WEBVTT - The UK Government Must Cut Spending - Here's Why (with Kallum Pickering) 0:00:02.720 --> 0:00:08.960 Bloomberg Audio Studios, podcasts, radio news. Are you a Bloomberg 0:00:09.000 --> 0:00:11.399 dot com subscriber? You should be. That's how you get 0:00:11.400 --> 0:00:15.280 my weekly newsletter Meren Talks Money and John's daily newsletter 0:00:15.320 --> 0:00:18.160 Money Distilled. Yours get access to all the brilliant reporting 0:00:18.200 --> 0:00:22.439 from our many colleagues. It's a very worthy investment. Okay, 0:00:22.640 --> 0:00:34.040 onto the show. Welcome to Meren Talks Money, the podcast 0:00:34.040 --> 0:00:36.280 and most people who know the markets explain the markets. 0:00:36.280 --> 0:00:38.760 I'm Meren Sumset Web. This week I am speaking with 0:00:38.840 --> 0:00:43.199 Callum Pickering Peel Hunt, chief economist. How close are we 0:00:43.240 --> 0:00:45.360 do an economic crisis in the UK? If you ask me, 0:00:45.400 --> 0:00:47.640 I say closer than we've ever been in my career 0:00:47.680 --> 0:00:50.600 of the financial journalist. If you ask Cullum, not quite 0:00:50.680 --> 0:00:52.839 as close as it feels to me. He argues at 0:00:52.880 --> 0:00:56.200 the nation and particularly the government, just don't fully understand 0:00:56.280 --> 0:00:58.640 the nature of the problem with the UK economy. In 0:00:58.680 --> 0:01:01.760 a recent research note titled why is UK Growth Sluggish? 0:01:01.960 --> 0:01:04.280 Callum lays it out his thesis. We talked about that 0:01:04.319 --> 0:01:07.000 note in this conversation, as well as getting his take 0:01:07.080 --> 0:01:11.800 on the upcoming budget. What exactly is going to happen? Callum? 0:01:11.920 --> 0:01:13.280 Welcome back, to myrin drugs. 0:01:13.080 --> 0:01:15.360 Money, my pleasure. Thank you so much for having me. 0:01:16.840 --> 0:01:18.920 Right, and we're gonna have one of our usual super 0:01:19.000 --> 0:01:22.200 upbeig conversations about the UK economy and UK politics. 0:01:22.240 --> 0:01:25.320 Right, that's right. Well, you know, I'm always trying my best, 0:01:25.319 --> 0:01:28.640 at least to just not be counter narrative on purpose, 0:01:28.680 --> 0:01:31.000 but just to kind of question the narrative a little bit. 0:01:31.040 --> 0:01:33.320 The last one, of course, everybody was focused on the 0:01:33.319 --> 0:01:35.280 price of energy. I tried to make my case that 0:01:35.319 --> 0:01:39.399 it's really the supply. This time around, I've taken issue 0:01:39.400 --> 0:01:41.480 with two things. The first is the idea that the 0:01:41.520 --> 0:01:46.319 economy is stagnating. It's actually not stagnating. Has some issues, 0:01:46.360 --> 0:01:49.040 but stagnation is not the right word. And second that 0:01:49.080 --> 0:01:52.760 the problems are uncertainty and confidence. I consider these to 0:01:52.800 --> 0:01:55.840 be symptoms of a problem rather than the problem in 0:01:55.880 --> 0:01:58.520 of itself, And in this this lady's piece of research, 0:01:58.520 --> 0:01:59.920 I've tried to unpick some of this a little. 0:02:01.200 --> 0:02:03.640 Okay, well, let's start at the very beginning. When you 0:02:03.680 --> 0:02:07.480 say it's not stagnating, what is it that you mean, 0:02:07.560 --> 0:02:09.880 Because you know, growth rate of under two percent for 0:02:10.000 --> 0:02:12.440 quite some time, that looks like stagnating to me. 0:02:13.000 --> 0:02:17.560 So UK potential growth is probably in the sort of 0:02:17.720 --> 0:02:19.720 mid one to two range. Let's get I think it's 0:02:19.720 --> 0:02:22.400 probably around one point six one point seven percent. If 0:02:22.440 --> 0:02:25.560 I look at the last two years of UK economic 0:02:25.560 --> 0:02:28.560 performance so late twenty twenty three, which roughly coincides with 0:02:29.560 --> 0:02:32.840 the normalization of the acute gas supply shock in Europe 0:02:32.880 --> 0:02:35.880 and the Bank of England stopping graizing interest rates, We've 0:02:35.880 --> 0:02:39.800 had annualized economic growth since then of one point seven percent. 