Things aren’t looking good for the UK. Tullett Prebon has sent out a new note today (The Sound of Roosting Chickens), which sums the whole thing up. They expect growth to come in at around 0.9% this year and around 1.4% next year.
Most people have long thought this kind of thing far too pessimistic (people find it strangely hard to distinguish between pessimism and realism) but it is now pretty clear that the UK isn’t going to see much more than 1% this year, if that – which of course is why the Bank of England has started a new round of quantitative easing (QE2): they know that with growth this low the government’s deficit-cutting plans are in trouble and they – like the rest of us – are pretty desperate for that not to happen.
So why is growth so horribly awful? Because there is nothing left to drive growth. Let’s get the facts straight, says Tullett Prebon. Between 2003 and 2010, Britain borrowed an average of 11.2% of GDP every year. This delivered apparent growth but “at an appalling cost”, with each additional £1 added to national output costing us £2.18.
Meanwhile, between 1999/2000 and 2009/2010, government spending rose by 53% in real terms. So the only two drivers of economic growth were private borrowing and public spending. These are now both “dead in the water”.
The result? The real estate, construction and financial services sectors can’t grow – they were entirely dependent on borrowing. The healthcare, education and public administration sectors can’t grow – they were entirely dependent on state spending. And there isn’t much else. The total proportion of the UK economy that is now effectively ex-growth is around 70%.
Worse, there isn’t much we can do about it from a macro economic point of view. We cannot cut back on cuts for the simple reason that we cannot even begin to afford the rise in interest rates that might cause. We can’t cut base rates further. And as for QE, we don’t know if it will do any good, but we do know that it automatically invites stagflation into our economy (by pushing the pound down).
Anyone with some spare time might want to look on the Bank’s website to see their explanation of quantitative easing. It isn’t they say, the same as money printing, because instead of being printing on paper, their new money is being “created electronically.”
Anyone working as a financial commentator reads a lot of nonsense in the course of the average day but this is pretty good even in this context. Everyone knows that the more units of something you have the less each unit is worth. It doesn’t matter whether you create them on real paper or on a screen. The effect is the same. So the pound falls anyway.
So what do we do to get ourselves out of this hole? The first part of the answer is to accept that there isn’t anything to be done about the 70%. The deficit needs to be cut, then the debt needs to be cut. If it isn’t, then interest rates will rise and it really is game over. Any rise in rates would be “lethal” to our economy. And the industries dependent on debt just have a nasty decade ahead of them. Nothing to be done about that.
The second part is to focus on the 30% – to shift from trying to fix things from a macro level to looking at the supply side. We need, says Tullett Prebon’s Tim Morgan, to get on with offering less rhetoric and more actual help to small and medium-sized businesses in area with growth potential.
But how? This week, I interviewed serial entrepreneur Luke Johnson – his ideas on the topic will be in subscribe to MoneyWeek magazine.