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The global economy provides a boost

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Speaking to clients of Eton Bridge Partners at the Langham Hotel in London in April, David Smith, Economics Editor of The Sunday Times, said he would address the global economy, interest rates and Brexit.

This, he pointed out, is a good time for the global economy, which is firing on pretty well all cylinders, with growth in Asia, emerging economies in general, America and, most encouragingly, Europe. New IMF forecasts suggest 3.9% global growth this year and next, after 3.8% in 2017. This is very close to pre-crisis norm of 4%. It is positive evidence that finally, the global economy is putting the financial crisis behind it. We had the banking crisis, the eurozone crisis and a threatened emerging market crisis, which never quite transpired. Now, while there are risks, notably from trade tensions but this is the best sustained period of growth since the crisis.

That matters a lot for the UK. We are an open economy, hugely influenced by the world economy. The global growth surprise has been very positive for Britain. Growth has slowed but not by as much as it would have done in the absence of this global surprise. Sometimes people in business say that they are not affected much by what happens out there in the world because they don’t export. But they are affected. Stronger global growth lifts the corporate mood and is important even for domestically focused firms.

The influences on the UK economy remain what they were. Consumers have been squeezed by the renewed fall in real wages over the past year or so – hence the very tough time for some retailers – but that squeeze is now easing. The latest numbers are 2.8% for average earnings growth and 2.5% for consumer price inflation. So real wages are rising again. They aren’t rising by much – in the past the norm was 2% – but they are no longer negative.

Business investment is constrained by uncertainty. It is not collapsing but should be rising faster than it is. This is not a time of rapid growth for our economy, despite the strong world picture, but it is not as weak as feared. Two or three years ago we were in a purple patch, with growth of about 3% a year. Now it is about half that. But as far as voters are concerned, there is enough good news around. Unemployment is low – the lowest rate since 1975 – and the budget deficit is back to pre-crisis levels. The great explosion of government debt since the crisis is almost over.

That is good news and it is probably the right way to think about interest rates. Despite the fall in inflation it is still more likely than not that the Bank will raise rates in coming months. The Bank is keen to embark on what you might call a path of normalisation; gradually raising rates to a new norm of about 2%, from 0.5% now.

David Smith, Economics Editor of The Sunday Times

You can take a gloomy view of that, Smith argued, which is that the Bank is raising rates even against a backdrop of slow growth, because the absence of productivity growth means the economy’s speed limit has come down. In other words, it does not take much growth to generate inflationary pressure.

But there is also a more optimistic view, which is that the Bank wouldn’t even be thinking of raising rates if it thought the economy was too weak to take it. And most would agree that you cannot go on for ever with near zero interest rates.

There is also good news on Brexit. Though there will be negotiating challenges in the coming months, we are doing what the British do best, which is muddling through. Theresa May is taking a sensible approach to Brexit, skilfully herding the headbangers in her party away from extreme outcomes. So, there will be no walking away without a deal on WTO (World Trade Organisation) terms. There will be continued close economic co-operation with the EU, probably including a version of the customs union. And there will be a lengthy transition deal, to avoid a cliff-edge exit. I have always thought that the prime minister would aim for something as close to EU membership as possible, but without the pressure for political integration, and that is what she is doing.

So, is it al plain sailing? No, Jeremy Corbyn, despite the row over antisemitism, despite Syria, despite the Russian nerve agent, should be struggling. But there was net support for Labour in every age group up to 47 in last year’s election. And, talking to Corbyn supporters, you get the sense that none of this matters. The next election could be uncomfortably close, and the election of an anti-business Labour government remains a possibility. A Corbyn government still looks unlikely. But then so did the election of Donald Trump as US president in 2016.

David, thank you for sharing your thoughts with us and speaking to our audience.