Elton, November 28th 2011

• UK set for among slowest growth in EU - Will Straw, November 11th 2011

• UK growth down as IMF warn deficit reduction should not be at the expense of growth - Shamik Das, October 5th 2011

• No growth? ‘Keep calm and carry on’ says Osborne – Ben Fox, October 4th 2011

The media hate campaign against Ed Miliband took a new low today as the Sunday Times commissioned a respected polling company to ask the public whether he was “too ugly” to be prime minister.

On Tuesday, John Humphrys was widely criticised for implying that Ed Miliband’s was “too ugly” to win an election during a Today programme interview with the Labour leader.

The Telegraph and Mail both described it as a “gaffe” while The Guardian’s media reporter Dan Sabbagh said Humphrys had “comprehensively lost his way” and that the “outrage would have lasted all day” if Miliband had been a woman.

Despite the backlash, the Sunday Times have stoked the fire by getting YouGov to ask the same question.

Disappointingly for Mr Miliband’s detractors, the paper reports (£):

Only one in 10 believes he is “too ugly”.

Tory MP, Louise Mensch, is among those to question the judgment of both newspaper and polling agency, and tweeted:

“Pity that a reputable polling firm agreed to ask the question, honestly.”

There’s a legitimate discussion to be had about leadership but we’re in trouble if the British media think personal appearance is fair game.

See also:

• “Nothing wrong” with the PCC code, thinks the head of the PCC – Alex Hern, November 14th 2011

• Sunday Times Editor: Newspapers take the PCC “very seriously” – Really??? – Shamik Das, November 1st 2011

• Rupert “page three” Murdoch’s ‘papal knighthood’ shames Catholic church – Daniel Elton, July 14th 2011

• The revolving door between News International and No. 10 – Liam R Thompson, October 28th 2010

• Murdoch press’s inaccuracies and half truths about Ed Miliband – Will Straw, September 26th 2010

Will Straw is IPPR’s Associate Director for Globalisation and Climate Change; he will be pitching the idea of a British Investment Bank to the Fabian Society’s New Year Conference today

The UK’s low investment levels are well documented but worth repeating.

Research (pdf) by Adam Lent and David Nash for the Institute for Public Policy Research shows that for years Britain has been outperformed by Germany, the US, Japan and others, as Graph 1 below shows.

Average annual investment, expressed in terms of gross fixed capital formation, which encompasses business, government and household investment, from 1980 to 2010 was 17.5 per cent of GDP in the UK, 20.1 per cent in France, and 27.2 per cent in Japan. It is currently barely above 15 per cent.

Graph 1 (p22, pdf):

Business investment reached 12.8 per cent of GDP in 1998 but fell to a low of 9.7 per cent in 2006 and only recovered to reach 10.2 per cent in 2008. By contrast, the US, Germany and France saw business investment rates rise to 11.7 per cent, 12.3 per cent and 12.7 per cent percent respectively in 2008.

In the UK, as part of the government’s programme of austerity, capital expenditure by government departments is projected to fall 29 per cent between 2010-11 and 2014-15. This includes cuts to school and other education building projects of 60 per cent, 34 per cent for environment, food and rural affairs, and of 17 per cent for the NHS.

Despite these low levels of investment, the cost of borrowing has rarely been cheaper. On Tuesday, for only the second time ever, the Treasury sold £700 million of government bonds that will pay returns below the level of inflation. Nominal par yields on 10-year bonds were at 2.06 per cent this week – the lowest level since they were first introduced in the 1950s.

Despite these low borrowing costs, it has rarely been harder to get credit in the private sector. The time is clearly right for a British Investment Bank set up on a strictly commercial basis and run by an independent board tasked with generating a long-term return across a diverse range of sectors.

Any investments with a rate of return greater than the current yield will generate a positive net impact for the government’s balance sheet.

Indeed, investing in marketable services like transport infrastructure, sources of renewable energy, or housing would turn the Private Finance Initiative policy on its head by allowing the public sector to borrow and then sell or lease back the service to the private sector, rather than the other way around.

This need not disrupt the government’s fiscal rules as Gerry Holtham has outlined. If Britain brought its accounting rules into line with the rest of Europe, this kind of borrowing could be treated similarly to the investments in banks like RBS and not score against the Public Sector Borrowing Requirement.

