Now for the bad news

I don’t generally publish other people’s material on this blog.  But I just received an economic commentary from my good friend Ewen Stewart, who is Strategist at a major UK Investment Bank.  I have the whole paper, but it’s too long to publish here — and the summary is quite scary enough.  Without growth, which is looking increasingly unlikely, George Osborne’s deficit reduction strategy cannot work.  We need to shrink the state radically, and deregulate, to make room for private sector growth.

Testing the limits of patience  
If Gordon Brown was Prudence, George Osborne has claimed to be his Prudent twin. Sadly neither has lived up to the billing. As Sovereign fires burn elsewhere, markets have looked at often articulated British Prudence with an admiring eye. The reality is, in our view, somewhat different.

  • ·                     This note argues that the British public finances are in danger of spiralling out of control and that urgent action is required to normalise a structurally-unsustainable degree of spending. This matters, as it impacts future spending plans, taxation, the consumer, confidence and potentially and critically, in the long term, the yield curve. The political and social implications of our conclusions will doubtless be unpalatable and the political elite will continue to pretend all is going to plan. But the current trends are unsustainable, in our view, unless real, sustainable growth is magically achieved.
  • ·                     A return to meaningful growth is an outcome we see as most unlikely in the short and medium term for reasons that we continue to argue are largely structural. These reasons include a crowding out of the private sector by the public sector, which now accounts for around 48% of GDP (up from 36% 10 years ago), a state which is greater than 50% of GDP in 7 out of 12 regions and more than 60% in 3 regions, the unwind of a financial and credit bubble which has some way to run, an over-reliance on a financial services industry that faces unprecedented political and regulatory challenges and a poor aggregate productivity performance for the economy largely as a result of lagging public sector efficiency and an ever-increasing regulatory burden.
  • ·                     While the UK has a number of strategic advantages including, for example, a vibrant cultural economy and professional and educational services leadership, these segments are simply not large enough to offset the structural challenges outlined, in our opinion. Relying on a V-shaped recovery to see down the deficit is wishful thinking. In our view it is better to lance the boil now, with a renewed effort to normalise the deficit, though a meaningful control of spending, offset with tax cuts to stimulate private sector growth, rather than allow events to force the pace.
  • ·                     With growth remaining elusive and the risks of a substantial negative shock to finances increasing, the UK ‘AAA’ status look generous to say the least. Under our core scenario the yield curve broadly holds, just, but even then this is a long hard slog. If however the economy takes a further lurch downwards, as confidence ebbs, our judgement is that markets would lose confidence in fiscal policy, as the deficit spiralled, with subsequent consequences for the yield curve. Either way, this is not positive for consumer-facing companies and we reiterate our structural underweight in this segment of the market, preferring global (non European) cyclicals and staple sectors.
This entry was posted in Uncategorized. Bookmark the permalink.

3 Responses to Now for the bad news

  1. Roger, I have been suspecting this for a very long time. The tax system creaks and groans along and is much too complicated and inefficient. It is worse than Mr Brown’s. Meanwhile we have at least 143 regulations which affect every business. Written in gobbledegook, they are strictly enforced and prevent rational risk taking. The people who run the government are, it is quite obvious, not the Rolls Royce people in bowler hats who once ruled the British Empire.

    Why are these very privileged people at the head of government not running the country? I look in Conservative Home and see rubbish about the Leveson Enquiry and so on. Then there are the Olympics (we did Wimbledon without any help from Boris) which cost quite a lot of time. Yesterday, in Wells, Norfolk, I went to a shop where a huge new wind farm is being “popularised”. I was the only person who went in, I think.

    I never thought that Mr Cameron would turn into Tony Blair or that Mr Osborne would turn into Gordon Brown.

  2. Is the whole thing available online anywhere?

  3. It’s a bit like the end of Animal Farm.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s