Bitesize Summary

Shortly before retiring from his role as head of economics at HSBC UK Commercial Banking, Mark Berrisford-Smith, gave his view on where the UK and world economies are at. 

 

Background 

Starting with the financial crisis of 2008, Mark described the last 15 years in the world of economics and business as “pretty torrid”. Once the Eurozone debt crisis had blown over, there were just a few years of calm before the Brexit referendum unleashed a host of practical uncertainties for businesses, accompanied by several bouts of political instability. Then came the Covid-19 pandemic and the war in Ukraine. He warned that there had been just 12 years between the 2008 crash and Covid, and that we shouldn’t waste time fixing the issues thrown up by Covid and Brexit, just in case another crisis came along in another 12 years’ time. 

 
Handling the commodities shock

The pandemic and the war caused a commodities shock, prompting oil, gas and wheat prices, in particular, to rise sharply in the spring of 2022.
However, “we have done a pretty good job at coping”, said Mark. Markets have adjusted and stabilised, albeit that prices remain a good deal higher than they were before the pandemic. The most striking example is what happened to gas prices in Europe after the Nordstream 1 pipeline was shut down and then blown up.

“Markets hate uncertainty,” said Mark, “So, when you give markets the certainty that the amount of gas flowing through that pipeline will be a big round zero, what happens? The price collapses. The winter was mild, everybody cut back, new LNG import facilities were built, and so the European benchmark gas price is now less than a tenth of what it was last August.” 

 

A year ago:

• Oil cost about $120 per barrel but is now below $80;
• Gas was €200 per megawatt hour equivalent, now around €30; 
• Wheat was £300 a tonne, now £170

 

What about the recession? 

• As energy prices have come down, fears of recession have receded and confidence and activity around the world have revived.
• In particular, as pandemic restrictions have been eased, the demand for services is expanding at a robust pace. We’re travelling and going on holiday, going to gigs and sporting events again. 
• But manufacturing is still under pressure. 

Mark said: “We were only ever expecting a mild recession, and indeed in Germany, it now transpires, they have had a mild recession. But here in the UK we escaped it by the skin of our teeth, and so have most other countries. It's thanks mostly to those lower commodity prices.” 
 

Inflation

Mark said that the consequences of the dislocations caused by Covid and the commodity shocks unleashed by the war in Ukraine was higher rates of inflation, which in turn has blighted economic growth and led to widespread falls in living standards. 

However, even before the Ukraine war, the UK had a problem with core inflation, (a measure which strips out food and energy prices) 

• On May 24, the day before the Nara Annual Conference, the office for National Statistics reported that “core” inflation had accelerated to 6.8% in April, from 6.2% in March.

“It's one of those hammer blow statistics that makes your heart sink”, he said.
 

Interest rates

• Until a few months ago, economists had hoped that the Bank of England’s base rate would peak at 4.25%; 
• But the persistent over-shooting of inflation data since March means that the chances of base rate topping out at under 5% is fading fast; 
• The rate of business failures will inevitably remain elevated for some while;
• It would be unwise to expect any interest rate falls before 2025.

“Interest rates around the world are near the top, but not quite,” Mark explained, “And even when we get there, we will still be at some risk. Business models both in the real economy and in the world of finance start to break when rates rise rapidly. 

“Deals that look perfectly sensible when money is cheap stop working, so that businesses and aspects of finance can suddenly find themselves in trouble.

“But unless we get that core rate of inflation right the way down, rates are not going to start falling.” 
 

Tight labour market 

• The UK’s economy has barely grown in the last year, and is still slightly smaller than it was before Covid struck; 
• Britain has one of the highest inflation rates in the developed world;
• The biggest contributor to this poor inflation performance is the UK’s very tight labour market, with around a million vacancies compared to the pre-pandemic norm of just over 800,000. 

 

Growth

Despite the above, Mark said most of the economy is now growing and the pace of expansion should quicken a little during the remainder of this year because: 

• Annual earnings growth is now running at over 6%, so that the squeeze on disposable incomes hasn’t been quite as severe as had been feared;
• In any case, the squeeze will come to an end during the summer; 
• Consumer confidence is reviving and many people are spending more freely, as they are no longer afraid of rising gas and electricity prices. 

“Bear in mind, many of us have still got lots of money that we stashed away during the pandemic when we were at home being paid but had nothing to spend it on,” added Mark.
 

Britain’s national debt

Mark pointed out that when Gordon Brown was Chancellor of the Exchequer (1997-2007), the burden of the national debt in relation to GDP never rose above 40%. But measured in the same way, that burden today is 100%. 
“Are we ever going to get it back remotely close to 40%? Not in my lifetime,” he said. With the public finances in such a creaky state, neither the Conservative nor Labour parties will have meaningful scope to tax us less or to spend more on public services. 
 

Mid to long term future?

Mark said that to get the economy back on track for a sustained period of steady growth, the UK required political stability and consistent policy-making.
Issues that the government needed to grapple with, but were sometimes reluctant to face up to, included:

• Demographics, economic inactivity, and migration; 
• The planning system, infrastructure, and housebuilding;
• Skills and investment;
• Poor productivity
• The green transition

“Whoever wins the upcoming general election is going to have to confront them. 
“We sort of know what to do. We're just not good at doing it consistently. But above all, we really have to slay this inflation dragon first.”
 
 

Updated figures, as at 24.7.23:

• Bank of England base rate: 5.00%;
• Headline CPI inflation: 7.9%; 
• “Core” CPI inflation: 6.9%.