Mark Beresford-Smith, head of Economics at HSBC, summed up the world and UK financial situation for the GCA Conference.
Things are getting better – 2013 was easily the best year since 2007, but we’re not back to par and we are unlikely grow fast enough to repair the damage of the last few years.
Here are his main points: -
- Most governments are ‘skint’ so can do little to influence the economy. Policy will be made by central banks: The Bank of England, The Federal Reserve and The European Central Bank. They will want to keep interest rates low because inflation and commodity prices are falling and because financial markets are falling out of love with emerging markets. What they are really looking for is job creation
- Tapering, the reduction in quantitative easing by the US, is causing ructions in economies, especially emerging markets. It has caused falling exchange rates in South Africa, Turkey, India.
- Why is the stock market doing so well after 5 rubbish years? It’s not faith in the future, but QE money looking for a home. A lot of this money will come out in the next 3 to 5 years so FTSE could fall to 6000. Tapering is likely to be good for the $ but bad for stock markets.
- The world economy has been reshaped. The Off-shoring revolution has run its course. China is not the low cost workshop of the world any more. If you want to make things cheaply, don’t go to Eastern China. Land and energy are now cheaper in East USA.
- The Eurozone recovery, led by Germany is feeble. Spain is showing positive signs but Italy’s debt burden is a problem and France is a worry.
- The UK pick up has been amazing in the last few months. In fact revised figures show there was no triple dip recession, or even double dip. Just 3 years of flat-lining, partly because of Osborne’s housing scheme.
- BoE has already fired a shot across the bows of mortgage lenders restricting what they can lend, it will not allow a housing bubble and help-to-buy is likely to be scaled back.
- UK economy has grown but not necessarily the right growth. Housing schemes make people feel better. Growth has been generated by household spending and firms stock building. It is not improved trading or exports. There has been little in the way of investment and trade spending.
- December Retail sales figures look too good and are likely to be revised down.
- Consumer spending makes up 2/3rds of GDP, but it will only rise 1-2% because prices are rising faster than incomes, consumers are reducing debt (down by ¼ on credit cards etc) and houses are worth less than they thought. This will affect how much they decide to spend.
- So something else needs to happen. GB has an appalling productivity problem. The economy is smaller but more people are employed. Sooner or later companies will have to address productivity.
- Best source of hope is business investment in capital projects, which has been woeful, now looks encouraging. If businesses don’t invest, competitors will.
- Business investment and house purchases could push 2014 growth to 2.5%. But we need several years of above average growth -4%- to repair the damage of the last 6 years. We won’t make it!
- If unemployment continues to fall – towards 6%, interest rates will need to rise. Best guess is the end of 2015, but it will be earlier if unemployment falls faster.
- Sterling is likely to fall against $ as our current account deficit is bad.
Our demographics are OK, but our productivity is awful. Interest rates need to stay low as long as possible and we need to find other sources of growth. Governments are out of the loop, they can’t do much because they have no money. UK needs business investment.