COMMS VISION 10-12 NOVEMBER GLENEAGLES PREVIEW
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Roger Martin-Fagg is an economist turned strategist who speaks at conferences around the world on the economic outlook and its impact on business. Here, he looks at the state of the UK economy and highlights some of the issues he’ll be discussing at this year’s Comms Vision Convention.
the future because each has their favourite model of how the economy works. The Bank of England has admitted that the problem with their model is that it doesn’t have banks in it. I take a very simple approach based on the money supply and where it sits in the system. For normal economic growth (five per cent nominal, 2.5 per cent real) the money supply needs to be expanding by seven per cent to 11 per cent. Last year it was growing by eight per cent, but now it’s only growing by two per cent. And we know that the public sector will be reducing the rate of growth in spending next year.
E
The chart below gives us the best indication of what will happen. If you add all the balance sheets of the UK up, including the Balance of Payments the
conomic
forecasters are offering wildly different views of
result will be zero. Through the economic cycle, households should be in surplus, Government in balance and companies in deficit (as they borrow household savings via pension funds to finance their growth). From 2002, households borrowed more than normal to get capital gains on property, and the Government continued to be in deficit when it should have been at least in balance. So both sectors were living beyond their means.
The big difference this time is both household and companies are in surplus, the consequence is a massive Government deficit. This they intend to reduce, so the surplus of companies and or households must fall. Over the past six months households have reduced their surplus, by reducing both their saving and debt repayments. Companies will have to reduce their surplus next year, either by
investing or because their sales are less than they expect. This is what will happen. As this adjustment takes place the real economy will shrink by one per cent. We will have a mini recession which will last for 16 months, then providing the money supply grows back at seven per cent, the system will expand again in the middle of 2012. It is likely that the Bank of England will create money in the Autumn, but we will not feel the effect of this for at least nine months. If the money supply doesn’t grow then our system will grow at under two per cent for many years.
To reduce the demand effect of the reduction in the public sector deficit, Governments are hoping for an expansion of exports. But all the Governments in the West have the same objective. This means that the West for export growth will have to focus on India and Asia. Why? The US money supply is
Roger Martin-Fagg
We are experiencing a discontinuity rather than a normal economic cycle
contracting at six per cent, Euroland zero per cent, but Asia on average has money supply growth of 23 per cent. Asia is where the money is and this is likely to be the situation for the next five years. Western banks are still not in good shape which makes them reluctant to lend to smaller, and in their view, more risky businesses. From a bank’s point of view a £1 billion loan to BP is much easier and more profitable than lending the same amount to SMEs in packets of £50,000. What is likely to happen is a rapid increase in credit unions where businessmen with cash lend to other businessmen, bypassing the banks.
Source The Bank of England
What we are experiencing is a discontinuity rather than a normal economic cycle. This happens usually
once a generation, and history shows that it unleashes human ingenuity and spurs innovation. Indeed it is the new driving out the old, a process of creative destruction which results in future prosperity.
Businesses will continue to emphasise efficiency and innovation. This will provide growth markets for suppliers who can show that their product and service can deliver defined and real cost savings with topline growth for their customers. As always in a slow or no growth system, a UK based business can only expand either by selling more overseas (the money supply in Asia is growing circa 18 per cent year on year) or by taking market share. To take share you have to be demonstrably better than your chosen competitors. n
Gleneagles Hotel
10th, 11th & 12th November 2010
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52 COMMS DEALER NOVEMBER 2010
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