Latest / Merryn Talks Money / Debt Traps, Interest Rates and Global Shifts: A Candid UK Outlook with Gerard Lyons

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Debt Traps, Interest Rates and Global Shifts: A Candid UK Outlook with Gerard Lyons · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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Speaker 2: Welcome to Merton Talks Money, the podcast in which people
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Speaker 2: who know the markets explain the markets. I'm John Stebbig,
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Speaker 2: senior reporter for Bloomberg and the author of the Money
0:25
Speaker 2: Distilled newsletter. Today I'll be covering for mern in this
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Speaker 2: special episode of the show, recorded live from the Edelman
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Speaker 2: Smithfield Investor Summit at the London Stock Exchange. With me
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Speaker 2: is doctor Gerald Lyons, one of the UK's most prominent economists.
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Speaker 2: He's an expert on the UK economy, emerging markets, and
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Speaker 2: global trends. Gerald is also chief Economists at Netwealth, having
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Speaker 2: taken up the position in twenty sixteen. He's also a
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Speaker 2: senior independent director at the Bank of China. Is a
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Speaker 2: chair of the Risk Committee at BGC, which is part
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Speaker 2: of the Cantor Fitzgerald Group, among many other things. Now, clearly,
1:04
Speaker 2: given Gerald's focus on the UK economy, I wanted to
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Speaker 2: get his views on a certain recent fiscal event and
1:09
Speaker 2: what he thinks the consequences of the budget might be
1:12
Speaker 2: for the year ahead, both of the UK economy and
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Speaker 2: for asset markets. But we weren't just focus on the UK.
1:18
Speaker 2: I'm also keen to get his views on whether we've
1:20
Speaker 2: really seen the back of inflation or whether there might
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Speaker 2: be any nasty surprises on that front or any other
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Speaker 2: fronts in twenty twenty six. So, Gerald, it's great to
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Speaker 2: have you on Merton Talks Money. Thanks for coming, lovely
1:31
Speaker 2: to be.
1:31
Speaker 1: Here, Thank you for asking me.
1:33
Speaker 2: So I was just reading a piece that he wrote
1:35
Speaker 2: in the immediate aftermath of the budget on CARPEX, in
1:39
Speaker 2: which you described it as bad, bad, bad. What do
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Speaker 2: you feel was the worst overall element of the budget?
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Speaker 1: Well, the most disappointing part of about the budget is
1:49
Speaker 1: that while old budgets are impacted by combination of politics, economics,
1:54
Speaker 1: and the public finances, usually it's the budget before the
1:58
Speaker 1: election that's dominated by politics. And ever since I've been
2:03
Speaker 1: following budgets, the first and usually the second budgets after
2:07
Speaker 1: elections are driven by the economics and by the public finances,
2:12
Speaker 1: in the sense of the government of the day wants
2:15
Speaker 1: to set out its economic vision and also usually they
2:18
Speaker 1: want to get the public finances back into shape, often
2:21
Speaker 1: so they can actually spend a bit more money ahead
2:23
Speaker 1: of the next election. But usually the first or second
2:26
Speaker 1: budget after election is where's the economic vision, let's get
2:30
Speaker 1: the finances into shape. We have had neither of those
2:34
Speaker 1: aspects in either last year's budget or this latest budget.
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Speaker 1: In fact, both were driven by politics, shall we say,
2:41
Speaker 1: And so the disappointing thing is there was no economic
2:44
Speaker 1: vision there. The public finances were given some temporary reprieve,
2:48
Speaker 1: but the underlying picture is the reason I called it
2:51
Speaker 1: bad was I thought it was bad for the economy.
2:54
Speaker 1: I thought it was bad for incentives and also despite
2:57
Speaker 1: the near term positive spin, it was bad for the
3:01
Speaker 1: public finances.
3:03
Speaker 2: I mean that's interesting because I mean I think that,
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Speaker 2: I mean, you're right. Usually the first couple of budgets
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Speaker 2: are where we expect to get the hard choices made.
3:10
Speaker 2: And actually the whole point about this budget was the
3:13
Speaker 2: hard choices. We were all ducked in fevery preserving, you know,
3:17
Speaker 2: arguably preserve and ritual Eves and Krestal was careers for now.
3:21
Speaker 2: So whenever you're saying the public finance is still being
3:24
Speaker 2: at risk because obviously the Gelts markets have kind of
3:26
Speaker 2: seen me have calmed down by you know, we started
3:29
Speaker 2: the year with everyone panicking on wordy in the Boord
3:32
Speaker 2: markets generally not just here, but in the years as well,
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Speaker 2: we're going to revolt, and so far that hasn't happened.
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Speaker 1: Yeah, let me answer in two bits. First, let me
3:41
Speaker 1: say why I think the finances in bad shape. Then
3:44
Speaker 1: I'll come onto the market reaction to the budget. The
3:46
Speaker 1: UK is a low growth, low productivity, low wage economy,
3:50
Speaker 1: but alongside that we've become a high public spending, high
3:54
Speaker 1: taxation and high borrowing economy. And this budget has not
4:00
Speaker 1: addressed any of those issues. Public spending continues to rise.
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Speaker 1: A year ago of taxes went up by sixty nine
4:07
Speaker 1: billion pound. In this budget they went up by twenty
4:10
Speaker 1: six billion pounds. Now there was this magical magical of
4:14
Speaker 1: reduction in borrowing four years out. Now we have a
4:18
Speaker 1: fascical fiscal process in the UK. We're all sitting here
4:21
Speaker 1: talking out the budget, and all these numbers refer to
4:24
Speaker 1: fiscal rules that are self imposed that apply in four
4:27
Speaker 1: years time. The margin of error on a one year
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Speaker 1: ahead economic forecast is high, and the margin of error
4:35
Speaker 1: on public finances difference between government spending revenue, given the
4:39
Speaker 1: large numbers involved, that margin of error is equally high.