0:02:40.080 --> 0:02:44.880 It's been predominantly driven to my by domestic oriented services. Now, 0:02:45.360 --> 0:02:49.440 this is not stagnation over say a full business cycle. 0:02:49.560 --> 0:02:53.160 If you had the normal fluctuations with growth above two 0:02:53.240 --> 0:02:55.359 for a while and then a period of recession, I 0:02:55.400 --> 0:02:57.440 think we'd be somewhat happy with this. To put it 0:02:57.440 --> 0:03:01.960 into context, between twenty ten two nineteen, growth was two 0:03:02.000 --> 0:03:04.639 point one percent annualized, with with bit better growth on 0:03:04.720 --> 0:03:08.480 things like exports and industry. But I think there's a 0:03:08.520 --> 0:03:12.400 kernel of truth, at least from the market's perspective, in 0:03:12.520 --> 0:03:16.000 the view that the economy is stagnating for the following reason. 0:03:16.280 --> 0:03:18.440 When I look at the components of this one point 0:03:18.480 --> 0:03:21.400 seven percent growth, what I see is a big expansion 0:03:21.400 --> 0:03:26.760 in government spending and declines in cyclical sectors like new 0:03:26.760 --> 0:03:31.200 housing construction, like durable goods expenditure, like broad construction in 0:03:31.240 --> 0:03:35.240 the private sector, which suggests to me and I call 0:03:35.320 --> 0:03:38.040 this kind of the flat white economy, the steady state, 0:03:38.120 --> 0:03:42.480 people buying coffees, people paying their bills. That stuff is 0:03:42.520 --> 0:03:46.240 actually ticking over, okay. But the cyclical bit of the economy, 0:03:46.280 --> 0:03:49.160 which markets tend to look forward to, which companies need 0:03:49.200 --> 0:03:52.240 to react to by raising capital in order to then 0:03:52.480 --> 0:03:55.720 do a little investment, that bit is actually not stagnating, 0:03:55.920 --> 0:03:58.680 but in many respects it's in decline. And I think 0:03:58.720 --> 0:04:02.160 the crux of the economic problem lies in trying to 0:04:02.200 --> 0:04:06.000 better understand why we have this absence of cyclicality right 0:04:06.080 --> 0:04:08.920 at the start of an economic cycle. And I put 0:04:09.080 --> 0:04:13.400 this on fiscal policy makers. I say that the policy 0:04:13.440 --> 0:04:17.800 makers fundamentally are lacking the credibility to get benchmark interest 0:04:17.880 --> 0:04:22.560 rates to where economic fundamentals need them, and because they're 0:04:22.560 --> 0:04:25.920 obstructively high, probably to the tune of about one hundred 0:04:25.960 --> 0:04:28.560 basis points on the ten year, we are crowding out 0:04:28.560 --> 0:04:31.280 these cyclical parts of the private sector. And this is 0:04:31.440 --> 0:04:33.800 essentially the heart of the issue that the UK's facing 0:04:34.040 --> 0:04:36.200 and why these budgets matter so much. 0:04:37.400 --> 0:04:40.600 Okay, we're going to come back to your three points 0:04:40.600 --> 0:04:42.640 on why you think the UK economy is sluggish, if 0:04:42.680 --> 0:04:44.640 not stagnating, But I do want to make the point 0:04:44.640 --> 0:04:46.840 before we do that that you're looking at GDP as 0:04:46.880 --> 0:04:49.360 a whole, and a lot of our listeners very interested 0:04:49.400 --> 0:04:52.840 in looking at population adjusted. So it's GDP per head 0:04:52.880 --> 0:04:55.000 and if you look at GDP per head, as you know, 0:04:55.120 --> 0:04:58.760 this is barely budged for years, and that is stagnant. 