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The Macro Brief - The UK’s tough choices
50 Plays2 years ago
Liz Martins assesses the daunting list of challenges facing the UK economy with sluggish growth, high inflation, elevated interest rates and a heavy debt burden. Disclaimer: https://www.research.hsbc.com/R/51/vGFLbSq Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction and Podcast Overview
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes.
00:00:16
Speaker
Thanks for listening.
00:00:17
Speaker
And now onto today's show.
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Speaker
The following podcast was recorded for publication on the 14th of September 2023 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
00:00:35
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Remember, you can follow this weekly podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
UK Economic Challenges
00:00:48
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Hello, I'm P.S.
00:00:49
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Butler in London and welcome to the Macrobrief.
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Now here in the UK, the economy is facing problems from all sides.
00:00:56
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We've got sluggish growth, high inflation, elevated interest rates and a heavy debt burden.
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A daunting list for any policymaker to deal with.
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Today we're taking a look at these challenges and the tough choices for the Bank of England next week and indeed whoever wins next year's general election.
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Liz Martins is our senior UK economist and she's here with me in the studio.
00:01:22
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Okay, so we've just had a UK GDP number.
00:01:26
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It was a worse number than expectations.
00:01:28
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Seems like a bad combination of strikes and poor weather.
00:01:31
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What happened really?
00:01:32
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Yeah, so GDP rose 0.5% in June and then it promptly fell back 0.5% in July, which was a bit of a disappointment.
00:01:40
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And yes, there were those factors.
00:01:42
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We had a heavy strike action in the NHS and we had a lot of rainy days in July.
00:01:48
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But looking more broadly than that,
00:01:50
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The economy was the same level in July 2023 as it was in July 2022.
00:01:56
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So we've had no growth in a year.
00:01:58
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So yes, there are those funny factors, but there's something more broad going on here as well, which is a lack of economic momentum.
00:02:06
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So how do you manage as a UK economy?
00:02:08
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It seems to be like we have one step back, one step forward.
00:02:11
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I mean, it must be with this volatility, it's really hard to actually get a proper forecast out.
00:02:16
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Yeah, it is.
00:02:17
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I think GDP has become much harder to analyse and forecast since the pandemic.
Bank of England's Policy Dilemmas
00:02:21
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All kinds of funny factors around, you know, lockdowns and then reopenings and then, you know, the health sector.
00:02:27
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And now we've got the impact of strikes as well.
00:02:29
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It's made everything a lot more volatile.
00:02:33
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But ultimately, I think, you know, and then we had the revisions a couple of weeks ago, which said actually the economy is about 2% bigger than we thought it was, which was obviously...
00:02:41
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good news, but it does make for everything to be a bit more complicated.
00:02:45
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Ultimately, look, this weak July number probably does pose some downside risks, as does the fact that if the economy is bigger now, it kind of means that all the catch up potential that we were relying on to drive growth has already been used up.
00:02:59
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So actually, maybe there's some downside risks there.
00:03:01
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And of course, we have the Bank of England meeting coming up on the 21st of September.
00:03:07
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Is this GDP news going to impact this widely held consensus view of one final rate hike of 25 basis points?
00:03:15
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Or are they going to be more impacted in terms of the view by the latest pain inflation data?
00:03:21
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Yeah, I think definitely more by pay and inflation.
00:03:23
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I mean, the Bank of England will, of course, look at everything.
00:03:25
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They will note that lack of economic momentum, that slow pace of activity and also the weakness in the jobs numbers of late, because actually, as well as the pay data, we had the unemployment data, which the unemployment rate rose again.
00:03:38
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Employment fell quite sharply.
00:03:40
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in July.
00:03:41
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So they'll be looking at all of that.
00:03:42
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But more immediately for their 2% inflation target, they will be looking at the fact that total pay in the economy rose 8.5% three months on year in July.
00:03:53
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And for them, that's still too inflationary.