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Speaker 1: So we have this situation where we have best guesses
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Speaker 1: about four years down the line. Of fiscal rules that
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Speaker 1: set things, but the chances are out unveiled front loaded
4:53
Speaker 1: spending increases, particularly next three years, then backloaded tax increases
4:58
Speaker 1: that hit very hard, particularly stealth taxes, but there was
5:01
Speaker 1: combination of taxes, and in the final year there's this
5:04
Speaker 1: fall in the borrowing requirement. But the reality is that
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Speaker 1: that's unlikely to occur because public spending will likely be
5:11
Speaker 1: rising as we head into the next election. In fact,
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Speaker 1: I think Britain is heading for a debt trap by
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Speaker 1: the end of this decade. A debt trap is when
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Speaker 1: your level of debt is above one hundred percent of
5:21
Speaker 1: GDP and when your rate of economic growth is less
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Speaker 1: than the rate of interest your pain on your debt.
5:27
Speaker 1: You then basically have to run what's called a primary surplus,
5:30
Speaker 1: a surplus where you take out interest payments and you
5:33
Speaker 1: have to run a primary surplus just to stand still.
5:36
Speaker 1: We haven't run that many surpluses. In fact, if you
5:39
Speaker 1: take wider surpluses the big picture stuff, we've only run
5:42
Speaker 1: seven budget surpluses since nineteen sixty nine, So the fiscal
5:46
Speaker 1: numbers are not being addressed. Spending is still rising. Can
5:49
Speaker 1: you believe this center of policy studies who I am
5:52
Speaker 1: associated with a few weeks ago, did analysis from nineteen
5:54
Speaker 1: ninety to twenty nineteen, the year before the pandemic. We've
5:58
Speaker 1: had fifty four term spending plans in the UK and
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Speaker 1: in every single case, fifty four out of fifty four
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Speaker 1: spending has exceeded expectations. Never once have regardless who's in power,
6:11
Speaker 1: never once have we come in below those targets. So
6:14
Speaker 1: those targets aren't particularly hard pressing. They allow a lot
6:18
Speaker 1: of room to spend money. So the reality is spending's
6:21
Speaker 1: going up, taxes unfortunately would go up, and borrowing is
6:24
Speaker 1: still pretty high. Now coming onto the market, you're right,
6:26
Speaker 1: the bomb market's.
6:28
Speaker 2: The obvious creation here is lately get laid to every tame,
6:31
Speaker 2: So what is it? The girls market? It's just daft.
6:33
Speaker 2: It's like, why don't they get this.
6:35
Speaker 1: When it comes down to expectations management. The worst thing
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Speaker 1: about this budget, apart from what was announced, was the
6:40
Speaker 1: shenanigans in the two three weeks beforehand. Now the obr mistake,
6:45
Speaker 1: obviously they've taken responsibility for that. That shouldn't have happened,
6:49
Speaker 1: but also pre budget pourder should be restored. Obviously you
6:53
Speaker 1: cannot stop rumors, but normally you have this period of
6:57
Speaker 1: silence before the budget. We had deliberate kite flying misleading messages.
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Speaker 1: Now that didn't help. I don't think it helped economic
7:06
Speaker 1: or business confidence. The outlook for any economies in the
7:10
Speaker 1: interaction between the fundamentals quality and confidence, and we can
7:13
Speaker 1: never predict confidence. But confidence were such that people basically
7:18
Speaker 1: stopped doing things. Savings ratio has picked up, but people
7:21
Speaker 1: stopped spending. Companies decided to wait and see. So I
7:24
Speaker 1: don't think that helped the economy in the run up
7:27
Speaker 1: to the budget. But coming back to your question about
7:28
Speaker 1: the markets, the markets reacted in a neutral to positive way,
7:33
Speaker 1: I'd say for four reasons, but two key ones. The
7:36
Speaker 1: first key one was that the fiscal black hole and
7:40
Speaker 1: the fiscal gap, however it was being described, but people
7:42
Speaker 1: called it the black hole. That was less bad than feared.
7:47
Speaker 1: So in that respect, the Chancellor managed expectations. Some people
7:51
Speaker 1: have used other words in recent weeks or to describe that,
7:55
Speaker 1: So the fiscal black hole was not as bad as expected.
7:58
Speaker 1: And second, very importantly, the fiscal headroom was rebuilt. Now
8:01
Speaker 1: the headroom is the buffer you allowed yourself to meet
8:04
Speaker 1: your main fiscal rule Jeremy Hunt, her predecessor, Rachel Reeve's predecessor,
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Speaker 1: Hunt had gone the squeezed the buffer down to a
8:13
Speaker 1: very small amount before the election. Foolishly, Reeves kept with
8:17
Speaker 1: that in her first budget, but it was nine point
8:20
Speaker 1: nine billion. We now know it was down to four
8:22
Speaker 1: billion before she took any measures. So she's rebuilt the
8:26
Speaker 1: headroom to twenty one point seven billion pounds, so that
8:30
Speaker 1: lessens the chance of a groundhog day situation next year.
8:33
Speaker 1: So the markets reacted both to the fact that the
8:35
Speaker 1: black hole wasn't as bad as feared and the headroom
8:38
Speaker 1: was rebuilt. On top of that, there were two other factors. One,
8:41
Speaker 1: the announcements of the guilt sales, whilst it was still high,
8:45
Speaker 1: was marginally less than the markets are feared, a shifting
8:48
Speaker 1: from longer dated because defined benefit schemes are now not
8:52
Speaker 1: buying really long dated guilts, so a lot more issuance
8:55
Speaker 1: of short to medium term gilts, which is what the
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Speaker 1: markets was anticipating. So all that andnnouncement was well received.
9:01
Speaker 1: And then also the takeaway from the budget was that
9:04
Speaker 1: it would lead still to an interest rate cut, so
9:07
Speaker 1: the market's reacted to the gap the headroom, the issuance
9:11
Speaker 1: news and also the expectation that the Bank of England
9:14
Speaker 1: would still be able to cut interest rates in December.
9:17
Speaker 2: Well, actually moving theoint to the Bank of England because
9:19
Speaker 2: this does feel a law Rachel reeves because obviously she
9:23
Speaker 2: also leaned against infleetion in quite an artificial way by
9:26
Speaker 2: it can I change an energy bills that sort of thing.
