This is my précis of the economic outlook which was expounded by Anthony Hilton, Financial Editor of The Evening Standard and a Wincott Financial Journalist of the Year, at the New Model Adviser Conference and Awards which took place in the Lancaster London Hotel on 13th and 14th January. The photo was taken during Anthony Hilton’s address to the Conference.
But First
Before continuing with this topic I should just add that Arch Financial Planning Limited was again shortlisted with four other companies for the New Model Adviser Award South East which we won in 2010. On this occassion we congratulate Skerrit Consultants Limited of Hove on winning the award this year but we cannot be anything but delighted to have made it into the shortlist again when there are so many good IFA firms in the South East.
Anthony Hilton
This précis was produced from notes that I took of Anthony Hilton’s speech and has not been approved by him as a true representation of his views.
As well as his role at The Evening Standard, Anthony Hilton is an author (he has written two acclaimed books on communicating financial information and the City of London) broadcaster and lecturer. He has also served as a non-executive director of insurance and publishing companies. Before joining The Evening Standard, Hilton served in New York as Business Correspondent for The London Sunday Times and had previously been City Editor of The Times, City Editor and Managing Director of The Evening Standard, Editor of Accountancy Age and also worked for The Observer, The Daily Mail and The Sunday Express. He has an MA(Hons) in Economics from the University of Aberdeen.
Hilton makes regular television and radio appearances, commenting on the international money markets and the state of the economy. He also assesses the outlook for investments, the pensions crisis and corporate governance.
Financial Regulation
Hilton directed his opening remarks very much to his audience by talking about financial regulation in the UK. He made the point that regulation is mechanical but businesses are biological, that is made up of human beings, so that regulation will always end up being bypassed. European regulatory panel decisions are binding on the UK’s financial services regulator, the FSA, so that the regulatory weather will be set in Europe not in the UK. This will mean much more consumer protection in focus. Hilton showed from the history of regulation that following yet another banking crisis we should be prepared for a long period of excessive regulation. The message to the UK’s financial advice community was not to fight it, but to reconcile ourselves that we have to live with it. The companies which survive will be those which are the most adaptable.
The Outlook for the Economy
Hilton then turned to his main topic – the outlook for the economy. He said that there is an industry in the City which makes its living out of frightening the wits out of us. Instead he wanted to downplay the economic problems circling the UK. He said while the country’s national debt is expected to rise to 80% of GDP, given the UK’s inability to meet inflation targets, it should be dealt with over time. The easiest way to get out of debt is inflation. So he is optimistic about the economy because ‘Mervyn King is playing a blinder’. We have had inflation of 4-5%, and if we continue then we won’t have a problem.
He was quite bullish about prospects for the UK economy. He said there were encouraging signs already in sectors including manufacturing, and he expected the economy to perform better than expected in line with previous busts and booms. If you look at growth rates after recessions in the 80s and 90s, the economy grew at 3.7% in the 1980s and 3.6% in the 1990s. So economies do make up the lost time and I think we are liable to grow much faster than people expect. Official forecasts are much lower than 3% at present, with the Office for Budget Responsibility revising their forecast for 2011 down to 2.1% in November.
The Case for Optimism
Hilton dealt with four of the areas seen as the biggest threats to the recovery.
(1) The Cuts. These will not bring the economy to its knees. When did any government do what they said they would do? They will not deliver on all of the cuts so no need to be overly concerned. They will not be able to cut spending – just slow down the increase in spending. The cuts are no worse than many businesses are having to do.
(2) The Eurozone. The business case for Germany keeping the Euro is that this provides them ith a permanently devalued currency compared to the Deutshmark. Defaults by countries in the Euro are not very important as banks will lend to them again. Such defaults will not bring the Euro down. Lots of US states default. Even if the Euro were brought down this would not be an insurmountable problem. When the Union of Soviet Socialist Republics (USSR) broke up the individual currencies were able to cope in time.
(3) The Consumer Squeeze. In a recession it is the unemployed who take the hit. If you are in work you are OK. 90% of spending is by those in work so the recession should not reduce consumer spending very much.
(4) Debt. Here Hilton was referring to the burden of debt on the country and individuals rather than as an investment asset (ie gilts and bonds). The issue with debt for governments is not the amount but whether it is manageable and able to be rolled over. The present Government is maintaining the level of confidence that international markets need to have in the UK. To deal with debt, governments can Deflate, or Default, or Debase (that is inflate the currency). We should not be surprised that some countries, like Greece, default because that is built into their history. The debase option works if people don’t notice and at present this seems to be working for the UK Government. We should expect inflation to continue at its present level with much posturing against it but with no action taken!
Learning from Previous Recessions
The 1982 Recession. Nine out of ten of the world’s top banks were technically bust but no one was told! Interest rates were reduced and the banks regenerated themselves very quickly which they can do in such circumstances.
The 1993 Recession. This was the worst recession before the present one. By 1997 the entire economy had turned round from the same conditions as we have now.
When economies do recover from recession they make up for lost time and grow much faster than expected.
Things We Should Worry About
Hilton felt that there were things that we should worry about.
The Asia effect on commodity prices. The heavily increased demand from Asia will continue the upward pressure on commodity prices and ultimately mean that we will experience lower standards of living over the long term.
What does the West have to do? What do the Western economies have to do to get back in the game?
The cost of financial intermediation. The cost of bankers’ bonuses are directly creamed off from our pension funds.
Investment Outlook
Hilton commented on the investment outlook.
Inflation will remain much higher than people are predicting and we will see rates of inflation up to 5%. [Note from me - the latest figures announced today show CPI inflation rose to 3.7% for the year to December and the RPI at 4.8%]
Interest rates will stay low.
This is a formula for equities to be a major investment at the expense of debt (ie gilts and bonds).
Europe should be a better equity investment than emerging markets. It is important to realise that you do not buy GDP when you invest, you buy company performance. The European corporate sector is doing extremely well. Many companies in Emerging Markets lack the same level of corporate governance.
You should buy investments that have an income stream which is why commodities as an investment, which are devoid of income, are heading for a fall.
Finally – a Missused Ratio
Hilton closed with some remarks about the dire predictions concerning the ratio of retired people to those in work which is continuing to shrink. He preferred to consider the dependency ratio which is those out of work compared to those in work. This is projected to be the same in 2040 as it was in 1960. So looking at the ratio of retired people to those in work is a political issue but not an economic one. Having said that, the UK economic system cannot cope with 25 years of idleness from those in retirement and increasing the retirement age will deal with this.
Hilton said that we cannot expect young people in their 20s and 30s to start saving for retirement when they have huge debts from their university education. This is another reason for delaying retirement.
I hope that you have found this economic overview to be helpful. Please note that this information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.
If you would like to review your financial planning in 2011 please ask your usual Arch adviser, telephone 01483 204600 or email enquiries@arch-fp.co.uk.