The coalition government plans to launch a Green Investment Bank, which will start investing in low-carbon energy and infrastructure projects in April 2012. But initial funds will only amount to £3 billion and are unlikely to leverage more than £15 billion over the next four years. Indeed, the Bank will only be able to borrow on the capital markets from April 2017 and that is subject to the government meeting its own debt target. In short, it will be too little too late.

Several other countries operate forms of national investment bank that Britain should look to emulate. The German KfW Bank lends to German companies that are passed onto it by private banks, but only if their investment plans are in line with the government’s priorities. The KfW is able to raise funds and make loans at a favourable rate because it is backed by the government. Importantly, although some of its board members are politicians, the management are all banking executives and they make the lending decisions.

Other examples include the Brazilian Development Bank, which has regional policy as a key remit, the Nordic Investment Bank based in Finland, the European Investment Bank and the US Small Business Administration.

Britain’s economy is crying out for greater levels of investment. Future generations will look back in astonishment if we fail to take this historic opportunity to utilise the low cost of borrowing.

See also:

• “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – Ann Pettifor, January 6th 2012

• Osborne has put Britain in an economic death spiral: Here’s how to break out – William Bain MP, November 14th 2011

• With Plan B, we can have a good economy for a good society – Howard Reed, October 31st 2011

• Will Osborne alter course? And how should Labour respond? – Matthew Pitt, September 15th 2011

• The government is failing to lay the foundations for long-term growth – Dr David Nash, August 22nd 2011

As with last year, I thought I’d share the collection of songs that my wife, Claire, and I have put together for our friends as a compilation of our songs of the year. These tracks will fit neatly on an 80 minute CD if you have the will or you can click on the links below.

Happy listening and, more importantly, Merry Christmas and a Happy New Year!

Will’s songs of 2011

1. ‘Midnight City’ – M83. One of the stand out songs of the year so a great way to kick things off. Alongside Washed Out and Cut Copy, it’s one of three 1980s-style ‘synthpop’ tracks on the mix.

2. ‘Pumped Up Kicks’ – Foster the People. Somewhat sinister lyrics but it hasn’t stopped this song becoming the backing track for numerous sports programmes on both sides of the Atlantic. Most recently heard on the ‘Yesterday’s Goals’ section of Match of the Day 2.

3. ‘Shuffle’ – Bombay Bicycle Club. An upbeat song from one of Britain’s best bands. This track is the stand out on an otherwise more downbeat album.

4. ‘I Follow Rivers’ – Lykke Li. Though there’s much confusion about the pronunciation of the eclectic Swedish singer-songwriter’s name, there’s no doubt about her music which has become a real favourite on Later with Jools Holland.

5. ‘Rolling in the Deep (Jamie xx Shuffle)’ – Adele. Worldwide sales of Adele’s album ’21′ have surpassed 13 million so few songs will have been played more this year. But this remix by Jamie Smith from The XX puts the track in a whole new light by paring back all the music and leaving her amazing voice bare and beautiful.

6. ‘The Last Living Rose’ – PJ Harvey. ‘Let England Shake’ has rightly been the critics’ choice for album of the year picking up the Mercury Prize, and topping the NME, Guardian, Uncut and Mojo awards. Choosing a single track is pretty tough but this one’s my favourite.

7. ‘Kaputt’ – Destroyer. Effortlessly louche. This band played the standout gig at Green Man festival in Wales and defy categorisation. If you don’t already own it, use your Christmas tokens to buy this album. When did the sax last sound so good?

8. ‘The Look’ – Metronomy. Another really catchy track from a talented British band.

9. ‘I Don’t Want Love’ – The Antlers. One for all the indie kids.

10. ‘Holocene’ – Bon Iver. Another critically acclaimed album which has too many great tracks to making choosing one an easy task.

11. ‘East Harlem’ – Beirut. A precocious band, a brilliant third album, and a great song.

12. ‘Second Song’ – TV on the Radio. After the brilliance of 2008′s ‘Dear Science’, their fifth album was a real disappointment. But this, the opening track, soars.

13. ‘One for You, One for Me’ – Bright Eyes. Fantastic track and a brilliant lyric.

