By Graham Vanbergen: Economics is not as hard to understand as many people think. It can’t be. I predicted the financial crash a year before it happened. I also predicted Brexit. On both occasions, I put my money where my mouth was and even wrote a book about it. I also predicted at least three post-Brexit PMs as the current Tory party tears itself apart amid continued decline and economic wrong-turns. I wrote an article about the forthcoming end of ‘trickle-down economics‘ early this year before being more recently debated and also wrote about what I saw as an inevitable UK recession and what will follow it – a period of stagflation. I threw in another article about a global recession as post-war geopolitical alliances disintegrated and globalisation fractured. I even predicted a global recession in 2019 before Covid arrived.
All of these things are now facts or going that way.
So let me explain what went wrong in Britain and why a harsh period of recession is about to arrive on our doorsteps.
Thatcherism (or Raeganomics) was the right economic turn at the right time but then went too far. Deregulation is good to a point. The year I was born in 1960, British citizens stood sixth in the world per capita in gross domestic product. Today, we now sit 20th in this same league. This is evidenced by the fact that an average middle-class family could afford to have a single-income earner, raise two children(very often in private school) and live reasonably well. Today, as averages go, that is not possible if you are aged 40 or below. Britain is now already well below the European average in terms of income and buying power. The cost of putting a roof over your head has largely seen to that. Inflation (or wages not keeping up) has done the rest.
For those families in the bottom 25 per cent of incomes today, the UK is expected to be overtaken by similar households in Poland and then Slovenia in 2025 and 2030 respectively in terms of income per capita.
These basic facts are a disaster for Britain. It came about because Thatcherism over-financialised our economy. This can be evidenced by the fact that the pound Sterling loiters around 15 per cent below its 20-year average against the euro, a currency that was continuously derided by Brexit’s cheerleaders and the same prominent Tory politicians sitting in Downing Street since 2016.
Over-financialisation has meant investors going after profits from an industry that does not invest in the long-term or productivity or much else frankly. But what was encouraged was the extreme privatisation of critical infrastructure where much of the revenue was offshored to tax havens. Worse, foreign investors have capitalised on the opportunity. One only has to look at the disaster that water privatisation represents. Much of the same could be said about energy and transport.
Liz Truss, the latest iteration of a right-wing orthodoxy that is merely regurgitating more of its own failure, doubled down and practically pushed our fragile economic model over a metaphoric precipice. A quick injection of some £65billion helped calm the nerves of international money markets.
As Phillip Oppenheim (Conservative Exchequer Secretary to the Treasury 1996-97) said just last week:
“Nothing in the mini-Budget indicates that our new leaders have the slightest grasp of the scale of our long-term, structural problems — or the solutions, above a half-digested, two-dimensional version of Thatcherism. Rather than blustering about Britain being the “fifth richest economy”, we need honest leaders who accept that we are no longer a world power, stop pretending there is a special place for us in the anglosphere or Commonwealth and concentrate instead on internal development. We need to rein back the worst abuses of financial services; reform education; encourage savings over consumption; reduce incentives to invest in property rather than productive assets; smarter, not higher defence spending and, of course, rejoin the EU single market.”
Before any of that happens though, it is clear that this route can only be attained by consigning this Tory government to history. Along with it, our pitiful and antiquated electoral system is quite clearly not fit for the 21st century. It no longer delivers political or economic stability, only division and what we are witnessing now – rapid decline.
As I write this, the Tories are, according to insiders, already plotting a ‘unity’ PM to replace Truss. Five Prime Ministers in six years. This is what failure looks like.
The result of all these self-inflicted ideological stab wounds is that analysts have downgraded their 2023 economic growth forecasts for the UK. Worse, there are now plenty of warnings of little improvement in the medium term. These warnings are a foregone conclusion. The government’s fiscal package, which sent gilts and sterling spiralling, has created a borrowing costs crisis on top of an existing cost of living crisis. No one in the normal world wins here. The result is that a recession is on the way. The only question is how deep will that recession be. Another almost certainty – is stagflation. In the meantime, Kwasi Kwarteng’s target of 2.5 per cent growth in the economy is as fictitious as the promised sunlit uplands of Brexit. The UK is no longer an investment target – albeit salvage hunters with strong currencies are circling distressed assets. Vulture capitalists are another sure sign of economic problems.
Valentina Romei – an Economics reporter at the Financial Times reports that – “Economists from Berenberg, UBS, Goldman Sachs and HSBC are forecasting three quarters of economic contraction from the three months to September, followed by either weak growth or the economy flatlining until the end of next year. This is despite the package of state energy support, which will freeze average household energy bills at £2,500 a year for two years. Markets are still pricing in that the Bank of England will raise interest rates to above 5.5 per cent by August 2023. This is a sharp increase on the current 2.25 per cent rate, and more than a full percentage point above what was previously expected.”
Let’s not forget that neither the real effects of energy price hikes have fully hit and nor have bank rate hikes. Combined, this will be a real force to be reckoned with economically speaking. Recessions are more often about confidence and worries than they are anything else. By mid 2023 – interest rate hikes will be feeding through to mortgages, energy prices will be hammering household budgets and a weak currency will cause inflation to creep even higher.
There’s another problem too. After the bank-led financial crisis of 2008 – central banks decided that ultra-loose monetary policy was the way to go. The trouble was they were unable to ween the QE junkies off their habit and kept interest rates artificially low in an attempt to do so. Asset prices were literally pushed through the roof and many investors are highly leveraged. Financial stability is threatened by one of several potential meltdowns. From open-ended investment funds (vehicles that let investors redeem assets at will) – a sector that has swelled to contain $41tn of assets, to the imbalance of liquidity. Property is one to keep an eye on.
Gillian Tett – chair of the editorial board of the US Financial Times says – “Expect a future reckoning. Investors should brace themselves for more surprises.”
Today, we have an unelected Prime Minister, put in place by a demographic that mourns an era long gone – that was fully supportive of a government erecting trade barriers with Britain’s biggest export market. It did so whilst discouraging enterprising and much-needed EU workers from moving to the UK.
After twelve years of a political dogma that has turned its back on strategies that foster growth, they are attempting a hand-brake turn of HMS Brittania without much of a clue of what they are doing.
Rather than constantly upping the culture war to divert from their own failures, Downing Street needs to take responsibility for developing a 21st-century growth strategy. It won’t because now it doesn’t have the time. It’s going for low-hanging fruit that no longer exists. George Osborne saw to that. All bar a miracle – Britain is heading straight into a recession and it will be painful for everyone – especially the bottom half of British households.