The Clash of the Titans III was the Economic Research Council’s third bold annual attempt to predict the future of the UK economy!         This event was sponsored by PwC.

This is icebreaker’s synopsis from the input of the Economic Titans:

  • Kevin Daly of Cambridge University,
  • Ros Altman from LSE,
  • and Stephen King from Oxford University.

Challenging the Titans was Andrew Sentance of PWC.

The UK economy in perspective

The UK Economy is still 1.8% GDP below 2008. Putting GDP Growth in perspective historically

  • 1960s – 40%
  • 1970s – 13%
  • 1980s – 25%
  • 1990s – 25%
  • 2000s – 30%
  • 2010s – 4% !

Referring to the economists Adam Smith’s model, the UK economy is going through a “melancholy or dull period”.    In these periods one persons gain is another’s loss.    This creates resentment and undermines trust in the markets. This pattern reduces the effectiveness in the way the markets work.

The UK growth in 2013 is currently leading most g7 nations.    The last time the UK did that was in 2007 and Japan did so in 1990s and has suffered ever since!    The challenge is the quality of growth and China for the next 18 months is focussing on sustained growth rather than growth for growth sake.

Why has UK growth jumped from 1% on q1 to 4% in Q3 2013?

  • funding for lending
  • sterling weakness q1 -15%
  • Euro break up less likely leading to more certainty
    • Reduction in press reporting uncertainty, and George Carneys suggestion of interest rate being based upon unemployment created certainty, supporting long term spending with business lending up 4%

Less plausible reasons:

  • Fiscal policy changed there has been no change
  • Help to buy – only started in Oct November
  • Forwards guidance

What is funding this growth?

The worry is the balance of payments – i.e. what is funding this growth?  The deficit in 2008 was 0.9% and now in 2013 has risen to 4% of GDP. This suggests that the economy is broken so more growth is likely to increase the balance of payments deficit and reduction in liquidity.

UK competitiveness and the EU

Lack of productivity growth and a reduction in the quality of jobs in the UK is reducing the competitiveness of the UK.   The European x booked creditor position in Europe shows promises broken without much knowledge of the ability to repay of the level of inter EU debts.

UK monetary and political policy

Government policy has kicked off construction, and cuts in fuel duty and energy costs.    There has been no Government austerity and this will not take place until 2015.   Interest rates are too low and this is creating unrealistic borrowing and it is likely debts will be unsustainable as interest rates rise.

With bank interest rates have been at .5% when actual cost of lending has been 3-4%, monetary policy seems very short term. This is fuelling inflated house prices and low cost mortgages, and the same mistakes of the past.  Savings are falling.  Inflation even with this growth will be uncertain.

Growth in 2014?

Drivers of growth in 2014 are likely to be rises in house spending, business investment, reduction in unemployment.

Other factors to consider:

  • Where is the cash globally?   What does global cash flow look like?   When will the money run out?
  • Distribution of wealth seems to becoming more concentrated in the hands of the few
  • Markets for products and services have changed and so has the way they are being bought
  • Structural costs – e.g. systemic environmental taxes seem to being relaxed
  • Climate change and energy and efficiency of using resources

In summary

Growth is being funded by more UK plc debt so the economy’s ability to growth its way out of its debt mountain indicates to be that the economy is broken and therefore not sustainable.

My preciction is that more growth therefore is likely to lead to a greater debt for UK plc reducing the UK plc’s solvency.