IoD Hertfordshire recently welcomed back Professor Joe Nellis to give a talk on The Outlook for the UK Economy.
Nellis is a Professor of Global Economy at Cranfield School of Management. He joined Cranfield in 1984 and established the Economics Group, which is currently ranked first in the world by the Financial Times for the teaching of economics on MBA programmes.
In what proved to be a hugely informative talk, followed by a lively discussion with IoD members, Nellis offered some much-needed clarity on what the future might hold for our economy.
Here is a summary of his key insights:
What are the main opportunities and risks for SMEs in 2018?
- More people in work than ever before
- Unemployment at a 42-year-low
- The UK has bounced back from recession
- Government finances are slowly improving
- The deficit is being cut
- Fragile business confidence
- Sterling depreciation
- Housing challenge
- Economic & societal imbalances
- Uncertainty of Brexit
- The productivity problem
Key Facts & Figures
- UK Growth for 2017 has been downgraded from 2% to 1.5%
- Global GDP will grow by 3.6% in 2017 and 3.7% in 2018
- Unemployment is close to rock bottom at 4.3%
- Another 600,00 people forecast to be in work by 2022
- Inflation expected to fall from peak of 3% towards 2% target in 2018
In the years before the global financial crisis, output per worker normally grew at about 2.1% each year. This has fallen to 0.2% pa in the past five years
We are experiencing a prolonged period of weak productivity growth and weak wages, which has not happened in the UK since the 1860s.
Nellis on…the budget
The Chancellor could have raised taxes. The reason he didn’t is because the economy is fragile so he didn't do anything hasty. All of this means a squeeze on ongoing government spending options unless they increase borrowing significantly but he's sticking to his plans to reduce borrowing.
What I would have liked to have seen is the government being much more adventurous in terms of corporate tax, particularly capital allowances.
I remember in 1981 Geoffrey Howe and the government, either to punish the unions or to create an engine of growth, decided to announce 100% tax relief for investment in capital equipment. It worked as capital investment surged.
So it’s a disappointment that the government didn’t do something to push us on to a stronger growth path. But whatever we do it will take a long time to unravel the inequalities (in our society and economy) and the skills shortage. This is not going to be a quick fix.
Nellis on…the slowdown in GDP growth
Let me say this clearly, I'm celebrating growth. This is not a recession.
But growth has been downgraded from 2% to 1.5% for 2017.
A trend below 2.5 or even 2% is a challenge. The reason why I say this is because normally we expect our growth to be at least 2.1%. That is our long-term trend of productivity. Above and beyond that, if we invest in more skills, capital and infrastructure we expect growth beyond 2.1%. We’re not going to achieve that for at least 5 years.
By the way, I am an optimist at all times but I am also a realist.
My biggest concern about growth is what happens when business pushes back on investment spending in plant machinery, systems, training…
There is a Greek word called hysteresis, which literally means to fall behind. The longer you're ill you may not recover. The longer you're unemployed you may become unemployable. The longer we delay investment, we may fall so far behind while our competitors move away and we may never catch up.
I think this is the most serious problem this country faces today.
You may ask me what's going to happen with Brexit and the answer is “I don't know” because nobody knows.
The Budget didn't mention the divorce bill by the way. But whatever the figure is, I bet you the deal will be packaged in such a way that it will seem very little. 'We'll pay it back over 20 years.' It will give the illusion this is fine.
Brexit will affect migration. Depending on which sector you're in you might say that's a good or a bad thing. If you're in agriculture in the East of England and you need workers to pick cabbages you might have problems unless we can sort the immigration status and have some sort of green card in place.
In education, I can tell you it is a crisis. Every university is looking at its faculty, how many are from the EU, how many students will they lose. Any University that has large Erasmus programmes, which means they rely on European funding, knows that funding will stop perhaps by March 2019. Those courses will not exist.
The dream is that we’re open for business and the world will rush to us because we’ll be more flexible and we can offer great deals. I hope this is true.
But the reason why I’m disappointed by Brexit is not because I’m in love with Europe. I think it’s full of faults and needs to be reformed but by leaving that club we’re casting ourselves into a very small boat into the middle of the Atlantic Ocean, hoping we can ride the waves.
As long as things are going well globally we will do fine. We will expand our trade, technology, R&D and so on. But when things get tough, and there will be tough times in the world, I’m not so confident that alone we’ll be able to cope with those challenges.
By the way, at least 51.8% are not happy with what I’ve just said. And I respect your view but respect my view that I’d rather base my future on something definite that I know is wrong but I can help to change it rather than hope it’s going to be okay. This (Brexit) is a future based on hope.
And remember the world is not standing still. We need a high skill economy but to do that we need to invest in education and those skilled people need to compete in a global market. That’s the reality.
Between 2015 and 2025, according to UN projections, which are very reliable on population trends, the number of university students worldwide, as one measure of the next talent pool, is going to more than double to 262 million.
This means that the number of talented people coming out of universities around the world along with our students is going to accelerate. This growth is coming from India and China. So we’re going to end up hoping to get market share in a world where there will be a lot more people specialising in robotics, AI and banking and so on.
Nellis on…The productivity puzzle
Productivity is the output per person per hour. Productivity is the engine of growth of every business, and every economy. It is what drives an increase in living standards. So If I employ you to pick cabbages I can pay you the value of the number of cabbages you pick per hour. I can't pay you more than that, as I need to make a profit.
It is a hugely important concept.
In the years before the Global Financial Crisis the output per worker was around 2.1%. But since the crisis, 2.1% has fallen to 0.2%.
It has been said that maybe we are measuring it wrong. Maybe work has changed so much. But even if we're wrong it is going to change fundamentally over the next five years?
Maybe productivity is so low because of you, the business leaders. Maybe you are holding back on new machinery.
Maybe it's our workers. Maybe they're not skilled enough to do the jobs we want them to do. Maybe it’s the government – it’s the roads, it’s the broadband, we're not getting goods and services to market quick enough. Maybe we're not investing enough in new ideas, robotics and AI.
Maybe workers are just lazy these days, but I don't agree with that.
However, none of these fully explain this mystery.
Nellis on…the global economy
“The UK is growing but the rest of the world is growing. You may say, ‘who cares’? But if we’re going to be a bigger trading nation we need to be catching up, not falling behind.
The IMF predicts 3.6% growth across the world. The strongest pickups are in Emerging Europe (former Eastern Bloc countries).
China’s boom has ended. It is only going to rise in 6.8% in 2017! The remarkable statistic is they are on target that they will double real GDP between 2010 and 202. And 6.8% is actually part of the plan. They want to wean themselves off exports. So they are focusing more internally than externally.
India’s economy is going to grow by 7% next year and they are set to exceed that in the years to come. It’s a country of entrepreneurs.
For emerging and developing markets in Europe growth of 4.5% is expected for 2017. So, as their economies grow, they won’t want to come to the UK.
Hopefully, we can join in the success of the world.
There is no sign of a recession on the horizon. Our economy will continue to grow.
However, it is the rate of that growth which Nellis finds troubling – that we will be continue to get by while other economies go forward.
Nellis says, “My concern is long-term for economic and societal imbalances - the rich and the poor, the haves and have-nots, the old and the young. We have a massive challenge to redress this balance.”
He adds that “for every organisation, be it public or private sector, we have to keep close relationships with local and national politicians to make sure they're not falling asleep on the job concerning our issues, not just Brexit but also skills, training, infrastructure and investment.”
Finally, he stresses that, “if there's one thing I want you to remember, it's that investment is the engine of growth.”
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