0:04:58.880 --> 0:05:00.640 Well, I have to push back on that again. If 0:05:00.640 --> 0:05:06.520 I look at the living standards of workers, so real incomes, 0:05:06.640 --> 0:05:09.800 real wages, they're rising nicely and have been for three years. 0:05:09.920 --> 0:05:12.000 It pays to work in the UK. What we have 0:05:12.520 --> 0:05:15.919 is a problem integrating new immigrants into the labor force, 0:05:16.320 --> 0:05:22.000 and therefore we have this ratio of output to population 0:05:22.240 --> 0:05:25.039 which is unchanged. But within that what you see is 0:05:25.080 --> 0:05:27.560 for workers, living standards arise in and for people that 0:05:27.600 --> 0:05:31.240 are not participating in the labor market, living standards are declining. 0:05:31.480 --> 0:05:34.479 And so the problem is not that we are not 0:05:34.600 --> 0:05:37.719 producing a means to raise living standards in the UK. 0:05:38.240 --> 0:05:42.279 It's that actually we are not properly integrating people into 0:05:42.400 --> 0:05:44.880 the labor market so that more and more people can 0:05:45.000 --> 0:05:49.039 participate in that wage story and lift per capita GDP okay. 0:05:49.040 --> 0:05:52.120 So it's rising levels of non participation as opposed to 0:05:52.680 --> 0:05:55.080 stagnating levels of productivity. 0:05:54.440 --> 0:05:57.360 Per worker wages per worker. We have to be a 0:05:57.400 --> 0:06:00.000 little bit careful with the productivity statistics at the moment. 0:06:00.040 --> 0:06:03.200 But for wages in the UK, inflation adjusted wages have 0:06:03.279 --> 0:06:05.920 been growing at a nice clip for the past two 0:06:06.000 --> 0:06:09.800 to three years. If I look at real disposable income 0:06:09.800 --> 0:06:12.200 for the household sector as a whole, we've had faster 0:06:12.360 --> 0:06:15.240 growth over the past three years, about one point eight 0:06:15.240 --> 0:06:17.520 percent year over a year, than we have had in 0:06:17.560 --> 0:06:20.159 the whole post GFC period. You have to go back 0:06:20.160 --> 0:06:23.440 to the pre Global Financial Crisis period and this is 0:06:23.520 --> 0:06:28.039 where you start to find some of the signs to 0:06:28.120 --> 0:06:31.119 what may be going on. So we've had this rise 0:06:31.320 --> 0:06:34.520 in real disposable income for the household sector since twenty 0:06:34.600 --> 0:06:37.440 twenty two, which is which is when inflation, of course 0:06:37.480 --> 0:06:39.479 peaked at eleven percent and it's come down. 0:06:39.560 --> 0:06:41.480 Do you know I'm going to interrupt you sorry, kind 0:06:41.480 --> 0:06:45.040 of briefly say that not all of our listeners are economists. 0:06:45.160 --> 0:06:48.680 So when you say real disposable incamp per household. Can 0:06:48.720 --> 0:06:50.600 just break that down for us and explain to listeners 0:06:50.600 --> 0:06:51.760 what is is you, This. 0:06:52.279 --> 0:06:54.640 Is the total amount of income which can be spent 0:06:54.720 --> 0:06:59.320 post tax, adjusted for prices. So we have had this 0:06:59.560 --> 0:07:03.040 rise over the past three years, but since twenty twenty 0:07:03.040 --> 0:07:05.600 two we've had a doubling of the savings rate in 0:07:05.640 --> 0:07:10.440 the UK from about five percent to ten percent. Now 0:07:10.480 --> 0:07:16.160 what's important to understand