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The Macro Brief - The UK's new team
1 Plays2 seconds ago
Liz Martins, Senior UK Economist, assesses the state of the UK economy as Andy Burnham prepares to take over as Prime Minister.
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Transcript
Introduction to Macrobrief Podcast
00:00:10
Speaker
This is the Macrobrief from HSBC Global Investment Research, our weekly look at the issues driving financial markets across the world.
The UK's New Prime Minister: Andy Burnham
00:00:18
Speaker
I'm Pierre Sbertler in London, and here in the UK we're set to welcome our fifth Prime Minister in five years, with Eddie Burnham set to take over the reins from Keir Starmer on the 20th of July.
00:00:29
Speaker
So today we're checking out the economic picture as Mr. Burnham takes office and looking at his economic plans. from house building and taxation to a drive for regional devolution.
00:00:40
Speaker
But could constraints on the public finances limit the extent of change? I'm joined in the studio by Liz Martins, senior UK economist. Liz, great to have you back on the podcast. Thank you, Piers. So we've just had the UK's latest GDP number for May.
00:00:54
Speaker
So maybe we should start with a recap on where the UK economy stands as Andy Burnham prepares to take over as prime minister.
UK's Economic Performance Recap
00:01:01
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Sure, yeah. So the UK had a good start to the year. We had ah a strong GDP growth number of 0.6% quarter and quarter in Q1. And then as has become typical, we've seen a slowdown post-Q1. So we saw that GDP fell by 0.1% in April. It rose by 0.1% in May. But of course, that just nets out for basically a flat level. So um I would say that as has become quite usual, um the UK has lost a lot of momentum post-Q1. And the private sector, I think, is a bit subdued.
00:01:28
Speaker
So as he takes over the reins, what are the big challenges that he's facing? Well, that's the first one, generating some economic growth. um I think the labour market is not in a great state either. We've seen, um well, the jobs numbers are are varied, but certainly the vacancies numbers are much lower. There's a challenge around job creation. um And then the big one, of course, is the state of the public finances and the fact that bond yields are elevated. We're spending
Economic Growth and Devolution Challenges
00:01:53
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a lot of money servicing national debt, and that is li limiting what anyone can do in terms of tax and spend.
00:01:59
Speaker
So a key plank of Mr. Burnham's announced policies, as far as we know them, are is devolution. So perhaps explain to us what's the argument in support of devolution? Yeah, so the argument is that if you put the power in the hands of local mayors, local authorities, um there will be an incentive for them to generate growth, compete with other regions to get investment and projects off the ground in their region. And then the rewards will also be in their hands as well. And of course, if you give that power to local authorities, um they might know more about what's holding back growth in their region than somebody sitting in London. um So that's the theory. The other hope is that if regions really have a stake in their own destiny, um then the concerns around nimbyism, so not in my backyard, this objection that pit populations often have to development, that that that might recede a little bit because actually there's ah a real positive result for this for the local people.
00:02:55
Speaker
And I was struck in reading your report about the illustrations of how centralised the UK is. Maybe give us just a sense of that relative to other countries? Yeah, so in other countries they've already devolved quite a lot of power and not only in terms of what you're allowed to do in terms of, you know, approving investments and projects and so on, but also in terms of the fiscal side as well. So they are collecting tax from the local people. And that means that they have a direct stake in how much growth they generate, because the more your economy grows, the more tax you are pulling in. And so, of course, that incentivises allowing growth to to take off, which maybe at the moment isn't really an incentive that's in place. um So, yeah, the UK collects a lot less tax locally um than its ah sort of developed world counterparts.
00:03:38
Speaker
I mean, we could almost say that the vast majority of tax is collected
Break and Macrobrief Updates
00:03:42
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centrally. Yes, exactly. It's essentially just council tax that that councils collect, yeah yeah. Can I push you on it, though? How hard is it going to be to achieve, given that today it's London and the South East that dominates the economy?
00:03:54
Speaker
Yeah, I mean, big changes like this are always difficult to achieve, aren't they? There will always be sort of political pushback and what have you. But the momentum seems to be there. um And yeah, I think Andy Burnham wants it to happen. He's obviously going to create this this office number 10 in the north. um so So we'll see how ah how far he gets.
00:04:14
Speaker
Somebody who would argue against evolution would point to the fact that it hasn't really helped Wales or Scotland outperform. Yeah, exactly. So they've had devolved ah powers since 2000. And if we look at the chart of GDP growth since then, both of them are underperforming relative to England. So on that evidence alone, of course, it's more complicated than that. But there's not great evidence that devolution has helped those regions.
00:04:37
Speaker
Well, that's a good time to take a short break. We'll be back with more from Liz in a moment.
00:04:44
Speaker
A quick message here from the Macrobrief team. If you're one of our listeners on YouTube, then we'll soon be moving.
Government Spending and Housing Plans
00:04:50
Speaker
To ensure you never miss another episode of the Macrobrief, then be sure to head to HSBC CIB on YouTube and click subscribe to keep up to date on our latest episodes.
00:05:00
Speaker
Now back to today's episode.