Housing Market and Mortgage Rates
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and in our view does cement a 25 basis point hike on the 21st of September with one caveat that there is one final missing piece of the puzzle and that is the inflation number for August that will come out on Wednesday the day before the Bank of England's meeting and really I think it would take quite a big downside surprise in that number for them not to raise rates but you know never say never it is an important piece of the puzzle.
00:04:21
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So when we think about markets, expectations are very important.
00:04:25
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So here I am, I'm thinking as an individual, we're really close to the peak of interest rates, irrespective of what happens on the 21st.
00:04:35
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And we are reading that some of the banks are already offering better mortgage rates.
00:04:40
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Isn't that going to be a big positive for the housing market and therefore for the economy?
00:04:43
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Well, it's certainly better than rates continuing to go up.
00:04:46
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But I think the bigger picture is that they might be down at mortgage rates might be down a little bit compared to the peaks in maybe July.
00:04:55
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But they're still higher than what people fixed on, you know, two or five years ago.
00:05:00
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So people who are rolling off those fixed rate deals.
Fiscal Policy and Political Implications
00:05:03
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They don't care what rates were in July.
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They just care that, you know, it's a lot more expensive than it used to be.
00:05:09
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So that's one factor, I think, weighing on the housing market.
00:05:12
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The other factor is new lending.
00:05:14
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You know, it's more expensive to get a mortgage if you're a first time buyer now than it would have been.
00:05:19
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And you haven't had that much of a compensation in the way of a fall in prices.
00:05:23
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So all in all, we're expecting really weak kind of activity in the housing market, low levels of transactions and further modest declines in in-house prices.
00:05:35
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Now, you've also published a report entitled Tough Choices, and that's a reference to the fact that we will have an election in the UK next year and that there are some tough choices.
00:05:45
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Firstly, there's some tough choices ahead of the election by the current Conservative administration.
00:05:51
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And I guess it will also be some tough choices post the election.
00:05:53
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So maybe let's start with the current state of government finances and what could be done ahead of the election.
00:05:59
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Yeah, so I mean, in the most recent release, actually, government borrowing was a little bit lower than what the Office for Budget Responsibility had been expecting.
00:06:08
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And I think that chimes very nicely with the fact that we now know the economy was, you know, 2% bigger than we thought it was.
00:06:13
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So, of course, revenues in that context are going to be
00:06:17
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stronger.
00:06:18
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But when we saw the numbers for the most recent release, you know, it was 17% below what was expected.
00:06:24
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And a lot of Conservative MPs said, well, can we have tax cuts now, please, ahead of the election?
00:06:29
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And, you know, I think the Prime Minister will be tempted to say yes, I think it's probably a bit soon to say yes.
00:06:35
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So we've got the autumn statement on 22nd of November.
00:06:38
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At that time, I think inflation will still be quite elevated, there'll still be worries about interest rates.
00:06:44
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It's probably a bit soon.
00:06:46
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But come March and the spring budget, if inflation is a bit more stable, rates are a bit more stable and the prime minister is thinking actually this election is getting quite close now.
00:06:55
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The understanding is he prefers a November 2024 election.
00:06:59
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Then maybe he will want to do something to kind of bridge that gap.
00:07:04
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gap with the Labour Party and the opinion polls.
00:07:08
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So he's talked about taking 2p off income tax and he's talked about abolishing inheritance tax and it is possible that he goes some way to one or both of those measures.
00:07:19
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But that's not to say that the public finances necessarily afford him the room for that because we do have a public sector net debt of about 100% of GDP.
00:07:30
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and a pretty high interest rate at which we're paying the interest on that national debt.
00:07:34
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So the room is limited and that's before you get to the wish list of the issues around public services which have made the news flow recently.
00:07:42
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So the schools which are closed due to the construction materials, the NHS waiting list, the state of the prison system, the state of the waterways.
00:07:52
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So this is a long wish list which isn't budgeted for
00:07:56
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So the idea that you've got lots of room to cut taxes is, I think, optimistic.
00:08:01
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What about Labour's policies?
00:08:03
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So Labour is very keen to position itself as the party of business, the party of economic stability, not the kind of Labour government that we might have seen in yesteryear about tax and spend.
00:08:15
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And it says it wants to grow the economy.