9:29
Speaker 1: You know who tried to do that, Direcletian in the
9:33
Speaker 1: year three hundred and one. I think he said inflation
9:36
Speaker 1: is too high, so let's control the price of vegetables.
9:39
Speaker 1: Did that lot well for Yeah, when you have a
9:41
Speaker 1: modern day chancellor, I think they can artificially keep inflation down. Well,
9:47
Speaker 1: it is artificial, let's be clear.
9:49
Speaker 2: I mean it definitely smacksitrated game the system slightly. But
9:52
Speaker 2: in terms of the Bank of England's rule in all
9:55
Speaker 2: of this actually generally because obviously there's been talk about
9:59
Speaker 2: the Bank of England should have been more key. If
10:01
Speaker 2: will be quoinity obtaining the Bank of England, it has
10:06
Speaker 2: its monagement of interestreet policy been as the ball as
10:10
Speaker 2: it should have been, And I'm just curious to get
10:12
Speaker 2: you're kind to take on that. I mean, do you
10:13
Speaker 2: think anterest streets are ahead and down next year.
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Speaker 1: Okay, interest rates are heading down. I'll come back if
10:19
Speaker 1: I may on the Bank of England because I think
10:21
Speaker 1: they've done a terrible job. But in terms of interest rates, yeah,
10:24
Speaker 1: I think they were trend down. Look, a rate cut
10:26
Speaker 1: is not guaranteed in December. That the vote at the
10:28
Speaker 1: last meeting was fire to for not to change, and
10:32
Speaker 1: when modern saw the individual paragraphs on the different members
10:35
Speaker 1: voting decisions, there are some entrenched views there. Inflation is sticky,
10:40
Speaker 1: so those people against cutting rates will probably find reason
10:44
Speaker 1: not to cut. But I think there will be a
10:45
Speaker 1: cut in December. Rates I think will trend down next year. Now.
10:49
Speaker 1: One of the big factors that the markets are not
10:51
Speaker 1: taken on board, I think is the involution effect in China.
10:55
Speaker 1: Involution is the key buzzword in China. I've just come
10:57
Speaker 1: back from two weeks in China. China is in such
11:00
Speaker 1: a competitive position. Its exports sector is phenomenal, Its quality
11:06
Speaker 1: car production is incredible, and at the same time as
11:10
Speaker 1: having real value for money production. The Chinese currency is
11:14
Speaker 1: moving with the dollar. It's definitely not paid, but it's
11:17
Speaker 1: moving with the dollar. So the dollar is depreciating. The
11:20
Speaker 1: dollar has been hit by passive diversification. International investors are
11:24
Speaker 1: not actively selling US assets, They're putting less of their
11:27
Speaker 1: net new money into the States. So the dollar is weakening.
11:30
Speaker 1: The Chinese currency linked to the dollar indirectly is weakening.
11:34
Speaker 1: So Chinese goods are incredibly competitive, and I think there
11:38
Speaker 1: will be a swathe of Chinese exports coming to Western Europe.
11:41
Speaker 1: It will really compromise to be polite the European auto industry.
11:47
Speaker 1: But in the UK we will see a real positive
11:50
Speaker 1: impact from this in disinflationary effect, this weaver deflection coming disfation, deflation.
11:56
Speaker 1: You might say, well, the auto industry definitely, And so
12:00
Speaker 1: I think that factor hasn't been factored in two expectations
12:04
Speaker 1: and just so so sorry.
12:05
Speaker 2: Just to pick up one. Think, so evolution this is
12:09
Speaker 2: where maybe this is where companies are all competitive that
12:12
Speaker 2: are basically not making any money at all.
12:14
Speaker 1: Well, they're so competitive, it's so cutthroat, and it's been
12:18
Speaker 1: an issue since June of last year in China June
12:21
Speaker 1: twenty four and so we've had a year of this
12:24
Speaker 1: in China. So you have close to deflation in China.
12:26
Speaker 1: China is still an economy doing well, but it's at
12:29
Speaker 1: cutting edge on AI manufacturing. UK still has quality, high
12:34
Speaker 1: end manufacturing, but we're suffering from energy policy, et cetera.
12:37
Speaker 1: But bottom line is for the Bank of England, I
12:39
Speaker 1: think interest rates next year will go down to three
12:42
Speaker 1: and a half percent by the spring, and I would
12:44
Speaker 1: say the base will be three percent by the end
12:46
Speaker 1: of next year.
12:47
Speaker 2: Oh okay.
12:48
Speaker 1: I would like to see interest rates eventually settle nearer
12:51
Speaker 1: three and a half percent, but I think interest rates
12:53
Speaker 1: will undershoot what I think would be their norm next year. Now,
12:56
Speaker 1: the Bank, like the FED, is very cautious in terms
12:59
Speaker 1: of cut rates. That gradualism is understandable when you look
13:03
Speaker 1: at sticky inflation and how that has been in the
13:07
Speaker 1: service sector. But I think the trend for rates will
13:10
Speaker 1: be down in the UK. But you asked a wider
13:12
Speaker 1: question about the bank. A couple of weeks ago there
13:15
Speaker 1: was a letter from the Governor to the Chancellor. I
13:18
Speaker 1: was surprised it didn't receive a bigger media pickup because
13:23
Speaker 1: in it the Governor said que was an unbridled success,
13:27
Speaker 1: which is complete nonsense. He then said quantitative tightening is
13:32
Speaker 1: a technical exercise and did not justify the setting of
13:36
Speaker 1: guilts now as opposed to letting the guilts mature. So
13:40
Speaker 1: wrong on that as well, so too wrong so far.
13:42
Speaker 1: And also defending the payment of bank rate on full
13:46
Speaker 1: commercial bank reserves at the Bank of England, which gave
13:49
Speaker 1: the Chancellor some ammunition to not change this policy, and
13:53
Speaker 1: again wrong on that because the payment of full bank
13:57
Speaker 1: rate is not necessary for monetary policy cost the taxpayer money.