here is that conventional wisdom, which 0:07:16.200 --> 0:07:20.080 is households are saving more because they're uncertain about the future, 0:07:20.480 --> 0:07:24.320 they're lacking the confidence to spend, does not fit the 0:07:24.440 --> 0:07:27.680 fact on a relative basis. So what I mean by 0:07:27.760 --> 0:07:30.200 that is, suppose you were to compare the UK household 0:07:30.440 --> 0:07:33.600 to the US household. US households are saving just four 0:07:33.640 --> 0:07:36.600 percent of their income compared to ten percent in the UK, 0:07:37.120 --> 0:07:40.120 and we, of course have had this increase both sectors, 0:07:40.120 --> 0:07:43.160 both household sectors have had a nice increase in inflation 0:07:43.200 --> 0:07:49.320 adjusted incomes. What I don't see is additional weakness in 0:07:49.560 --> 0:07:53.280 British confidence versus US confidence. If I look at things 0:07:53.400 --> 0:07:56.680 like the index of economic pulsy uncertainty of course, with 0:07:56.920 --> 0:08:02.440 trade wars and the uncertainty around Trump's policy agenda. We 0:08:02.520 --> 0:08:05.600 report more uncertainty in the US than in the UK, 0:08:06.040 --> 0:08:08.800 so the facts don't fit the picture that confidence and 0:08:08.880 --> 0:08:11.600 uncertainty explain this saving trade isn't. 0:08:11.440 --> 0:08:13.400 One of the important things here that there is not 0:08:13.480 --> 0:08:17.320 a regular expectation in the US that there will be 0:08:17.360 --> 0:08:21.600 a consistently rising tax burden, whereas in the UK we've 0:08:21.600 --> 0:08:24.240 had for the last three or four years a constant 0:08:24.280 --> 0:08:27.840 expectation of a rising tax burden. And that's particularly relevant now. 0:08:27.880 --> 0:08:30.600 So that's one big difference between the US and the 0:08:30.720 --> 0:08:32.800 UK in terms of individual continence. 0:08:32.960 --> 0:08:35.200 No, I don't think so. And actually, if I just 0:08:35.280 --> 0:08:37.240 think about the size of the deficit in the US, 0:08:37.320 --> 0:08:40.520 the fiscal deficit, it's sevenercent of GDP, it's actually almost 0:08:40.520 --> 0:08:42.439 twice what it is in the UK. And at least 0:08:42.480 --> 0:08:45.320 in the UK's instance, it's likely to decline over time, 0:08:45.320 --> 0:08:47.640 whereas it's likely to remain around seven percent of GDP 0:08:47.720 --> 0:08:52.040 In America. That deficit is a signal that at some 0:08:52.080 --> 0:08:54.439 point taxes have to go up. For Americans, that's a 0:08:54.520 --> 0:08:57.640 much stronger signal in the long run that taxes need 0:08:57.679 --> 0:08:58.720 to be adjusted upwards. 0:08:58.760 --> 0:09:02.280 Sure, but that what ordinary people listen to. They listen 0:09:02.360 --> 0:09:05.040 to the political conversation as opposed to looking at the 0:09:05.040 --> 0:09:09.080 size of the deficit. If we're thinking about the ordinary person, 0:09:09.200 --> 0:09:12.600 not the economist, not the professional investor, not someone who 0:09:12.720 --> 0:09:15.360 understands the bond market, not someone who looks at how 0:09:15.400 --> 0:09:17.920 bigger deficit is or isn't. What they're looking at is 0:09:17.960 --> 0:09:21.760 the political conversation. And here the political conversation is all 0:09:21.800 --> 0:09:24.680 about your taxes are going up, And in the US 0:09:24.800 --> 0:09:27.760 the political conversation is absolutely not like that. Of course 0:09:27.800 --> 0:09:28.199 you live in. 0:09:28.120 --> 0:09:31.680 New I suspect that part of the story maybe that 0:09:31.720 --> 0:09:34.920 people anticipate taxes going up, but