Aug
2023
Heroes: ‘It’s the Economy, Stupid’ (1)
DIY Investor
16 August 2023
‘Got a bum education, double-digit inflation
Can’t take the train to the job, there’s a strike at the station”
Let’s not get carried away by the news. Yes, the UK economy grew faster than expected in the second quarter of this year, boosted by a recovery in car manufacturing and a surprisingly strong June, when output rose by 0.5%.
UK GDP increased by 0.2% in April to June, up from 0.1% in the previous three months and the best quarterly reading in more than a year, according to the ONS.
The overall picture is awful; the UK economy remains 0.2% smaller than it was in the final quarter of 2019, before the onset of the coronavirus pandemic triggered the deepest recession on record.
James Smith, the Resolution Foundation’s research director, said: ‘The big picture is that the UK economy has expanded by just 0.4% since the start of 2022 – the weakest growth in 65 years outside a full-blown recession.’
The cost of living crisis has been driven by the highest inflation in four decades reaching 11.1% in October. Inflation has gradually fallen – albeit slower than Rishi Sunak had hoped – and there was some sign of a pickup in consumer-facing services in the second quarter.
Data in the Bank of England’s latest report on the economy shows that price gouging may still be a factor in pushing up inflation. This supports claims made by unions and academics that corporate profits could be pumping up inflation as much as rising wages, a factor that has been downplayed by policymakers at the central bank
‘corporate profits could be pumping up inflation as much as rising wages’
The data shows that customers are paying 8% more for their goods than last year, despite an easing of supply chain pressures and a fall in commodity prices that mean it costs no more to produce goods now than it did in the summer of 2022. Producer price inflation is close to zero. Typically, a fall in the wholesale price leads to a fall in the retail price.
The report says in the report: ‘That relationship would suggest that goods price inflation could decline sharply in the near term.’
Despite this the Bank’s forecasts appear to accept the gap will continue, because it thinks other factors are at play – and not just greedy businesses, mostly large and with a strong marketing presence, making sizeable windfall profits.
For example, while the price of gas and electricity has fallen steeply this year, it is possible a majority of companies were panicked into buying long-term, fixed-price energy contracts when prices were high, and those contracts have yet to run out.
The data also excludes the impact of rising import prices, leaving companies that rely on foreign partners for components in a worse position than those that source components from domestic suppliers.
Given the difficult circumstances, any business that has maintained margins over the 3-years has performed well.
Nestlé and Procter & Gamble, are good examples of firms that have maintained or improved margins, allowing them to maintain dividends throughout the crisis period.
‘Aldi and Lidl were to blame for the steepest increases in everyday groceries’
In the spring, Which? made an assessment of supermarket food prices and found Aldi and Lidl were to blame for the steepest increases in everyday groceries. The price of some items had doubled in a year. Asda, Morrisons, Ocado, Sainsbury’s, Tesco and Waitrose all took their lead from the German discounters.
Despite mounting evidence to the contrary, BoE Governor, Andrew Bailey, continues to call for wage restraint, whilst overlooking companies and their profits.
Perhaps the BoE’s attitude helps to explain why we have become a poor country?
During other times of financial stress, such as the currency crises of 1931, 1949, 1976 and 1992, we able to fight back with a combination of belt-tightening and devaluing the pound. We could do this as the currency was supported by secure trading relationships, initially within the empire and later the EU.
Then our assets were far in excess of our liabilities, with a well-structured national debt built on the issuance of long-dated gilts. This meant that when the GFC struck, our low national debt enabled us to put our balance sheet to support the troubled banks and bail them out.
Today, we are no longer a creditor nation, and, in the words of former Bank of England governor Mark Carney, we depend on the ‘kindness of strangers‘, to support our currency, as our liabilities to foreigners exceed our assets by 30% of GDP and growing.
Thatcher’s decimation of the country’s industrial base, in the name of free-market economics, has produced permanent current account deficits, which since 2000 cumulatively exceed £1.5tn. we have continued to run up debt and sell our assets to foreigners to maintain our living standards. We have neither the empire or the EU to anchor our trade; we are alone.
‘we have continued to run up debt and sell our assets to foreigners to maintain our living standards’
The national debt has trebled since 2000, and is now > 100% of GDP. We aren’t alone in this, but structurally our position is short term and therefore vulnerable; for example, 25% of our debt issuance is in inflation-linked bonds, therefore subject to the vagaries of rising interest rates and inflation. Servicing this debt (interest payments) costs C.10% of all tax revenues, the highest in the G7.