14:01
Speaker 1: The European Central Bank, for instance, has a tiered system
14:04
Speaker 1: that allows it to actually not pay full back rate
14:08
Speaker 1: and have allow monetary policy to work work properly. QUE
14:13
Speaker 1: quite frankly has gone through. It's a bit like interest rates.
14:16
Speaker 1: You have to look at q in the context of
14:18
Speaker 1: the economic environment, and we've had three stages of QE,
14:22
Speaker 1: the good, the unnecessary, and the bad. The good after
14:25
Speaker 1: the global financial crisis when it was justified, then the
14:29
Speaker 1: complete unnecessary QE and cheap money for ten to twelve years,
14:34
Speaker 1: when it led to asset price inflation led markets to
14:38
Speaker 1: not price properly for risk, led to a misallocation of capital,
14:42
Speaker 1: led to zombie firms remaining business, led to growth firms
14:45
Speaker 1: being denied access to that capital, and it fed the
14:49
Speaker 1: inflation we saw to describe any aspect of that as
14:52
Speaker 1: good is complete nonsense. And then we had the bad
14:55
Speaker 1: QI policy after the pandemic, when it was what did
14:59
Speaker 1: we do the last time there was a crisis? Oh,
15:01
Speaker 1: we had QE without recognizing that the QE after the
15:04
Speaker 1: global pandemic was wrong and compared to the que out
15:08
Speaker 1: of global financial crisis. So I think question marks have
15:12
Speaker 1: to be continued to be raised about monetary policy. But
15:16
Speaker 1: we only have a judge monetary policy in terms of
15:20
Speaker 1: base rate, it seems. Yeah, but the markets very much
15:22
Speaker 1: will be focused on that base rate aspect and the
15:26
Speaker 1: wider quantitative tightening impact and the impact that has on
15:30
Speaker 1: the Yell curve as well.
15:31
Speaker 2: I mean, I did notice that lay, and I did
15:34
Speaker 2: think it was it was kind of strong from you
15:38
Speaker 2: say that, Oh yeah, over over the course of QE
15:41
Speaker 2: and q T, it's all going to basically net out
15:44
Speaker 2: and be profitable, and you're kind of yeah, but we've
15:48
Speaker 2: we've already had the bit where the government took the
15:50
Speaker 2: money out from q E and now the tax piers
15:53
Speaker 2: haven't you paid that back? So haven't you kind of
15:55
Speaker 2: net in it like that? It doesn't really work for
15:58
Speaker 2: tax piers today because we weren't actually really given the option.
16:01
Speaker 2: They're putting the money in a seven's account for the future,
16:04
Speaker 2: you know, ten years ago whenever it was that George
16:06
Speaker 2: Osborne kind of like changed the accountant of Quey. So yeah,
16:09
Speaker 2: I don't think that was an interesting we look at
16:13
Speaker 2: it absolutely.
16:15
Speaker 1: In one respect, it leads into a wider debate about
16:19
Speaker 1: the relationship between the central bank and government because this
16:22
Speaker 1: has always been a gray area in terms of que
16:25
Speaker 1: and the fact that we haven't really sort of examined
16:28
Speaker 1: all the pros and cons of it. But it's very
16:31
Speaker 1: relevant in the States at the moment, where there's a
16:33
Speaker 1: debate being held in public about the roles and responsibility
16:39
Speaker 1: of the FED. How did the likely change of the
16:42
Speaker 1: head of the FED next year?
17:00
Speaker 2: Where's your view in the central bank independence, because obviously
17:04
Speaker 2: it's always promoted as being the thing that created this
17:08
Speaker 2: stability of the last kind of help of the FoST
17:10
Speaker 2: ten years of the millennium basically, and I mean has
17:14
Speaker 2: always struck me as just this convenient timing rather than
17:16
Speaker 2: anything else.
17:17
Speaker 1: Well, in modern day terms, one of the challenges is
17:21
Speaker 1: that central banks are not held to as much account
17:24
Speaker 1: as they should be. Certainly here in the UK, there
17:27
Speaker 1: was the Law to for scythe House of Lords Economic
17:30
Speaker 1: Affairs Committee report a couple of years ago, which was
17:33
Speaker 1: quite devastating on the Bank of England. That was an exception.
17:36
Speaker 1: Then we had the Banank Report last year which was
17:39
Speaker 1: also pretty devastating. Now, given what was raised in the
17:43
Speaker 1: BANANKI reports, I would have hoped that the Central Bank
17:46
Speaker 1: would be more under the spotlight than it is. But
17:49
Speaker 1: we have this situation in the UK where any criticism
17:52
Speaker 1: of the bank is regarded as an attack on its
17:54
Speaker 1: independence or integrity, when what it really is is a
17:58
Speaker 1: challenge to its competence and its credibility.
18:01
Speaker 2: Yeah, says the mind in accountability is not the same
18:03
Speaker 2: thing as independence.
18:06
Speaker 1: A year before the Bank of England was made independent
18:08
Speaker 1: in ninety seven, there was a report by very famous
18:12
Speaker 1: economists Barrow in the Bank of England Quarterly Bulletin which
18:15
Speaker 1: examined center bank independence and it concluded that central bank
18:19
Speaker 1: independence did not guarantee low inflation. It said, actually it's
18:24
Speaker 1: normally a third factor, something outside of the bank's control.
18:28
Speaker 1: And you could say in the first twenty years of
18:30
Speaker 1: central bank independence, as was the joke in the city,
18:33
Speaker 1: has to be said. It was an external factor. I
18:36
Speaker 1: say the joke in the city because for many years
18:38
Speaker 1: the city said the CPI Consumer Price Index should be
18:41
Speaker 1: renamed the China Price Index because it was international factors. Now,
18:46
Speaker 1: coming back to independence, once you have an independent institution,
18:51
Speaker 1: to take away the independence, as we're seen in terms
18:54
Speaker 1: of how the markets are acting to the debate about
18:56
Speaker 1: the FED sends too many negatives, norms, etc. So what
19:01
Speaker 1: you really want to do is retain the independence, but
19:06
Speaker 1: to have more accountability and better examination of the issues.
19:11
Speaker 1: Central bank independence was not everything that was made out
19:16
Speaker 1: to be, but to reverse it is dangerous and damaging.
