Post budget Economic Seminar

'Buy beans and guns as there may be more pain to come...'

 

Over 100 local businessmen gathered for a seminar hosted by Maidenhead Chartered Accountants Donald Reid & Co in order to hear the thoughts of John Redwood, MP for Wokingham, and Tom Vosa, Head of Market Economics for National Australia Bank, on the state of the economy and the outlook for the future. After appraising the UK economy Tom argued that we are in year one of a 5 year process and joked that the audience should buy guns and beans as there was the potential for more pain to come.

 

John Redwood standing in for Theresa May at short notice gave a short introduction as to what Theresa would have said 'We took over an unholy mess and the coalition has to tackle this mess by eliminating the structural deficit over the lifetime of the Parliament. The burden will be split 70% spending cuts and 30% through tax increases and will be achieved through a private sector led recovery. After one year all is on track...'

 

However, John Redwoods' view is less optimistic despite the tough talk of the coalition over the next 5 years the UK is in fact going to double the national debt. After one year there has been slippage of £34bn behind targets and spending is up 5.1% in cash terms. This, according to John Redwood is not exactly tough.

 

He went on to argue that in order to eliminate the structural deficit the strategy is reliant on growth with target growth rates of 2.9%, however, the trend growth rate is more like 1.5%, which is very worrying. He couldn't stress how important it was to hit the growth figures.

 

To make matters worse there is an ongoing Euro crisis. This is resulting in some very big issues over the control of national debt, the issuing of currency and whether bond holders will take any losses. The Euro will either require greater cooperation between countries which may lead to a nation state through the back door or it will come apart. As the UK did not enter the single currency John Redwood maintains that the UK should not be made to pay for it.

 

Tom Vosa appraised the global macro economic outlook and placed Europe at the bottom of the global regions for GDP growth and the UK was lagging in this region. In Q4 the economy declined and construction fell off a cliff.

 

However, despite this there were some positives, manufacturing has had 6 quarters of growth, services were not too bad and the private sector is more lively growing at 3.2%.

 

It is inflation that is reducing the UK's disposable income. This has been affected by the VAT increase and world commodity prices. However, the monetary expansion does have the advantage of reducing the UK debt, which is particularly important as public sector debt is going to double from 527bn in 2007 to over 1,000bn in 2013. Despite the government talking up the cuts spending is actually going to increase each year until 2013.

 

Banks have been accused of not lending but they can't as they have a funding gap. This gap was £150bn in 1997 and increased to £770bn in 2008. Therefore, the only option available is to repay the debt which results in very little spare lending capacity. Banks have as a result increased their margin, which has rationed credit as a result of price.

 

Tom summarised by saying that this was not a standard recession as there was not a demand shock, which would have resulted in higher unemployment and an asset devaluation of up to 24%. Instead there was supply shock as banks stopped lending. Measures introduced by the government have protected asset prices which have only fallen by 8%. As such there is the potential for more pain to come as we haven't had the full asset price adjustment.

 

Tom expects the UK economy to remain flat with growth forecasts of 2 - 2.25%. The recovery will take at least 5 years and we are in year 1. On top of this there may be more pain in house prices. Inflation needs to be brought under control with interest rate increases expected in Q3. The biggest uncertainty is whether Greece will default as this would result in a significant economic shock that would also impact the UK.