Not only is our average incomes per head below most other western nations; strip out London and our poverty is even more marked. Lose London and the GDP per head in the rest of the UK is below the poorest US state, Mississippi.
In 2022, US GDP per capita was$76,622, in the UK it was $45,775 (2)
Comparisons with our G7 contemporaries doesn’t make good reading:
Statistics like this have a human cost; 2-million people report going without food for at least a day in any month. For many malnutrition is a fact-of-life:
- Our 5-year-olds are among the shortest in Europe.
- One third of children live in poverty.
The current quarterly review by the National Institute of Economic and Social Research (‘NIESR’) makes for sobering reading (3). Their forecast for economic output shows that we will not return to pre-pandemic levels until the third quarter of next year, with a 60% chance of the outlook worsening with a recession.
During the 5-years of stagnant productivity and low growth, cumulative household incomes for those in the lower half of the population have fallen by 17%.
This is the result of 13-years of failed Tory governments, during which time they have tried two quasi-Thatcherite quick fixes; Brexit, and Liz Truss’s dash for growth with huge libertarian tax cuts. The Thatcherite press lapped it up; Daily Telegraph columnist Allister Heath swooned over her and Crazy’s budget, describing it as ‘the best I have ever heard a British chancellor deliver‘. It certainly had impact, so much so that it had to be reversed within weeks.
‘Daily Telegraph columnist Allister Heath swooned over her and Crazy’s budget, describing it as ‘the best I have ever heard a British chancellor deliver”
As I wrote in ‘British Exceptionalism is our Weakness’; ‘Until you admit you have problems you can’t begin to overcome them.’
We are no longer a rich industrial country but a poor country facing first-order economic development challenges. Large parts of the UK are scarcely better off than middle-income developing countries, and on current trends are about to get poorer. As the NIESR report argues, we cannot continue with the same, tired old policies such as tax cuts, which we can’t afford.
Instead we need to look to the US, to Bidenomics. As I wrote in ‘Priorities’, his policies are restructuring the US economy.
As Covid showed there is still a need for government intervention, the economy cannot be left to the vagaries of free-markets, the ultimate survival of the fittest. There needs to be more direct intervention into markets, and a sharper focus on distribution. There is nothing Marxist about governments investing in certain industries and helping to protect workers with greater employment rights.
In addition, there is a need for thinking outside perceived wisdom. The role of the City needs to be reconsidered. Pools of capital within our £3.5tn pension fund industry could be used to support risk and enterprise.
‘Net zero and levelling up must form the basis of any economic plans’
Education needs more attention if we plan to train the young for the right jobs with the requisite skills. Net zero and levelling up must form the basis of any economic plans.
The final question, is can we achieve this standing isolated? No.
It is highly unlikely that a Tory government can deliver a trade deal with the US in the foreseeable future. Without this, and outside of the EU, we will struggle to find a path, and to convince foreign investors that we are credible.
I leave you with a stark conclusion, should there be another financial crisis, perhaps driven by our almost total reliance of a healthy housing market, we lack the wherewithal to react.
‘Government has done me wrong, I’m mad about that.
And it makes me feel like I don’t belong, I’m mad about that.
It’s making life a misery, you wouldn’t have taken the liberty
Government has done me wrong, I’m mad about that.’
Notes:
Another powerful piece from Philip, and the final part of a trilogy including ‘British Exceptionalism’ and ‘Priorities’; they don’t make comfortable reading, but that, apparently, is where we’re at.
If the headline is that one-third of children are in poverty, that is shocking enough, but similar stats come thick and fast, and we’re heading down the gurgler at a rate of knots.
A valid question is at which point does PR tip over into gaslighting or plain old lies? Social media is swamped with ‘good news’ messages and metaphorical high-fives at the fantastic job that the Tories are doing. If that’s the case, why is this country such a shit-show?
Given that the genesis of Philip’s column was Brexit, how many Little Englanders can honestly say they like what they see? That is, of course, a rhetorical question, they all do, and Rishi keeps throwing them more ‘stop the small boats’ red meat.
‘OK, so the cost of living has gone through the roof, my mortgage has doubled, I can’t get to see a GP, the economy’s screwed, the only trade deal we’ve done is with Ulan Batar, and the climate crisis is posing an existential threat to our children’s planet, but we’ve taken back control. Bloody listeria, never did us any harm – gym, three meals a day, more like a bloody cruise ship….’
Musical contributions are ‘The Message’ by Grandmaster Flash and ‘Blue’ by Fine Young Cannibals. Enjoy!
@coldwarsteve
Philip Gilbert is a city-based corporate financier, and former investment banker.
Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s
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