Two key phrases help describe the current economic challenge facing politicians and policy makers in the UK and across the western world. These are "hyper normalisation" and "policy normalisation". How they are resolved will have a big impact on economies and markets in the year ahead.
Hyper normalisation is not used often and so may not be immediately known. I think it describes well what many people have attributed to "populism" and the disconnect seen frequently across western economies.
It was first used by Alexei Yurchak, the author, to describe life in the old Communist countries. People were told that life was as good as it could be. They suspected otherwise. It reflected an acceptance of the current situation even though people knew it could and should be better. Moreover, even though no one could see the Soviet system changing, when it collapsed no-one was surprised that it did.
That latter lesson may be worth remembering when thinking about the euro in future years, as it still faces big underlying problems. Although, thankfully for now, helped by the European Central Bank's printing of money, the euro area is enjoying a much needed economic recovery. Now, its recovery is part of the worldwide reflation that is taking place, boosting global trade and growth, which should be good for UK exporters.
The reason hyper normalisation is relevant for the UK is many do not feel they are sharing in success. It was a contributory factor in last year's referendum and played its part in this year's election too.
The UK faces considerable economic challenges. It should be stressed these are not linked to Brexit: the twin budget and current account deficits, the tendency for household borrowing to rise too much in good times, and the short-termism of UK firms.
This short-termism is reflected in low investment and is a factor in the immigration debate, as UK firms spend too little in the training and skills development of their staff. Of course we need skilled workers, it begs the question why we don't invest in our people first.
While migration is good for an economy, unlimited migration is not. Also the picture varies across the country. Data quoted by the Centre for Social Justice mentions that those from Western Europe earn higher wages than the UK average, suggesting they work in London or in skilled roles. But the picture is different for workers from Eastern Europe. They earn far less than the UK average, topped up by benefits, suggesting they work regionally or in lower skilled roles. Add in the pressure migration adds to housing and public services, as well as suppressing wage growth, as outlined in a report by Cambridge University's Professor Bob Rowthorn a couple of years ago, and the challenges of everyday life become more apparent.
Unemployment being at a 42 year low is impressive by any standards. Yet even that doesn't address the hyper normalisation challenge. One reason is the squeeze on real incomes - which measures wage growth in relation to inflation.
Many factors, including globalisation and technology, are restraining wage growth. This makes it more important than ever for inflation to be kept in check. The economy has had a lull in the first half of this year, as I predicted it would, not helped by the squeeze on real incomes.
It is often overlooked that the rise in inflation from last June to this spring was seen globally, rising sharply in the US, Germany and the euro area too. Since spring, inflation has eased globally but because of the weak pound, has risen further here. UK inflation looks set to peak in the next few months, after which it should then follow the global trend and decelerate. If so, that will ease the squeeze on real incomes and boost consumer spending next year.
Indeed, this week, the IMF said that globally, inflation pressures are muted, core inflation is low and wage pressures are subdued. If so, then alongside the slower pace of recent UK economic growth, this would imply monetary tightening is not needed.
This is where the phrase "policy normalisation" comes in, as it threatens to be a constraint on our ambitions. The markets and international investors think politicians have their hands tied. The budget deficit persists and national debt continues to rise. In the 2009 Budget, the year after the banking crisis, Govenment spending was £671bn. This year's spring Budget showed it reaching £802bn in 2017/18. The market view is there is not much room for fiscal manoeuvre.
If we are to avoid a slowdown now while also positioning for the opportunities that Brexit will undoubtedly bring then we have to use fiscal policy more proactively. To his credit the Chancellor has signalled a more flexible approach, including achieving a budget surplus being put back to 2025.
Instead the focus is on the Bank of England to accept that some normalisation is required in their policy area. The Financial Policy Committee has already tightened conditions, and now the issue is whether the Monetary Policy Committee should begin its exit strategy, reversing its printing of money by withdrawing Quantitative Easing and also hiking rates gradually.
But if we need to address hyper normalisation while accepting the constraint of policy normalisation then we need a new normal. Brexit is naturally part of this new normal but it is not just about leaving the EU, it is also about the domestic policies we implement to ensure success once we do. This has to address living wages, more skills and education training and an enabling environment for the private sector - especially small firms. Central to this, firms need to be confident to invest in their workforce to be positioned for future growth.
This article appeared in the Times newspaper and the Times online on Saturday, 29th July, 2017.