Toscafund Discussion Paper

Transcription

1 31 May 2012 Britain s Got Growth Author: Dr Savvas Savouri, Chief Economist Research Assistants: Conor Kennedy, Sam McKay, Dimitri Tsimplis and William Tutte Toscafund Asset Management LLP 90 Long Acre t: +44 (0) e: ir@toscafund.com London WC2E 9RA f: +44 (0) w:

2 31 May 2012 Britain s Got Growth Contents Part 1: Strength in Numbers Executive Summary Introduction Household Growth - Britain s internal driver Britain s external trade position learning skills Britain's past and future special economic relationships Britain s regional story Housing market Britain s labour market - so much different from its past Current affairs One last word on politics Part 2: Beating Germany on Penalties Executive Summary Introduction Plans for post-war Germany: A Great Escape Britain s post-war experience: Defeated by victory German reunification: Renewed ambitions, same self-interest Britain s growth future: Beating Germany on penalties What then beyond 2030? Conclusion Appendices

3 Executive Summary Great Britain s medium term economic outlook is more positive than the austerity obscured consensus suggests, and wealth-favourable population growth will be the key to this surprise. The growth rate in Britain's prime-age permanent and transient population is being significantly understated because the desire to be in Britain for work, study, leisure or health is being underestimated. Education will capture the spirit of New Growth Britain's geographically spread "export engine, with the number of full-time fee paying students from outside Britain rising to half a million within ten years, the enthusiasm for them from academics more than a match for obdurate politicians. More generally the burgeoning enriched classes of the emerging world will be heading to Britain, happy to relocate for work, medical treatment or just to spend leisure time. Britain is also poised to exploit the evacuation of people and capital from what threatens to prove protracted austerity across swathes of Europe. Of those EU nationals already in Britain the desire to stay will increase in tandem with the deterioration in economic conditions across much of Europe. In short, for a variety of reasons, net migration to Britain will remain high despite Westminster's commitment to contain numbers; one political promise whose breaking we should all be grateful of. Arrivals will deliver sizeable economic multipliers; lifting saving levels, as they lift consumption, as they lift reproduction, as they lift productivity, as they rebalance growth and provide Exchequer revenues. For developing nations London will prove the off-shore global centre for the provision of financial and business service expertise for their rapidly expanding internal economies. Whilst London and the South East will enjoy disproportional strength, these areas will in no way be an oasis, with employment and growth multipliers spreading out widely across Britain. Of all the measures that will capture Britain s strength in numbers, few are more powerful than the fact by 200 it will have overtaken Germany as Europe's largest economy by GDP and population. Summary statistics Population growth Household growth 9m 1% p.a. 7.1m 27m 1 ¼% p.a. 34m Nominal GDP growth Real GDP growth ¾% p.a. 3 ½% p.a. Source: ONS, Toscafund 3

4 1 Introduction This paper aims to look beyond the short-term challenges Britain clearly faces, considering instead what awaits it in the next two decades and indeed beyond. If one line captures Britain s future it is that it is open for business. Britain will be the destination of labour and capital evacuating economically misfiring parts of Europe. We are as confident Britain will attract still other arrivals, not distressed by events from where they originate, but the reverse. Britain is sure to benefit, possibly like no other nation, from increasing prosperity across large parts of the world. Against the backdrop of a growing population we are confident Britain will enter a NICE and SOBER period from The SOBER of Saving, Orderly Budgets and Equitable Rebalancing coined by Mervyn King in a recent austere speech. And the NICE reflecting his inventive acronym forged in the halcyon days before the maelstrom of 2008, of Non-Inflationary Consistent Expansion. We see no conflict in these conditions coexisting. Other nations will join Britain in benefiting from the enrichment of emerging nations. However, the scale of Britain s benefits will be considerably, if not proportionately greater. Britain after all possesses like no other sovereign nation a capacity, attractiveness and openness. There are sure to be those concerned by Britain s fiscal position. We are not amongst them. It is precisely because we are convinced British economic growth will come in ahead of current consensus that we believe the same consensus is overstating its fiscal drag. We are confident better growth will imply better public finances which in turn will mean reduced drag and so stronger growth; producing a virtuous cycle. Whilst believing the British economy will enjoy consensus beating growth, we recognise benefits will not be spread evenly. But spread it still will be. Although the South East generally and London in particular will record the strongest growth, large swathes of Britain will experience their own uplifts. The reality will be that as much as provisional Britain will lag the growth being seen across the capital it will still prove a healthier economic environment that much of Continental Europe is set for. Chart 1: Nominal GDP, Britain Chart 2: GDP Deflator, Britain % Chnage yr on yr Tosca Estimates OBR Estimates % Tosca Estimates OBR Estimates Source: ONS, OBR, Toscafund Even those who agree that Britain will benefit from its exceptional connections to a strongly expanding emerging world and rather loose ones to a malfunctioning Europe, may argue these advantages will most likely have been dissipated by 2030, if not sooner. Our response to this rejoinder is on two fronts: 1. We believe Britain will be stimulated by emerging economies as they maintain their strong growth. 2. Britain's internal economy will expand with each passing decade as its population grows. If it is not tough enough anticipating how an economy might perform two to five years out, trying to work beyond is often treacherous. Conscious of the perils, we press on and offer projections for British real and nominal GDP out to 202. Indeed, we go two steps further. First, we present forecasts for the regional equivalent of GDP, Gross Value Added (GVA). Second, we offer forecasts for GDP broken into five sectors. Let us make clear our forecasts do not dismiss the chance of cyclical oscillations out to 202. They instead emphasise the secular path we feel is most likely to be followed. Our thesis is that Britain's new growth phase will be one centred on population growth, quite literally enjoying strength in numbers. 4