00:08:17
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It wants to reform and grow the economy.
00:08:19
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And that will provide the revenues and that will allow them to reform public services.
00:08:23
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And that all sounds wonderful.
00:08:25
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But of course, previous governments have wanted to do the same thing.
00:08:28
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Liz Truss's plan was to grow the economy, of course,
00:08:32
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and it's easier said than done.
00:08:35
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So Labour actually only have two revenue raising measures that they have announced, only two policies that really make them look any different from the Conservative Party.
00:08:44
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One is abolishing the non-DOM status and the other is abolishing the VAT free tax status of the private schools.
00:08:52
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Now those two are not going to raise really that much money in the greater scheme of things.
00:08:59
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which means that Labour will face the tough choices of, you know, if they do want to address that long wish list of, you know, the public services, but also net zero demographic challenges, any further economic deterioration, other gas price spike, you name it, then they're going to have the choice between borrowing more and risking, you know, interest rates going higher, another kind of episode, perhaps like the
00:09:22
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the mini budget one or raising tax and I think it might come to the conclusion that raising tax is the least worst option but I should say that that is true of whoever is going to be in power we are not singling out the Labour Party and saying they might raise taxes actually whoever's in power is going to face these difficult choices
00:09:42
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Looking at external influences, we just published a report about changing our view on the dollar because and part of the reason behind that is the strength of the US economy, which has proved to be very resilient.
Global Economic Influences and Predictions
00:09:54
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Is that a big influence for the UK or is the UK more likely to be influenced by the weakness in the eurozone?
00:10:01
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What are the factors at play there that could influence the outcome for the UK?
00:10:06
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Well, the Eurozone, of course, remains our largest trading partner.
00:10:09
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So that does affect us.
00:10:11
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I think, you know, US economic strength has been the backdrop to the last two years, really.
00:10:18
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So insofar as, you know, that the whole world is kind of connected, yes, it benefits the UK economy, but I'm not sure it's going to be a game changer for us.
00:10:29
Speaker
And just to finish off on, can you remind us about your GDP forecast for the UK?
00:10:33
Speaker
Yeah, so we're forecasting 0.6% GDP growth for 2023 and 0.8% for 2024.
00:10:39
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And I think, you know, it doesn't sound particularly impressive, but considering we might have been in recession by now, and considering many people think higher interest rates will lead to recession, you know, this is a picture of muddle through and perhaps as good as it's going to get in the current environment.
00:10:56
Speaker
Liz, thank you very much for joining us.
00:10:57
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Thank you.
Emerging Markets and Growth Opportunities
00:11:02
Speaker
Before we go, here's a quick quiz question for you.
00:11:05
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Which country is the world's fifth biggest economy and on track to become the third largest by 2027?
00:11:10
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It also has the world's largest youth population with a medium age of just 28.
00:11:14
Speaker
The answer?
00:11:17
Speaker
India.
00:11:18
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The country has emerged as one of the world's growth engines and its equity market has outperformed in the last two decades.
00:11:25
Speaker
Our team from across the asset classes has come together to publish a major new report profiling India's economy and the investment opportunities in its equity, FX and credit markets.
00:11:36
Speaker
To find out more, follow us on LinkedIn.
Upcoming Events and How to Follow
00:11:38
Speaker
It's hashtag HSBC Research.
00:11:41
Speaker
India is also one of the many items on the agenda of our Global Emerging Markets Forum, which is taking place online from the 18th to the 29th of September.
00:11:50
Speaker
We will be hosting around 50 panel discussions featuring insights from policymakers and thought leaders on trends that will define the future of emerging markets.
00:11:58
Speaker
If you're an HSBC client and would like to attend, please get in touch with your HSBC sales representative.
00:12:05
Speaker
And finally, don't forget that you can follow the podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macrobrief.
00:12:16
Speaker
So that's all from us.
00:12:17
Speaker
Thanks for listening to The Macrobrief and we'll be back next week.
00:12:45
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:12:48
Speaker
We hope you enjoyed the discussion.
00:12:50
Speaker
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