Howard Flight is ex-deputy chairman of the Conservative Party and director of Investec Asset Managem...
Howard Flight is ex-deputy chairman of the Conservative Party and director of Investec Asset Management
In his speech, Howard Flight examined the state of the UK. He warned that everything is not all a bed of roses for the country's economy.
Flight said: "The issue here is that growth has been sustained by an increase in personal borrowing, whether this has been through credit cards for consumption or against houses. Borrowing has occurred at a faster rate than take-home pay and economic growth. It is inevitable this will run out of steam and, the longer it goes on, the more painful it will be for the economy."
It is clear from the April retail sales and from the figures since December the economy has already run out of steam. The issue is whether or not this situation can be accommodated without the economy suffering further.
Excessive economic demand
According to Flight, the UK has had excessive demand in the economy for the past eight years but it has not led to inflation. Rather, it has gone into imports following increased globalisation. What has happened, however, is that the UK has built up an accumulative current account deficit of £150bn in the last seven years. This has risen from £60bn pa, which is 2.5% of GDP.
However, Flight warned this can only be sustained as long as there are matching direct capital inflows and there is sensible management of monetary policy. Recent figures show this does not look too good. Inflows of direct investment have declined dramatically and central Europe has become a cheaper place within the European Union to do business. The UK is much less competitive than some of its neighbours in terms of taxation and regulatory costs.
Furthermore, money supply growth is running at 10% pa. Flight pointed out this should not be much more than the rate of economic growth plus a tolerable rate of inflation. He thinks 5%-6% should lead to stable prices.
He warned that the Bank of England will have a problem warding off inflation as this would mean interest rate hikes. But, as retail sales are flat and house prices are going down, any interest rate rises could lead to a painful situation. The Bank of England is cautious on monetary policy and this could lead to stagflation, in some ways the worst climate of the lot.
In addition, said Flight, the issue of public borrowing is not particularly encouraging. The government is borrowing £80bn more than anticipated, and both the IMF and OECD have warned that unless public spending is brought under control, there will have to be big tax increases of £10bn-£12bn pa, beyond the £30bn already planned in the red book.
"Public finance is not in a healthy state, particular at this time in the economic cycle, as we already have had full capacity", he said. "The pressures are in the wrong direction. It is not possible for increased borrowing at this stage in the cycle without running economic risks. The UK has fallen from fourth to 11th in the world competitive league," points out Flight.
The Office of National Statistics has reported that there has been a 70% increase in public spending since 2000, with 84% gone in public sector inflation such as higher wages and hiring people. Pay is 20% higher in the public sector than the private sector. Flight thinks there will be a price to pay as borrowing and spending is running out a steam.
A positive note
However, on the equity front, Flight is positive. Equity prices are still lower than they were eight years ago. He thinks equities are the best bet as property has already outperformed so is likely to underperform.
He also believes more and more HNWIs will leave the UK and look towards offshore investments. Neither the Pre-Owned Asset Tax or inheritance tax reforms give them any incentive to stay in the UK.
Offshore investments offer more flexibility than those based in the UK. For example, the UK is talking about having open-ended property funds but these have been available in offshore jurisdictions for the past 10 years. He feels offshore has the great advantage of flexibility and demonstrates what can be done when not shackled by the excessive regulation and excessive political interference experienced in the UK.
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