00:05:03
Speaker
And another topic that's much talked about in terms of these potential economic policies is house building. Yes. So we don't know quite what Andy Burnham is planning on this front, but he did say in his speech on 29th of June that he is looking to launch the biggest programme of council house building since the post-war period. And as he rightly identified, the sale and non-replacement of council housing in the UK... has really increased the cost to the government because they're actually having so but to pay people's rent in private accommodation, which is much more expensive.
00:05:36
Speaker
um So he wants to build more council homes. We don't have any detail on that and we will see as it comes through. What i would say is whether you're building council homes or private sector homes, the same issues are probably going to apply. And that is that the construction sector has undergone a huge increase in cost which has made building less viable. Now, it may be that that becomes more viable if you are building as a government looking to invest in an asset rather than a private sector builder looking to make a profit. But if that is the case, um then, you know, again, it points to perhaps so the government having to borrow more money.
00:06:12
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so it's going to be challenging, to say the least. um When it comes to initiatives on taxation and spending, isn't the fact ah that the room for manoeuvre to achieve this is actually quite limited?
00:06:23
Speaker
Yeah, it's really limited. So what we argue in the report is that if Andy Burnham wants to set himself apart from his predecessor, he probably needs to spend a bit more money. um But to do that, that then begs the question, well, how are we funding this? So is it going to be more tax, which might not go down so well with the public? Is it going to be less welfare spending, which might not go down so well with the Labour Party? Or is it going to be more borrowing, which might not go down so well with the gilt market? So none of those options is going to be easy. And that really does constrain what he's going to be able to do.
Fiscal Policies and Market Reactions
00:06:52
Speaker
And of course, we've talked about this on previous podcasts, but there is the legacy of LizTrust that we know that if you go too far in one direction, the bond market isn't going like it. Yeah, exactly so. And I think the bond market, the reason the bond market is is is quite sanguine at the moment is because it believes that Liz Truss set that example and no prime minister will ever want to repeat it. um And as such, you know, we have seen Andy Burnham commit to the current existing fiscal rules. And there is a belief that he will broadly try and balance the books and therefore they don't need to worry too, too much about a repeat of that episode in 2022.
00:07:24
Speaker
twenty twenty two So you conclude in your report that we're likely to have more uncertainty and late budget, which could weigh on consumer confidence and ultimately not be a ah great positive for the economy. Yeah, potentially. So, i mean, i have to say the last two years consecutively, um you know, the conversations we've had with clients and investors is, well, we're just on hold pending the budget because we think taxes might go up and we're not quite sure which taxes will go up and and therefore we'll just put everything on hold until we know.
00:07:53
Speaker
And we've had that for two years running. And because we've now got a new prime minister and I think a new chancellor and those will take some time to, you know, assess the lay of the land and figure out what they want to do, possibly it does mean the budget will
Impact of World Cup on Economy
00:08:05
Speaker
be later. And that then opens up those same conditions where we're spending all that time um wondering what will be in the budget, which, as you say, is not particularly helpful. Yeah, again, challenging for the the new team in terms of having to get on with it. But so we'll have to wait and see. One thing which is certain is that England isn't going to win the World Cup. Yeah. Which we're feeling tired and emotional today about that result. Yeah. But are we still going to see World Cup boost to to consumption? and I mean, it's been busy on the pubs when I go out in the evening and and see the activity around, watching matches and what have you. I mean, is that is that likely to have a bit of a positive effect?
00:08:44
Speaker
Yes, um I think it's been a funny summer because we've not only had the World Cup, we've also had this stretch of very hot weather for some time. Now that has mixed implications because in theory it should get people out and about spending money. um But actually in June, the heat waves went to such an extent that footfall at shops fell. fell because people couldn't couldn't bear how hot it was and trains got cancelled. So ah that might have a negative impact on activity in June. But for July, I think the impact of the World Cup and the good weather um on hospitality should be ah positive. We've had pubs open for longer than they usually would. Into the middle of the night. Exactly, exactly. I didn't go myself. A lot of people did, apparently. um And then, yeah yeah, a lot of extra pints sold while we watched the football. And we've still got the final to look forward to. Sadly, England are not in it, but it still should be a big event. So, yeah, you would expect a small temporary positive boost to GDP
Conclusion and Future Policy Choices
00:09:36
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from that.
00:09:36
Speaker
And we're not going to get that extra bank holiday that we all hoping for. I know, very sad. It is indeed. Liz, thank you again for joining us. And I'm sure we'll have you back to interpret the new team's announcements as they come through. Thanks, Piers.
00:09:55
Speaker
That was Liz Martins on the policy choices facing the new yeah UK Prime Minister, Andy Burnham. If you'd like more on what's happening in Asia, then please check out our sister podcast, Under the Banyan Tree.
00:10:06
Speaker
This week's episode looks at how the AI boom is remapping Asia's supply chains. But that's all from us here on The Macrobrief. This episode was hosted by me, Piers Butler, and produced by Tom Barton.
00:10:18
Speaker
Please like and subscribe wherever you get your podcasts. Thanks for listening, and we'll be back again next week.