there's just something much 0:09:34.920 --> 0:09:38.120 more fundamental taking place, which is since twenty twenty two, 0:09:38.800 --> 0:09:43.760 UK household net wealth has declined appreciably. In the US 0:09:43.760 --> 0:09:46.920 it's up almost fifty percent. And what you find is 0:09:47.679 --> 0:09:51.199 in credit based economies, consumer oriented economies like the US 0:09:51.280 --> 0:09:56.600 and UK, trends in household spending are influenced greatly by 0:09:56.720 --> 0:10:00.240 trends in household net wealth. So take the experience in 0:10:00.280 --> 0:10:04.760 the UK, for instance, ten twenty nineteen, we had a 0:10:04.880 --> 0:10:09.400 dramatic appreciation in house prices. We had a dramatic appreciation 0:10:09.720 --> 0:10:12.600 in guilt, which is what drove interest rates down over 0:10:12.640 --> 0:10:16.760 that period we also saw actually quite a decent rally 0:10:16.800 --> 0:10:22.720 sustained rally in UK equities. This supported net wealth and 0:10:22.800 --> 0:10:28.079 it meant over that period, even in the ghastly uncertainty 0:10:28.320 --> 0:10:31.840 of the post financial crisis period, when in twenty twelve 0:10:31.880 --> 0:10:35.280 we had a horrible budget, the Omni shambles budget, with 0:10:35.520 --> 0:10:38.319 the weak confidence and the uncertainty, and in the wake 0:10:38.360 --> 0:10:41.520 of the Euro crisis, UK households were reducing their savings 0:10:41.559 --> 0:10:45.720 rates with weaker income growth because in net wealth terms 0:10:45.760 --> 0:10:48.800 they were becoming much better off. So when you had 0:10:48.800 --> 0:10:52.560 this dramatic upturning net wealth, you had this corresponding reduction 0:10:52.640 --> 0:10:55.760 in saving This time around, you see from twenty twenty 0:10:55.760 --> 0:10:59.920 two onwards, roughly coinciding actually with the big fiscal event 0:11:00.080 --> 0:11:03.679 which was the Trust budget wobble in the bond market, 0:11:03.960 --> 0:11:07.200 you have this crash in household net worth to the 0:11:07.240 --> 0:11:11.480 tune of a trillion pounds, mainly in pensions, coincide with 0:11:11.520 --> 0:11:14.800 this sudden adjustment upwards in the household savings rates. So 0:11:15.000 --> 0:11:18.439 what I maintain here is we try to apply narratives 0:11:18.600 --> 0:11:22.600 about uncertainty over taxes, uncertainty over economic policy confidence which 0:11:22.640 --> 0:11:25.480 I can't spot a clear trend in the fact. But 0:11:25.559 --> 0:11:28.160 then I see this very clear fact in front of me, 0:11:28.240 --> 0:11:30.760 which is households are actually poorer in net wealth terms 0:11:30.760 --> 0:11:33.959 in the UK, they've responded by saving more. In the US, 0:11:34.200 --> 0:11:37.280 where we often see similar patterns of household behavior, households 0:11:37.280 --> 0:11:39.840 are saving much less, but they've had a dramatic increase 0:11:39.880 --> 0:11:44.079 in net wealth, which means households are rational. They are 0:11:44.120 --> 0:11:47.320 reacting to being poorer by saving more. This is why 0:11:47.720 --> 0:11:50.480 this fiscal problem that we have comes at such a 0:11:50.480 --> 0:11:53.720 bad time, and we should get into a conversation about 0:11:54.000 --> 0:11:57.000 what is underpinning higher interest rates in the UK. But 0:11:57.120 --> 0:12:00.280 these higher benchmark rates versus what you would act expect 0:12:00.320 --> 0:12:05.559 given economic fundamentals and given rates in other countries, are 0:12:05.640 --> 0:12:10.240 holding back asset prices by pushing mortgage rates, by holding 0:12:10.280 --> 0:12:13.559 down the underlying value of the bonds, and by forcing 0:12:13.600 --> 0:12:16.200 equity analysts to apply a discount rate that is higher 0:12:16.240 --> 0:12:17.760 than it ought to be to equities. 