UK slump - a path out?
Bucking broncos and the return of industrial policy…
It has thankfully been a very long time since I tried one of the bucking broncos on San Antonio’s main thoroughfare. However, capital markets continue to deliver an eerily similar experience. Bond markets remain at the heart of much of this wild ride. As incoming data on the US economy has continued to defy the gloom, those lending to the US and other governments have been scrabbling to incorporate the implications – both for the path of monetary policy and that path’s ultimate consequences for the US and global economy. As real interest rates rise, valuation and other effects have rippled across stocks and on.
There is much to be uncertain about here of course. We are dealing with an economy that is very different in many important aspects from that of 2019 and before. The return of muscular industrial policy these last two years is one important area, as we discuss in this week’s Word on the Street podcast above. ‘It’s different this time’ is often touted as the most dangerous thing you can say in investing. Rubbish. The truth is that it is always different this time, sometimes subtly so, but in this case the differences could be quite profound. From the many ways that we as individuals have been shaped by the rolling tragedy of the last few years to the much-changed role of government and companies, we potentially live in very different times.[1]
UK – Decline (continued…)
The UK continues to suffer the decline debate. This is not a particularly new phenomenon as we’ve warned before. For much of the period since peak empire, commentators have fetishized a future of irrelevance and decrepitude for this little island. We secretly seem to enjoy rolling around the prospect. For this episode, fears of inexorable (relative) decline may admittedly be better founded. The last fifteen or so years of stagnation in labour productivity and therefore household income growth really do stand out (Figure 1). Some famous academics argue there is nothing like it in our post-industrial revolution history.[2] Brexit cannot foot all the bill here either – this predates the referendum. There is nonetheless increasingly plausible evidence showing it certainly hasn’t helped (Figure 2).
The proposed causes of this bizarre period of economic slumber for the UK are many and various, akin to an Agatha Christie where many domestic factors have a stab. Some have argued for an important role for the public sector austerity that followed the global financial crisis, pointing to the many ways that public and private investment are co-dependent. As the state receded, necessarily in the eyes of many at the time, private investment swooned in sympathy. Interesting this links to some of the proffered justification for the return of US industrial policy launched by the legislative waves of the last two years.[3] Government spending in specific areas is being designed specifically to crowd in not out private sector investment. Competition with China, using similar weapons, has ultimately demanded it. We shall see if it catches, but similar efforts are certainly part of the proposed cure to some of the UK’s ills.
There may also be something in the idea that the UK had managed to swerve many of the financial crises that occasionally kneecapped other global financial centres in the preceding century, with both regulatory skill and a bit of luck to credit. To that extent, the fact that the UK was one of the epicentres of the global crisis in 2008 and 2009 struck a blow to the UK’s economic psyche that was always going to leave us reeling for some time.
There is also undeniably a global element to the story. The gains from the Information and Communications Technology revolution have been wrung out some time ago. We have, in many senses, been waiting for the next general-purpose technology to come to our aid. It appears to be here. Artificial Intelligence (AI) is finally beginning to deliver on its considerable promise on the evidence of ChatGPT and other incoming wonders. This is only the beginning of course and there could be many damp squibs, or worse.[4] However, AI at best, could help banish the warping influence of gut instinct from a variety of transactions and activities. It is already offering a route to further growing our base of useful knowledge beyond the limits imposed by explanatory theory.[5]
Investment conclusion
The past is too noisy and often indistinct to provide us with cast iron policy recipes for today. Besides which, it is mostly too different in too many ways. So instead, we tend to refract all the available information through a particular ideological or other lens. Certain episodes or data sets are emphasised over others, the success of a particular country or failure of another identified as decisive. It is unfortunately much messier than such debate allows. In the UK’s case, the longer we have stagnated, the more we seem to have provided scope for the more extreme answers rooted in squinting historical ‘analysis’. In that context, it will be interesting to watch this US policy experiment for as long as it lasts. The state may have an important role in the recovery of productivity growth, even if that role must always be challenged with the question of whether markets could do it better.
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[1] DeLong, Bradford J (2022) – Slouching towards utopia – an economic history of the twentieth century – Basic Books UK
[2] Crafts, Nicholas and Mills, Terence C (2020) Is the UK productivity slowdown unprecedented? National Institute Economic Review, 251. R47-R53. ISSN 0027-9501
[3] https://www.bloomberg.com/news/articles/2023-02-17/brian-deese-on-the-legislative-legacy-of-president-biden-s-first-two-years?srnd=oddlots
[5] Noah Smith – ‘The third magic - A meditation on history, science, and AI’ – NoahOpinion Substack – January 1st 2023.?