19:20
Speaker 1: But what you can actually do, certainly here in the
19:23
Speaker 1: UK and the wake of the budget, you can use
19:26
Speaker 1: it as an example of how we should be re
19:28
Speaker 1: examining how these institutions can do their job better. And indeed,
19:32
Speaker 1: if I may like here in the UK, I quite
19:35
Speaker 1: like the OBR. There was an external review of the
19:38
Speaker 1: OPR earlier this year. It was the third five year
19:42
Speaker 1: review of the OBR. Again didn't receive much press coverage.
19:45
Speaker 1: Bloomberg yourselves covered it in February. It was Dutch experts
19:50
Speaker 1: and it said you need to move away from an
19:52
Speaker 1: obsessive focus on fiscal headroom to focus on medium term
19:57
Speaker 1: fiscal numbers. I think that's important because if you on
20:00
Speaker 1: the headroom for all the problems in entails, you immediately
20:05
Speaker 1: focus on taxes because that's the lever you can pull.
20:08
Speaker 1: When you start to move to medium term for cast,
20:12
Speaker 1: politicians ignore it because they're not thinking beyond the next
20:15
Speaker 1: five years, which is disappointing because the OBR says that
20:19
Speaker 1: the UK's medium term fiscal numbers suggest debt is heading
20:23
Speaker 1: to two seventy percent of GDP two hundred and seventy percent.
20:27
Speaker 1: Once you move away from fiscal headroom and taxes and
20:30
Speaker 1: focus on the medium term, you then focus on the
20:33
Speaker 1: thing you have to get under control, which is public spending.
20:36
Speaker 1: So all of these issues is make the bank do
20:38
Speaker 1: a better job, keep it independent, use the OBR that
20:42
Speaker 1: in a different way, and start to reframe this policy debate.
20:47
Speaker 1: So we do use experts, but we do have political accountability,
20:51
Speaker 1: and what we're trying to achieve is an economy that
20:54
Speaker 1: does better rather than just ticking short term boxes.
20:57
Speaker 2: Well, I look forward to the happening once hernda's crisis
21:02
Speaker 2: actually forces.
21:02
Speaker 1: Us to do it.
21:04
Speaker 2: Billot obviously none of that is terribly happy sounding. But
21:09
Speaker 2: for the readers, the sort of thing, well, what actually
21:14
Speaker 2: readers are listeners again? Bad time, too many years of
21:17
Speaker 2: a magazine. What do you think is they look for
21:19
Speaker 2: UK companies and for UK markets this year? You know
21:23
Speaker 2: what it is, because as I said, this doesn't sound
21:26
Speaker 2: great for the way the economy.
21:28
Speaker 1: One of the positives in terms of the companies is
21:31
Speaker 1: that when one asks firms about their own situation, they
21:35
Speaker 1: tend to be quite upbeat. So it's quite divergence between
21:38
Speaker 1: what firms say about their own balance sheets and position
21:41
Speaker 1: versus what they think about the economy. Now, in the past,
21:44
Speaker 1: it's usually been the case that what firms have said
21:46
Speaker 1: about their own situation which has been the better predictor
21:50
Speaker 1: of what is to come. So that should give us
21:52
Speaker 1: some confidence. Obviously, it varies across the boards. Small firms
21:57
Speaker 1: are ninety nine point eight percent of them, but they're
22:01
Speaker 1: not the dominant players in the market. Obviously, the Footy
22:03
Speaker 1: one hundred is very much driven by international factors. The
22:06
Speaker 1: banking sector came out of the budget very well. That's
22:09
Speaker 1: important factor, and so the global picture is one of
22:14
Speaker 1: modest growth. The UK economic picture is one of modest growth.
22:18
Speaker 1: The obi's forecast for the year ahead is one point
22:20
Speaker 1: five percent. Market consensus is probably closer to one percent,
22:24
Speaker 1: so it's modest growth. The savings ratio is quite high,
22:28
Speaker 1: so people have the ability to dip into their savings
22:31
Speaker 1: if they want to. So in terms of investment, I
22:34
Speaker 1: don't think the budget itself set down the good benchmarkers
22:37
Speaker 1: we were touching on, but the prospects for interest rates
22:40
Speaker 1: is quite key here, and if interest rates trend down
22:44
Speaker 1: then I think that will be a positive development. At
22:47
Speaker 1: Networth we very much talk about the need to be
22:50
Speaker 1: globally diversified given the unpredictability of US policy, the uncertainty globally,
22:56
Speaker 1: A key thing in the year ahead is liquidity. Which
23:00
Speaker 1: investments you go for, you need to be thinking of liquid,
23:04
Speaker 1: not at illiquid vestments. The growth of private markets is
23:07
Speaker 1: a big development in the year ahead. People are going
23:10
Speaker 1: into crypto and other assets. Bear in mind that a
23:15
Speaker 1: consequence of unpredictability in policy is high volatility, so again
23:19
Speaker 1: one needs to be cognizant of that feature. But overall
23:23
Speaker 1: I'm not negative. I would highlight the fact that the
23:26
Speaker 1: picture itself, both in terms of growth and markets, is
23:30
Speaker 1: far more nuanced, and if you decide to be more
23:34
Speaker 1: risk averse, then it's important to bear in mind that
23:38
Speaker 1: not all risk of type assets react in the same
23:42
Speaker 1: way to all risks. By that, I mean you need
23:44
Speaker 1: to be very clear why you are buying a particular
23:49
Speaker 1: asset class, and so overall, I would still be as
23:55
Speaker 1: invested as possible, I would be diversified, and I would
23:58
Speaker 1: be very global in one's outlook.
24:01
Speaker 2: That's an interesting point because it's actually been a pretty
24:05
Speaker 2: spectacular year for markets this year, which again given all
24:09
Speaker 2: the gloom over politics in general, so I like felt
24:13
Speaker 2: a bit counter you know, intuitive, but I was looking
24:15
Speaker 2: at numbers and like the fifteen one hundreds, like up
24:18
Speaker 2: with this best year since two thousand and nine. Yeah,
24:21
Speaker 2: you know, all plenty of the other global markets. In fact,
24:23
Speaker 2: the US is the lagout this year for the first
24:25
Speaker 2: time in a long time. And I'm just wondering, do
24:27
Speaker 2: you think, well, this can trend of the rest of
24:30
Speaker 2: the world catching up continue next year, or do you
24:32
Speaker 2: think that this was a one off.