0:12:18.040 --> 0:12:21.120 Okay, so most people will recognize that fall in their wealth. 0:12:21.160 --> 0:12:24.960 I mean, if you look at the shifts in the 0:12:25.000 --> 0:12:28.160 bond market, a lot of people will feel that only 0:12:28.200 --> 0:12:31.520 through their pension portfolios, right, and not everybody looked at 0:12:31.520 --> 0:12:35.439 their pension portfolios. Not everyone will be aware of that shift, 0:12:35.760 --> 0:12:37.240 but enough people will be. 0:12:37.440 --> 0:12:41.120 Plus the story in UK equities, plus the story we 0:12:41.280 --> 0:12:42.800 see in house prices. 0:12:42.960 --> 0:12:45.960 But of course most people aren't very exposed to UK equities, 0:12:46.000 --> 0:12:48.559 and we see that across all portfolios that they tend 0:12:48.600 --> 0:12:51.040 to be much more exposed to the US, irritatingly than 0:12:51.080 --> 0:12:55.120 to the UK, particularly inside a pension portfolio if it's 0:12:55.320 --> 0:12:57.440 one of their auto enrollment portfolios or something like that, 0:12:57.440 --> 0:12:59.680 where they might be slightly more exposed to the US 0:12:59.679 --> 0:13:02.160 than the old fashion pension to the UK. Then old 0:13:02.160 --> 0:13:05.679 fashion pensions are still it's a minority of their holding. 0:13:05.800 --> 0:13:08.440 So they should be seeing rising well from their US 0:13:08.480 --> 0:13:11.800 portfolios and from the UK portfolios this year definitely, so 0:13:11.880 --> 0:13:14.199 they will be feeling it in the main through their bonds. 0:13:14.280 --> 0:13:16.359 We'll we've seen it in the main through their bond exposure. 0:13:16.480 --> 0:13:20.000 And I suspect if you inflation adjust, most people's house prices, 0:13:20.080 --> 0:13:23.680 especially in London and the Southeast, house prices have declined 0:13:23.880 --> 0:13:27.240 appreciably over this period. And again, just to get out 0:13:27.240 --> 0:13:30.080 of the abstract economics for a second, what we all 0:13:30.120 --> 0:13:32.920 know is true and it's why QI worked so well 0:13:32.960 --> 0:13:36.200 to stimulate the recovery is people on a Friday night 0:13:36.720 --> 0:13:39.160 at their dinner parties like to say, Oh, I'm feeling 0:13:39.160 --> 0:13:41.120 frightfully well off. My house price has just gone up 0:13:41.120 --> 0:13:43.080 by fifty thousand pounds in the last month. I'm going 0:13:43.080 --> 0:13:44.679 to go and borrow some money to do some repair 0:13:44.720 --> 0:13:49.120 maintenance improvement on my extension or whatever. This is not 0:13:49.240 --> 0:13:51.720 happening in the UK, and so this net wealth shock, 0:13:52.280 --> 0:13:56.000 which is persisted because we have these obstructively high interest rates, 0:13:56.320 --> 0:13:59.160 is holding back the normal cyclical momentum. Let me just 0:13:59.160 --> 0:14:01.160 come at this from two day two different ways, because 0:14:01.720 --> 0:14:04.679 the thing that's really important when you have economic problems, 0:14:05.000 --> 0:14:08.319 which we do, is to demystify and to just sense 0:14:08.400 --> 0:14:11.440 check the narrative. And that's why I think it's important 0:14:11.760 --> 0:14:14.800 to push back on these notions of confidence and uncertainty 0:14:14.800 --> 0:14:17.040 and tax worries when we can see this real effect. 