14. ‘Loop the Loop’ – Wild Beasts. From ‘Smother’, my favourite album of 2011. ‘Bed of Nails’ and ‘Reach a Bit Further’ are also brilliant but this track wins it for the beautiful moment when the bass comes back in at 2:14.

15. ‘Eyes Be Closed’ – Washed Out. Does what it says on the tin.

16. ‘Separator’ – Radiohead. A disappointing album but this closing track showed the best band in the world at their most creative.

17. ‘Need You Now’ – Cut Copy. Unbelievably funky and a way to end the selection as we started – with another synthpop track.

See also:

• Merry Christmas from Left Foot Forward – December 25th 2011

• Look Left – Look back at the year – Shamik Das, December 23rd 2011

• My songs of the year – Will Straw, December 31st 2010

Backbench Conservative MPs drew attention yesterday to what they saw as broad public support for David Cameron’s actions in Brussels in the early hours of Friday morning. But while the headline findings support the prime minister, there are already signs that the public is wary of what has happened.

A new YouGov poll for The Sun this morning reinforces yesterday’s Times poll on the public’s broad reaction to Britain walking away from the Franco-German treaty revisions. Although a veto was not technically used, by almost three-to-one (58%-21%), voters think Cameron was right when asked ‘Do you think David Cameron was right or wrong to veto the treaty?’.

Yesterday’s Populus poll for The Times (£) found support at 57%-14% while a Survation poll in the Mail on Sunday found support at 62%-19%.

But more in depth questions by YouGov (pdf) show that the public do not think that the outcome will be a happy one for Britain.

As the charts below show, just 24 per cent think the outcome will be good for Britain (31 per cent say ‘bad’) while a meagre 15 per cent think the summit will be ‘good for the British economy over the next few years’ while 34 per cent think it will be bad:

The latest poll also finds the narrowest support for British withdrawal from the EU in months. Only 43 per cent now want Britain to leave while 36 per cent think Britain should remain a member. As recently as August, 52% said they would vote to leave, while 30% would remain a member.

In a recent IPPR report on ‘Euroscepticism in Britain’ (pdf) I explained the nuances of British public opinion on the European Union with voters deeply hostile to the institution but enthusiastic about closer working on a range of issues including counter-terrorism, climate change, and security policy.

In his commentary on the poll, YouGov President Pete Kellner discusses the long term implications:

What will people think when the dust settles? At the moment, voters are reacting to the dramas of the past week. In a year or two’s time they will be reacting to the consequences of Cameron’s actions.

If Britain’s economy does better than those in the eurozone, and some kind of calm, however awkward, returns to our relations with the rest of the EU, then the prime minister’s stance will have been vindicated, and his party is likely to be rewarded with extra votes and seats at the next election.

If, however, our economy stumbles and enough voters blame at least part of this on Cameron’s veto, then the Tories could well suffer.

Tory backbenchers would be wise to avoid being too triumphalistic about their leaders’ diplomatic moves.

See also:

• What exactly did Cameron get from the EU summit? – Shamik Das, December 13th 2011

• Cameron turns Britain from an outlier into an irrelevance – James Denselow, December 12th 2011

• How Cameron traded influence for isolation – Ben Fox, December 12th 2011

• Look Left – Europe 26-1 Cameron: Britain isolated like never before – Shamik Das, December 9th 2011

• The view from abroad: The day Britain locked itself out – Alex Hern, December 9th 2011

The small print of the chancellor’s autumn statement shows that the totality of tax, tax credit and benefit measures adopted by the coalition government or carried over from the previous Labour government will be regressive for the lowest 80 per cent of earners.

The latest analysis will further damage George Osborne’s claim that those with the “broadest shoulders should bear the greatest burden”.

Chart 1B of the supplementary document titled ‘Impact on households: Distributional analysis to accompany the Autumn Statement 2011’ (pdf) shows that those in the lowest income decile are the second worst hit by the totality of government measures, after the richest 10 per cent who face a 50p income tax charge on earnings above £150,000.

The line slopes upwards across the poorest eight deciles, showing that low earners are harder hit than wealthier families.

Measures announced today that will exacerbate this trend include the announcement that the government will not go ahead with the planned £110 above inflation increase to the child element of the child tax credit, and will not uprate the couple and lone parent elements of the Working Tax Credit in 2012–13.