24:35
Speaker 1: Yeah, we had a great year at net Wealth, and
24:37
Speaker 1: it's reflecting all those different moving parts. Yeah, it's not
24:42
Speaker 1: that the risks and the downsides are not important, but
24:45
Speaker 1: if you pin everything onto those, you can get caught
24:49
Speaker 1: out by other factors. Volatility is there, There's no doubt
24:53
Speaker 1: about that. That's reflected in the goal price, for instance.
24:57
Speaker 1: But it was not just cheap int a price, but
25:00
Speaker 1: cheaper in terms of where real years were a few
25:03
Speaker 1: years ago to be buying gold than it is now.
25:05
Speaker 1: So the point is that you need to look at
25:08
Speaker 1: all these factors. But coming back to your specific question, Yeah,
25:12
Speaker 1: what we have is Western Europe, unfortunately, is the slow
25:15
Speaker 1: growth region of the world economy. The Dragged Reports from
25:18
Speaker 1: September twenty twenty four talked about the innovation gap. The
25:22
Speaker 1: first anniversary of the Draggy Report a couple of months
25:25
Speaker 1: ago showed that only eleven point two percent of the
25:27
Speaker 1: recommendations had been executed, the.
25:30
Speaker 2: Whole eleven point two that's really specific. I'm quite in pressed.
25:34
Speaker 2: I want to know who they might uge to get
25:35
Speaker 2: the point to what measure was that.
25:39
Speaker 1: Exactly, because I kept thinking, what they need to focus
25:42
Speaker 1: on is a mindset change. That's what you need to
25:44
Speaker 1: move away from that. So Western Europe is in a
25:47
Speaker 1: difficult position. I think that turn the atlas around is
25:51
Speaker 1: my point, and I've been saying this for a number
25:53
Speaker 1: of years now. So you need to look at the
25:56
Speaker 1: world with the Indo Pacific, with India on your left,
26:01
Speaker 1: America on your right, and you look at where the
26:03
Speaker 1: growth engines are. So it's about UK companies positioning themselves
26:09
Speaker 1: within this and the UK economy itself. But coming back
26:11
Speaker 1: to your question, Yeah, the global environment I think is
26:13
Speaker 1: still an attractive one. But put this in perspective. The
26:18
Speaker 1: IMF is a good benchmark for global growth forecasts and
26:22
Speaker 1: they expect global growth in twenty twenty six to just
26:25
Speaker 1: be above three percent, as it was in twenty twenty five.
26:28
Speaker 1: Now trouble has we've become used to these growth rates.
26:32
Speaker 1: Before the global financial crisis, that global growth rate on
26:36
Speaker 1: the IMF measure was around four and a half percent,
26:38
Speaker 1: So so we have a significant slowdown, but more of
26:43
Speaker 1: that growth is coming from other parts of the world
26:46
Speaker 1: than the UK and Western Europe. So therefore we do
26:49
Speaker 1: need to be thinking in the very international way.
26:53
Speaker 2: And there's an enemy on potato. This stands out to
26:55
Speaker 2: you has been attractive for next year.
26:59
Speaker 1: In terms of the.
26:59
Speaker 2: Global So any regions that you know you'd play pointing
27:02
Speaker 2: week more towards or anything like that.
27:05
Speaker 1: Yeah, you need to be thinking structurally a longer term.
27:09
Speaker 1: Take for instance, India's growth rate is the highest globally,
27:15
Speaker 1: but it should be far higher than it is now
27:18
Speaker 1: given its population dynamics. But in answer to your question,
27:22
Speaker 1: it's that Indo Pacific region, but particularly East Asia looks
27:25
Speaker 1: pretty dynamic itself. The Chinese economy has they have their
27:29
Speaker 1: fifteenth five year plan. Obviously there's issues about where one
27:34
Speaker 1: invests in China, but East Asia is generally a strong positive.
27:39
Speaker 1: But then let's come back to the dynamics sector AI. Now,
27:44
Speaker 1: on the global comparisons for AI, whether you use Stanford
27:47
Speaker 1: University or the Australians are pretty good with their global rushers.
27:50
Speaker 1: There's two countries that dominic China and America, And if
27:54
Speaker 1: we were using the football analogy, we would go from
27:58
Speaker 1: the Premier League down to the Championship League one and
28:01
Speaker 1: then we get the third country, which is Britain. I
28:04
Speaker 1: we're in the pretty good position, but let's not kill ourselves.
28:07
Speaker 1: Those two countries are so far ahead. But the important
28:11
Speaker 1: point in terms of your question about investment is that
28:13
Speaker 1: America and the Magnificent Seven, their balance sheets are pretty
28:17
Speaker 1: good and they are investing heavily in capital investment. That
28:22
Speaker 1: will help the US economy, but the challenges the markets
28:25
Speaker 1: have almost fully discounted a lot of that news. But
28:29
Speaker 1: when you look at the earnings expectations in the US market,
28:32
Speaker 1: there's such a difference between that magnificent seven and the
28:36
Speaker 1: rest of the economy in the States. So it's it's
28:40
Speaker 1: again to use the word nuanced. It's not a case
28:43
Speaker 1: of just picking one country or one region. You need
28:45
Speaker 1: to sort of differentiate between those factors.
28:48
Speaker 2: Oh not argue worried about an EA bubble. Do you
28:51
Speaker 2: have a view on this? Do you have the sayings
28:53
Speaker 2: of whether there's a kind dot com take bus coming
28:56
Speaker 2: at some point in the whether it's next year or
28:59
Speaker 2: a couple of hands.
