Why the UK will bounce back strongly: an economist’s view
Tom Bill talks to Savvas Savouri, the chief economist at asset manager Toscafund about why he thinks pessimism surrounding the economic future of the UK has been overstated
6 minutes to read
There is a lot of speculation about the shape of the UK economic recovery. What is your assessment?
You have a whole alphabet soup of recovery shapes that economists have put forward. I completely dismiss ‘L’ and ‘W’ but I like the idea of a Nike-shaped swoosh, it’s essentially a V drawn by someone with bad handwriting.
We’re certainly in for some historic lows as well as some historic highs for GDP movements. What we will see is a one-off, never-to-be-replaced £350 billion loss to the economy in Q2 of this year. It’s a dead-weight loss that you need to write off like a bad loan. It doesn’t matter when you will have recovered that figure by, what matters is when the UK economy gets back onto growth tramlines. I expect a bounce back in Q3 before the largest increase on record in Q4.
Is there anything else to think about as the recovery takes shape?
You also have to remember that GDP itself is a pretty abstract concept. It’s a measure designed for a mercantilist economy that makes widgets, but there’s a lot happening at the moment that it won’t show. Many people are working at home and you can’t tell me that GDP is capturing that sort of output in the professional sector. If the Coronavirus had struck in the 1960s, GDP would have collapsed to zero. You couldn’t repair a ship or mine coal but it’s a far more complex picture now.
What’s happening is disorientating. The tendency is to look to the past for clues as to how we emerge from this, is that useful?
There appears to be an obsession with 2008 as a comparison and this is nothing like that at all. If anything, there are closer parallels with 9/11 although it’s not a perfect facsimile: a polarised global economy, a fear for loved ones, an event that paralyses the economy, a huge monetary response and airlines on the brink of insolvency. By comparison, 2008 was a good old fashioned financial crisis.
Thanks to Basel rules, the banks are in a much better position now. What’s happened is that the economy has been temporarily nationalised, it’s a hiatus.
After 9/11 you had four or five years of uncertainty including 7/7 in the UK. But if you look at the UK economic growth data between 2001 and 2005, it didn’t miss a beat.
Drawing comparisons to 2008 is also a questionable thing to do if you didn’t live through it.
You put a value on experience?
Let’s put it this way, there are a lot of assumptions about 2008 from people who didn’t experience it first-hand. For example, it might come as a surprise to some but UK worker numbers after the global financial crisis only ever fell 500,000 below their peak. After that jobs were created at such a rate that we entered this challenging period with a record 32.9 million in work.
What’s happened now is that everyone has become an expert. ‘Ultracrepidarians’ is the term, which means people talking beyond their own knowledge. We get narratives today from people who don’t research things carefully enough.
I spend 80% of my time as an economist unstitching bad analysis and 20% being constructive. Age holds sway in law and medicine but less so in my field. There is a tendency today to transmit too much and receive too little.
What gives you confidence that the UK will rebound so quickly?
You will have a public sector that comes out of this fully employed, including almost certainly a recruitment drive. It will be expanded to ensure it remains in a state of permanent readiness. On top of that, nobody is going to stand in the way of pay increases in the NHS and with collective bargaining in the public sector, the government will have to take this approach across the board. Residential markets will benefit from inflation-busting pay awards. I’d be unsurprised if public sector headcount increased by 500,000 and as for pay awards, a figure not far off 6% wouldn’t shock me.
Public sector expansion will take place in a way nobody thought possible the day after the election. You also have to remember that an ICU bed has an entire supply line and supply chain servicing it. Medicine is incredibly land and labour intensive.
The other thing to remember is that many people who lost their jobs in the private sector have service skills that are quite transferrable to the public sector, limiting any dramatic impact on their pay. The economy will see some unemployment but as more people are employed in the public sector there are wider benefits including less reliance on the gig economy.
And what about the private sector?
Medically, we will never be this under-prepared again and cupboards will never be as bare again. “Just-in-time” inventory management will give way to a strategy of “just in case”, which is a change that will take up labour and space. Another development will be a heightened security around essential supplies, leading to greater on-shore production. Expect to see demand for warehouse space pick up.
Industrially, expect to see a car scrappage scheme and business rate suspensions – the government will want to give people money to spend. Intellectually, the UK will host ever more students from overseas paying to broaden their mind. Financially, it will be the permanent home to institutions from the same nations as the students making it their temporary home.
It’s also rare in economics that you allow for the flicking back on of a switch but just remember we are one vaccine away from a game-changer.
How does the UK fit into the world order as we emerge from this?
There are two perverse forces at play. First, what’s good for China is good for the UK.
I give you a cast iron guarantee that the one country that will come out the other side of this flying is China. Beijing knows it can’t afford to have an economy on half throttle. It can cut rates and has money to spend in a command and control economy. And who benefits given the educational, cultural, business and financial ties? The UK. I believe Beijing will deliver the greatest concentrated fiscal and monetary stimulus it has ever injected into its internal economy.
The second part of that equation is that what’s bad for Europe is good for the UK.
After the debt crisis in Europe of 2010 there was a net flow of labour to the UK. This time there’s also a strong chance that you get ex-pats returning for economic and medical reasons and overall you could see 200,000 to 300,000 migrants arriving in the UK, boosting demand for residential property.
Some countries in Europe went into this in poor shape economically and if the Brits start a trend for “staycationing”, that will only exacerbate the trend.