These measures save £1.2 billion, much of which is passed on to motorists, who will benefit from a defer the 3.02 pence per litre fuel duty increase that was due to take effect on 1 January 2012 to 1 August 2012, and cancel a further increase planned for August 2012 at a cost of £975 million in 2012-13.

After enduring two years of pay freezes, public sector workers including teachers and nurses will have to endure pay rises of a paltry one per cent for two years, saving the Treasury £1 billion by 2014-15.

George Osborne did not claim today that “we’re all in it together”. The reason is glaringly obvious.

See also:

• Kellner: The public don’t like the Tories, but they’ve signed up to their economic argument – Daniel Elton, November 28th 2011

• On the Financial Transaction Tax, why is Osborne on the side of the one per cent? – Shamik Das, November 2nd 2011

• There’s nothing exceptional about 50% tax rates – Declan Gaffney, September 9th 2011

• Cruddas: Big Society failing the “all in this together” test as safety nets go – Daisy Blacklock, April 26th 2011

• Lib Dem, Tory and Labour all in this together on financial regulation – Will Straw, January 24th 2011

The chancellor announced today that the OBR’s projection of growth would be 0.9 per cent this year and 0.7 per cent next year. As we feared, this is yet another downgrade from earlier projections, as the chart below shows.

Given OBR’s past optimism, their prediction of a 300% increase in growth between 2012 and 2013 might also be met with scepticism.

See also:

• Whatever Osborne’s growth forecasts today, the reality is probably worse – Daniel Elton, November 29th 2011

• Inflation report is bad news for Osborne’s targets – Tony Dolphin, October 18th 2011

• Cameron’s “failed experiment” leads to yet another economic downgrade – Alex Hern, October 17th 2011

• OECD prediction rocks Osborne’s deficit reduction hopes – Ben Fox, September 9th 2011

• Britain is bottom of the G7′s growth table – Will Straw, August 4th 2011

The UK’s student visa system is turning prospective entrepreneurs away from the UK, according to a leading Indian newspaper; Will Straw reports from India

The revelation shows that despite surviving a week of political scrutiny, Theresa May’s policy is storing up long term trouble for Britain. An eight-page supplement distributed with Thursday’s Economic Times of India focused on the UK’s Higher Education system.

The article reported:

“The change in work-visa rule after completing a degree in the UK has caused concern among prospective Indian students. Many feel that the opportunity to work in the UK was the incentive that attracted them to invest in education overseas.

“However, students should realise that the true value of studying in UK is to gain a competitive edge in the Indian job market, which faces a skill gap in many growing sectors.”

The perspective should be troubling for a country where businesses cite the Government’s increasingly strict immigration policy as a drag on growth.

Given UK universities are second only to the United States on quality it is an increasing concern that individuals taught in the UK are being prevented from realising their potential or setting up their own businesses on British soil.

As Sally Hunt, General Secretary of the University and College Union (UCU), wrote on Left Foot Forward in September:

“The changes to student visas as part of the government’s clampdown on immigration risks making the UK a less popular destination for foreign students, which, based on today’s figures, would be bad news for UK universities as they struggled to adjust to huge government funding cuts.

“It is not just universities and our thriving educational export sector that would suffer though. In June, the home affairs select committee warned government plans to limit visas could result in a £3.6 billion loss from the British economy.

“The government might think soundbites around immigration play well to a domestic audience, but they risk doing real harm to our universities and our reputation on the world stage. UK universities are enriched by the students and academics that come to this country to study, carry out research and share their knowledge.

“Politicians must be very careful not to restrict academic access or make ill-judged comments that give the impression UK universities are closed for business.”

Despite all the evidence, the government appears resolute in its attempt to reduce immigration regardless of whether it enhances the UK’s productivity or not.

The home secretary has survived the Brodie Clark scandal but the damage her policy is causing the UK is yet to be fully understood.

See also:

• Anti-foreign student rhetoric risks real harm to our global reputation – Sally Hunt, September 22nd 2011

• How Tory immigration populism is costing us £3.4 billion – Awale Olad, July 26th 2011

• The crazy economics of reducing foreign student visas – Stephen Henderson, February 24th 2011

• Give the international student market the credit it deserves – Ranjit Sidhu, October 1st 2010

• Visa changes threaten Universities & fan anti-immigrant fears – Peter Bloom, October 15th 2009