29:01
Speaker 1: Well, there are always risks out there. The way I
29:05
Speaker 1: would answer the question is this, look at the three
29:07
Speaker 1: big macromoving parts. First, we've got sort of a significant
29:13
Speaker 1: shift globally and globalization to fragmentation, protectionism, there's no replace
29:18
Speaker 1: free trade and home country bias has therefore come to
29:21
Speaker 1: the fore so. And then the second big factor is
29:24
Speaker 1: that you now have uncertainty unpredictability in terms of US
29:28
Speaker 1: policy making. That seen in trade policy and institutions. And
29:33
Speaker 1: then you've got that third big sort of factor coming
29:35
Speaker 1: through in terms of geopolitics and geoeconomics, and you basically
29:40
Speaker 1: have supply chains been disrupted. So all of those parts
29:45
Speaker 1: come to answer the question here. There is some underlying strength.
29:48
Speaker 1: But in terms of markets fullting pricing for risk, it's
29:51
Speaker 1: often linked to the liquidity cycle. We've got central banks,
29:55
Speaker 1: their balance sheets have been drunk, but there are still
29:59
Speaker 1: sufficient but they drive in these markets. Next year we'll
30:02
Speaker 1: see the growth of private markets, the growth of crypto.
30:05
Speaker 1: But in answer to question, yeah, yeah, I think markets
30:09
Speaker 1: are not fully pricing in the risk, but that doesn't
30:12
Speaker 1: mean these markets are about to adjust tomorrow. I still
30:16
Speaker 1: think if rates are trending lower, the answer to this
30:20
Speaker 1: question becomes more apparent as you end the interest rate
30:23
Speaker 1: easing cycle, or as you approach the end of the
30:26
Speaker 1: interest rate.
30:28
Speaker 2: As long as hidden.
30:31
Speaker 1: As long as there's economic growth and rates are heading down. Earlier,
30:35
Speaker 1: I talked about the UK heading for a debt crisis
30:40
Speaker 1: later this decade. Unfortunately that before six of the G
30:44
Speaker 1: seven countries. Later this decade, markets might start to anticipate
30:47
Speaker 1: that more. But we saw it recently with France being
30:51
Speaker 1: a worry France in the UK depends more on foreign
30:53
Speaker 1: investors to buy their debt than anyone else. But answers
30:56
Speaker 1: to your specific question, you never say never, But I
30:59
Speaker 1: think there are The point I was trying to make.
31:01
Speaker 1: Was there enough other structural moving parts that means that
31:05
Speaker 1: that question you asked should not just be the dominant question,
31:09
Speaker 1: and you need to answer that question itself within the
31:11
Speaker 1: context of the other moving parts and also the interest
31:14
Speaker 1: rate cycle.
31:15
Speaker 2: So now I'm going to ask you something that is
31:17
Speaker 2: very simplistic and straightforward. But next year, what is the
31:20
Speaker 2: one thing you'd been most worried about that could de
31:23
Speaker 2: real the finding that we've been having this year, If
31:27
Speaker 2: that's the right word.
31:28
Speaker 1: Well, the gear of politics is always a concern, and
31:33
Speaker 1: that goes without saying the unpredictability of policy is concern.
31:39
Speaker 1: But in macroeconomic terms, it has to be the debt issue.
31:44
Speaker 2: So do you think that could come to the boil
31:45
Speaker 2: next year?
31:46
Speaker 1: Yeah, in the sense that markets anticipate. And as we
31:50
Speaker 1: saw in France a couple of months ago, the French
31:53
Speaker 1: government found it hard to pass what the markets perceived
31:58
Speaker 1: was necessary legislation on pensions, and that led to not
32:03
Speaker 1: only political but financial problems in France. So in the
32:07
Speaker 1: UK it could come to the fore if you had
32:10
Speaker 1: sticky inflation. As I say, I'm expecting that disinflation trend
32:14
Speaker 1: to allow rates to come down. Let's assume a different
32:17
Speaker 1: universe where domestic inflation remains high in the US and
32:22
Speaker 1: in the UK, and suddenly the markets start to think
32:25
Speaker 1: rates are not trending down, that actually they've already hit
32:29
Speaker 1: bottom and could the next move be up. Obviously the
32:32
Speaker 1: markets are not thinking that, particularly if there's a change
32:35
Speaker 1: in FED leader coming. But if you started to change
32:40
Speaker 1: perceptions because of sticky inflation and then that key relationship
32:46
Speaker 1: between not only the level of debt, but relationship between
32:50
Speaker 1: R and G interest rate and growth, the markets will
32:53
Speaker 1: start to think, well, these issues are mounting. There's no
32:57
Speaker 1: easy guess out clause. Now, let's anticipate these problems and
33:03
Speaker 1: sort of back to them in now. Crowded trades are
33:06
Speaker 1: a dangerous thing for any investor. Crowded trade is where
33:10
Speaker 1: you all do the same thing because you all think
33:13
Speaker 1: everyone else is doing it, and then you think you
33:16
Speaker 1: can get out quicker. The analogy people used to use,
33:20
Speaker 1: probably some people might think it's a nap analogy is
33:22
Speaker 1: the idea of someone standing up and saying fire in
33:25
Speaker 1: the middle of the theater. Everyone rushes to get out
33:28
Speaker 1: the emergency exit at the same time. So the idea
33:32
Speaker 1: is in the crowded trade when people run for the exits,
33:35
Speaker 1: they don't do it in an orderly predictable way, and
33:38
Speaker 1: so you need to be sort of very aware of debt.
33:42
Speaker 1: So in terms of the debt problem, it encourages investors
33:46
Speaker 1: to start being more cautious sooner.
33:49
Speaker 2: Yeah, okay, that makes a lot of sense. Is there
33:51
Speaker 2: anything else that you wanted to bring up specifically, Jeral
33:55
Speaker 2: We've covered you were wanting to.
