Robert Peston is in reflective mood as he prepares to leave one national broadcaster to another, most recently in the role of economics editor.
Whilst recognising that many problems in the global financial system have been fixed since the crisis of 2008, and that the UK economy is in relatively rude health, he sees plenty of bumps in the road ahead that businesses should be mindful of.
Clarissa Coleman, Partner & David Engel, Partner, Addleshaw Goddard
Robert Peston was delivering the second lecture in the Addleshaw Goddard City Lectures 2015 series, on the subject of 'Britain's economic recovery in a dangerous and uncertain world'. His talk featured reasons to be cheerful and reasons to be cautious in equal measure, but perhaps the most compelling message for our clients was that interest rates not only will not, but cannot, rise any time soon, so now is the time for businesses to invest for growth.
Peston says the recovery in the UK economy since 2008 has been significantly stronger than that experienced by any of the Eurozone countries, and, among the big rich economies, growth is third only to the US and Canada. But that recovery has been slower than any economic turnaround seen historically, highlighting just how serious and impoverishing the most recent financial crisis really was.
Of critical importance is the fact that the UK recovery has so far been very much consumer-led, driven by the household sector increasing spending. Without the service industries the recovery would have been far less robust, if it had occurred at all.
Back in 2010 there was much talk amongst politicians about the need to reshape the economy and rebuild the UK’s manufacturing capabilities, but that has not occurred. In fact, according to the latest published quarterly figures, there would have been zero growth without services, which saw more growth than GDP as a whole, thanks to negative growth in the construction sector and almost no expansion in production. The UK's manufacturing industry is still in depression, and services account for around 80% of our economy.
On the face of it, that reliance on services is not a problem. What is a problem, Peston argues, is that we do not sell enough services abroad. There is a huge opportunity for the UK's world class service industries to export more than they do, and we would encourage our clients to look for opportunities.
If we go back to the recession of the late 1980s, interest rates went up to staggeringly high levels, peaking at around 16%, as governments fought to bring down inflation. But today's record low interest rates are here for the duration, Peston argues, because household debts are so high that the economy could not sustain a rate increase. Household debt as a percentage of disposable income was tiny in the 1980s compared to where we are now. Today, any rise in interest rates would have such a dramatic impact on disposable incomes, and thus on consumer spending, that the Bank of England can no longer rely on rate increases as a tool to guide the economy.
Long-term low interest rates are good news for companies looking to invest, and should convince corporations to stop hoarding cash and start putting money to work. But not having interest rates as a tool in the arsenal could create longer term problems at a macro level.
Most notably, Peston highlights the UK's current account deficit, caused by a drop-off in the income the country is earning from overseas investments, which means the UK is effectively borrowing abroad at a rate of 6% of national income annually.
That current account deficit becomes a problem if it leads to a fall in the value of sterling, to which the rational response would be for the central bank to raise interest rates. Today, that would not be an option.
Such paralysis in interest rate policy arguably makes the UK economy powerless to sustain another shock, including any that might be caused by a bursting of the housing bubble, which Peston argues is probably pending.
Peston identifies two global concerns that could yet have a big impact on the health of the City going forward: the Chinese economic slowdown, and what he sees as the inevitable collapse of the Eurozone.
China's economic growth has slowed significantly, from 10% per annum to as little as 4% a year by some estimates. Global consumers stopped buying Chinese output during the slowdown, and in response the country's government instructed banks to dramatically increase lending, thereby fuelling growth through borrowings. Now debts are reaching unsustainable levels, forcing the government to rein back, so growth has stalled, seriously impacting many world economies that rely on exporting to Chinese consumers.
As a consumption-led economy, the UK has been hit far less than most by the Chinese slowdown, because China is not a key export market. (In fact, the UK exports more to the Republic of Ireland than it does to China – arguably, one of the world's largest economies is being seriously overlooked by UK businesses.) But a continuation, or worsening, of the Chinese problems could yet have serious repercussions for global economics.
And then there is the Eurozone issue, where problems are still a million miles from being fixed, and a migrant crisis is giving leaders a distraction and an even greater political headache to compound an already enormous economic challenge. The recovery in the Eurozone is trivial, Peston argues, with growth still around 1% per annum nearly eight years after the crash. Unemployment is uncomfortably high in almost all the countries across the Channel, and major economies like France and Italy remain uncompetitive internationally.
The potential for political upheaval is enormous, and we have seen the rise of far right and far left politicians across the continent. In Britain, Peston demonstrated that since the crisis, what growth there has been has gone into asset price rises, which means there has been a redistribution of wealth from working to retired people.
At the same time we have what has been dubbed a 'political deficit' to deal with, whereby the first-past-the-post electoral system has delivered democratically unacceptable results: in the most recent general election, it took 26,000 votes to win each seat at Westminster for the Scottish National Party, and nearly four million to get just one UK Independence Party candidate elected. Political unrest, perhaps resulting from the EU referendum, may yet cause the economy another nasty shock.
The abiding message: the UK's indebtedness has gone up from below 200% of GDP in 1990 to north of 470% of GDP today, and interest rates simply cannot increase as a result. The recovery is better here than it is elsewhere, but it is fragile.
Still, for our clients, we see low interest rates as an opportunity to invest for international growth.
The City and the Future
The City and the Future was conceived to bring together influencers and businesses so that we can all learn, share and form opinions on future thinking within the City. It is clear that the most successful businesses in 2030 will be those that were forward looking and willing to implement changes ahead of their competitors.
Futurologist Richard Watson delivered the first lecture of the series, while former Mayor of London Ken Livingstone held the third and final talk on 24 November.
We hope all our clients found Robert Peston's evening as insightful and thought-provoking as we did.