We recently hosted our “Year-ahead webinar” to discuss the outlook for global growth with you. With limited time for Q&A, I was able to respond to only a few of the questions some of you posed. So, in this week’s briefing, the economics team and I respond to six additional questions, covering the themes that came up most frequently in your queries.
1. How much of a risk are rising debt levels to the UK consumer sector?
This depends on debt levels, growth rates and servicing costs.
Levels of household debt in the UK do not look excessive by international or by historical standards. The ratio of debt-to-income stands at 135% in the UK, down from 153% in 2008 and lower than many other developed nations.
Mortgages make up the bulk of consumer debt and growth here has been subdued reflecting tougher regulation and greater caution on the part of lenders and consumers. Unsecured credit, including credit card and personal loans, has been growing at a stronger clip although this has slowed significantly in recent months.
Debt servicing costs are near all-time lows, meaning most households look well placed to make their payments.
So for the economy as a whole levels of debt, credit growth and servicing costs look manageable. Some households struggle to make interest payments or are in arrears but the picture is of pockets of vulnerability rather than an economy-wide problem.
2. Is poor productivity due to low business investment?
Business investment has run at fairly low levels in the UK in recent years, though it’s not clear that it has been “insufficient”. Companies face the costs and reap the benefits of investment and if they are not investing it may reflect the fact that the returns, even at vanishingly low interest rates, are insufficient. Low investment may be as much a symptom as a cause of low productivity. It blunts the return on, and would therefore tend to dampen, investment.
A complicating factor is that Western economies are becoming more dependent on services and, therefore, less reliant on the sort of investment in equipment, plant and machinery that official statistics are good at measuring. In this world spending on human capital, brand, intellectual property, education and training become more important sources of value.
Inadequate investment may be part of the explanation for the near stagnation in UK productivity in the last ten years. But there is a long, and contested, list of alternative culprits – including the slow diffusion of knowledge between firms, management practices, elevated risk aversion, so-called ‘zombie’ businesses sustained by low interest rates, the declining power of technology to drive productivity and weaknesses in public infrastructure and vocational skills.
Everyone agrees that productivity is vitally important. But there is no consensus on why it has stopped rising.
3. Why are public equity markets shrinking?
The structure of business ownership is changing. Since the peak in 1996 the number of listed or quoted businesses in the US has almost halved. The number of UK-listed businesses has fallen by well over a quarter since the peak in 2006.
In the last three decades interest rates have trended down making debt finance ever cheaper. It has made sense to finance businesses with debt, rather than with equity. Robert Buckland, chief equity strategist at Citigroup, estimates that the cost of debt for US companies is around 3.0%, less than half the 7.0% cost of equity.
Issuing debt tends to be less onerous than taking a company public and avoids some of the requirements of listed firms including quarterly earnings calls, mandatory disclosures and listing fees.
There’s also a supply aspect to this process of de-equitisation. Equity markets used to be the default source of finance for a growing business. Now there are alternative pools of finance available, for instance, through private equity, venture capital, sovereign wealth funds and infrastructure funds.
Finally, Western corporates have record levels of cash on their balance sheets. That has fuelled share buybacks and mergers and acquisitions which have reinforced the shrinkage of public equity markets.
4. The Bank of England kept rates on hold last year even as the ECB and Fed cut. Will the Bank belatedly start cutting in the next few months?
The Bank of England not only stood back from last’s years monetary easing – as recently as last summer it was talking up the possibility of higher interest rates. Since then the UK economic outlook has softened. UK growth has surprised on the downside and inflation has fallen away sharply. Two of the nine members of the Bank’s rate-setting committee voted to cut interest rates last month and a third has recently stated that, barring a ”significant” improvement in data, he would vote to do so too.
Of the three, Michael Saunders, recently gave a speech setting out his arguments in favour of a cut. Alongside weak inflation he cited rising margin pressure and the latest Deloitte Survey of CFOs which showed that firms remain in defensive mode.
As of Friday markets were assigning a 50% probability to an interest rate reduction. Barring an improvement in the UK outlook my guess is that we will probably see a modest, 25bps rate cut in the UK in the next few months.
5. Will protectionism get worse in 2020?
Last year investors’ hopes of a let up in the Sino-American trade dispute were repeatedly raised and then dashed. Since the signing of the ‘phase-one’ trade deal in December – effectively a truce – the US stock market has hit new record highs.
Markets seem to expect an easing of the trade war between the US and China although other disputes continue to simmer, notably between the US and the EU, as European nations mull digital taxes, and between Japan and South Korea.
The environment for trade and globalisation has become tougher and that’s unlikely to change. My guess is that things probably won’t get significantly worse this year – not because the US administration has changed its mind on protectionism, but because Mr Trump will hold back from measures that hit US consumers and farmers ahead of November’s presidential election.
6. Today’s technologies appear transformational – why aren’t they pushing up measured productivity?
One response is that technology has lost its power to achieve the dramatic productivity and life-enhancing gains we saw through the last century. The US economist Professor Robert Gordon, for instance, argues that the impact on human welfare of modern inventions such as the smartphone is trivial compared to past innovations such as indoor plumbing and antibiotics. On this account we have exploited all the life-changing innovations and we’re left to grind out marginal gains from today’s technologies.
We are more optimistic.
Innovation, unlike the exploitation of a physical resource, is infinite. The nature of innovation is that it changes the world in unexpected ways. That explains both our tendency to believe that innovation is exhausted and the poor predictive record of ‘futurology’. (The newly opened exhibition at London’s V&A museum on the car starts with a 1950s vision of a future of rocket propelled cars. Instead we got something altogether more prosaic and useful – safer, cheaper, more comfortable, efficient and easy to navigate vehicles.)
The full impact of new technology is often realised after a long lag. It takes time to deploy technologies and reorganise work to exploit them. This means that productivity growth does not proceed at a constant pace. The 1960s was a golden decade for US productivity, the 1970s dire and the period from the early 1980s to around 2008 good.
Current technologies are almost certainly bringing us greater benefits than are captured in the official measures of output. The consumer sector is awash with services such as Wikipedia or Google which have transformed our lives but for which we pay little or nothing directly.
PS: Last week the International Monetary Fund published its latest economic update. The Fund downgraded its forecast for global growth this year from 3.4% to 3.3% largely due to concerns over disappointing economic data in emerging markets – particularly in India. The impact of social unrest in other emerging markets is also a concern. Despite the downgrade, the Fund is more optimistic about the risks facing activity than it was in October, citing better news on trade and early indications that manufacturing is “bottoming out”. It notes the impact of expansionary monetary policy and the resilience of the consumer as helping to support growth. Growth of 3.3% this year, though lacklustre, would still represent a slight acceleration over 2019.