33:58
Speaker 1: Because we're here at this ale. One thing I was
33:59
Speaker 1: sure from the panel before and some of the asked
34:01
Speaker 1: a really pessimistic question on the UK, as you probably
34:04
Speaker 1: would a week after the UK budgets, which was a
34:07
Speaker 1: disastrous budget, as we said, and they said, is there
34:10
Speaker 1: anything positive to say? So maybe let's given its Christmas time,
34:13
Speaker 1: let's try and cheer people up on the UK. Savings
34:17
Speaker 1: ratio is high yep, corporate balance sheets are good. Being
34:20
Speaker 1: outside the Single Market allows the UK to have regulatory
34:24
Speaker 1: autonomy in the area of AI, which is the big
34:27
Speaker 1: growth area. Of the future also gives us regulatory autonomy
34:31
Speaker 1: and the city the financial markets. We haven't really pulled
34:34
Speaker 1: that lever yet, but the banking sector, as we touched on,
34:37
Speaker 1: came out of the budget relatively well. Being outside the
34:41
Speaker 1: Customs Union actually allows us to cut trade deals with
34:44
Speaker 1: the fast growth regions of the world. And despite everything,
34:49
Speaker 1: the growth picture for the UK is seen as one
34:53
Speaker 1: to one and a half percent, and we've discounted we
34:56
Speaker 1: hope a lot of the negative news, so maybe they
34:59
Speaker 1: might be some positives on the upside. And also maybe
35:02
Speaker 1: it's the case I say, maybe I'm covering myself a
35:05
Speaker 1: lot here. The housing market has been stagnant for some time.
35:10
Speaker 1: The mansion tax, which was really a London and Southeast
35:13
Speaker 1: of England tax. It was such a stupid tax, Such
35:16
Speaker 1: a stupid tax. Do they not realize how many people
35:20
Speaker 1: work in industries linked to the housing market. I worked
35:25
Speaker 1: at his City Hall for a while and it was
35:28
Speaker 1: there were figures used internally about how many trades people
35:32
Speaker 1: were working on housing to do up housing. When you
35:35
Speaker 1: start to tax housing, as we know from other countries
35:39
Speaker 1: that have done this, you discourage people from upgrading their property.
35:42
Speaker 1: You discourage people from doing them up, and it has
35:45
Speaker 1: a much wider economic impact.
35:47
Speaker 2: We've seen that with some duty.
35:50
Speaker 1: Absolutely discourages turnover. Now maybe the positive given I was
35:54
Speaker 1: trying to get a positive out of it, I was thinking, now,
35:57
Speaker 1: given that we had a lot of uncertainty, and given
36:00
Speaker 1: that some of these taxes don't feed in for a
36:02
Speaker 1: few years, maybe we might see some turnover return to
36:06
Speaker 1: this market as well, and that helps things as well. Well.
36:09
Speaker 2: Yes, I suppose, if I mean if in industries do
36:11
Speaker 2: take law and they have been taking lawer, then mortgage
36:15
Speaker 2: kind of like create it will be available more, more
36:17
Speaker 2: cheaply and more readily. So you may see a bit
36:20
Speaker 2: of an up left a law. The only problem is
36:23
Speaker 2: hopse places going back up is that obviously that are
36:26
Speaker 2: an awful lot of unhappy young people, particularly in London,
36:29
Speaker 2: who that seems to be to me to be one
36:31
Speaker 2: of the drivers of political distress rather than.
36:33
Speaker 1: Yeah, well, actually the budget. Let's finish on the budget again,
36:36
Speaker 1: because the real golden opportunity in the first or second
36:39
Speaker 1: budget after an election is to try and simplify the system.
36:43
Speaker 1: We had the most compacts and it's particularly evident relevant
36:47
Speaker 1: to young people as well in terms of the Manhattan
36:50
Speaker 1: skyline of taxes. We have high marginal tax rates, and
36:54
Speaker 1: the way it used to be described in the Treasury
36:56
Speaker 1: was Manhattan skyline. They go up and then they go down,
37:00
Speaker 1: then you earn a bit more money, they go up again,
37:02
Speaker 1: then suddenly you earn a bit more they go down.
37:04
Speaker 1: Because if your worker with the student loan, you're repaying
37:07
Speaker 1: your student loan, you now have a nine percent higher
37:10
Speaker 1: marginal tax rate. Unforgivable. Not only unforgivable, but the Auger
37:15
Speaker 1: reporting twenty nineteen to review higher education came out with
37:19
Speaker 1: recommendation to actually lengthen the time from twenty five years
37:24
Speaker 1: to forty years. I joke to people that if you'd
37:26
Speaker 1: studied history at university, you could probably cram all your
37:30
Speaker 1: history lessons into one month and you could be repaying
37:33
Speaker 1: a student loan for forty years on your one month
37:36
Speaker 1: of studies. So high marginal tax rates for student, high
37:40
Speaker 1: marginal tax rates then hitting again around sixty thousand pounds,
37:44
Speaker 1: and if you're lucky enough to have one hundred thousand pounds,
37:47
Speaker 1: high marginal tax rates. But obviously for younger people, I
37:50
Speaker 1: think we haven't done enough to reduce that burden. In
37:55
Speaker 1: the early sixties. This was debated about whether students should
37:58
Speaker 1: repay student loan. Obviously small number of people for a
38:01
Speaker 1: different people. Then that was decided. Why burden them at
38:05
Speaker 1: an early stage in their career with this excessive Yeah,
38:09
Speaker 1: obviously complex issues, but the point is that we need
38:12
Speaker 1: to be doing more to help young people. You need
38:14
Speaker 1: to be building houses, you need to be reducing stamp
38:16
Speaker 1: duty to actually have more mobility. You need to actually
38:20
Speaker 1: lesson there tax burden as well.
38:24
Speaker 2: Listen, Thanks very much for your time, Er. I really
38:26
Speaker 2: appreciate you coming along talk to us about the state
38:29
Speaker 2: of the budget and the UK economy.
38:31
Speaker 1: It was a great pleasure to be here.
38:32
Speaker 2: Thank you, Thank you, Thanks for listening to this week's
38:39
Speaker 2: Merton Talked to Money. If you like our show, rate
38:41
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38:44
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38:47
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38:52
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38:57
Speaker 2: episode was produced by Summer Sadian was Hiss and signed
39:00
Speaker 2: by Blake Maples. Special thanks to Doctor Jared Lyons, Edelman,
39:04
Speaker 2: Smithfield and the London Stock Exchange.