5 If Britain is indeed poised to enjoy robust growth in the years ahead, who or what should we thank for having made this possible? The answer is some good judgement and some good luck over many, many years. As much as we can identify decisions made in Britain, we can point to errors made elsewhere. In what follows we hope to encourage a more positive outlook for Britain. We will do it in the context where Continental Europe faces an extremely challenging future and where the United States has to deal with its very own adverse shocks. At the core of our argument is the idea that Britain s internal economy will create and build on self-serving momentum and that it will provide a major overseas hub for the world s emerging economies. We point to Britain s considerable positional qualities and the fact it possesses a wide number of positional goods. After all, from the manufacture of a Rolls Royce Phantom and a seat at a West End show to a place at Warwick University or treatment on or around Harley Street, none can be performed outside Britain. In short, whilst in no way denying the ills still facing Britain we place them in this context; why and how they will be remedied in the rebalancing of world growth to nations whose close connections with it promise to lift Britain's economy in tandem with the strong upturns of their own. To conclude, it might appear trite to claim as much with Britain in the throes of austerity and recession, but we will say it anyway. Britain promises like no other developed nation to capture the zeitgeist of the years of growth set to enrich the developing world. It will sound equally strange to say the following but we will say it all the same; Britain s economy will recover sooner and faster than is being suggested by the consensus not despite worsening conditions across much of Europe but helped by them. As economic conditions deteriorate across the euro-zone and widely across the EU, Britain will find itself the destination of considerable human and financial capital evacuating distressed nations; and there is little to nothing the British Government can do to stem the flood. 1.1 Exorcising the ghosts of the past Being the first to begin the industrial marathon in the 19th century, also meant Britain was first to hit the "wall" in the 20th. As British workers demanded a worthy share in the rewards thrown off by their labour, this contributed to their lost competitiveness. Britain suffered for a long period from a tendency to record stubborn inflation. Indeed, inflation was often shocked higher from already heady levels by regular reversals in sterling. As inflation moved higher it tended to build on itself, and as it did this sometimes forced drastic moves in short term interest rates (see chart 3). Sometimes, but not always since control of the base rate was firmly in the hands of Chancellors whose eye was as much on the political as the economy cycle. The result was unsurprisingly a British economy that suffered comparatively high long-term interest rates, relatively weak internal growth and violent economic cycles. To repeat, matters were not helped by poor economic management from No.11 Downing Street. Britain s economic fortunes were not helped by a labour force which it would not be unfair to claim was unfit for purpose (see chart 4). This was quite frankly the story before and into the 1970 s, the 1980 s and even extending into the 1990 s. However, towards the end of that decade Britain experienced a series of events which we certainly would claim transformed it economically and monetarily, and did so for the better. In the section on its labour market we cover how Britain s labour market today is more dynamic than it has been probably in its history. Below we turn to how the British economy today is in the admirable position of neither facing a future of imbedded inflation or the arguably even more stubborn virus of deflation. Chart 3: Base Rate, Britain 2 Chart 4: Labour disputes, Britain 3 % Working days lost, thousands Source: ONS, Bank of England, Toscafund Base Rate Yearly Inflation