0:14:17.480 --> 0:14:20.320 Consider this in a different way. If I look at 0:14:20.400 --> 0:14:23.160 consumer confidence for the UK and I look at it 0:14:23.200 --> 0:14:27.040 across age groups. The GfK index is split by four 0:14:27.080 --> 0:14:31.200 different demographics under thirty, under fifty, fifty to sixty five, 0:14:31.200 --> 0:14:34.880 and then sixty five and over. You can see the 0:14:34.920 --> 0:14:37.360 picture for these cohorts all the way back to the 0:14:37.440 --> 0:14:39.320 year two thousand and if you think about all the 0:14:39.360 --> 0:14:41.800 things that have happened since the year two thousand, you 0:14:41.880 --> 0:14:43.960 of course had the dot Com bus, we had nine 0:14:44.000 --> 0:14:47.120 to eleven, We had the Globe of financial crisis, the eurocrisis, 0:14:47.240 --> 0:14:49.800 we had Brexit, we had COVID, we had the Russian 0:14:49.800 --> 0:14:52.080 invasion of Ukraine. And at every single one of these 0:14:53.080 --> 0:14:57.120 events we have seen a co movement in cohort confidence 0:14:57.560 --> 0:15:00.480 younger people, and I think this is the the silver 0:15:00.560 --> 0:15:03.520 lining in all of this. Remain and always are more optimistic. 0:15:03.560 --> 0:15:05.360 So young people are just looking forward to the future. 0:15:05.400 --> 0:15:08.320 I think that's great news. But very recently the last 0:15:08.400 --> 0:15:10.880 two years we've seen for confidence among young people, so 0:15:10.960 --> 0:15:14.280 those under fifth day rise to the extent that for 0:15:14.400 --> 0:15:17.000 the youngest cohort it's actually close to its all time high, 0:15:17.720 --> 0:15:22.520 but for those aged over fifth day it's declining. Now. Again, 0:15:22.640 --> 0:15:24.640 it's where we apply a narrative in the UK without 0:15:24.680 --> 0:15:28.680 thinking about the underlying fundamentals. The common view is this 0:15:28.840 --> 0:15:31.640 is driven by political preference. That we have a left 0:15:31.680 --> 0:15:34.120 wing government and young people are happy about that, and 0:15:34.240 --> 0:15:36.880 the older voters that would have preferred perhaps a conservative 0:15:36.920 --> 0:15:40.480 government are unhappy that the Conservatives are no longer in office, 0:15:41.000 --> 0:15:43.680 then I say, okay, let's ignore the narrative and look 0:15:43.680 --> 0:15:46.960 at what we can see in the under fundamentals. Two 0:15:47.040 --> 0:15:49.320 things that we've already established. The first is we've had 0:15:49.400 --> 0:15:51.720 decent income growth in inflation a just in terms for 0:15:51.760 --> 0:15:53.880 the last three years, but we know the asset prices 0:15:53.920 --> 0:15:57.480 have suffered. For young people, so under fifth day, they 0:15:57.600 --> 0:16:00.960 typically either don't own many assets, or the assets that 0:16:01.000 --> 0:16:03.560 they have, such as a house, they tend to have 0:16:04.040 --> 0:16:07.800 debt associated with it, so they're not as sensitive to 0:16:07.880 --> 0:16:11.440 these net wealth effects. They're much more sensitive to income effects. 0:16:12.200 --> 0:16:16.000 For older voters that have gone through their lifetime earnings growth, 0:16:17.320 --> 0:16:19.960 that have accumulated assets, they tend to be sensitive to 0:16:20.000 --> 0:16:22.760 asset prices. And what you see is a decline in 0:16:22.840 --> 0:16:27.160 inflation adjusted house prices coincides with this weaknessing confidence among 0:16:27.240 --> 0:16:30.720 all the cohorts and explains confidence over a long period. 0:16:31.760 --> 0:16:33.960 The rise in real wages over the past two to 0:16:34.000 --> 0:16:37.240 three years explains the rising confidence among young workers and 0:16:37.480 --> 0:16:42.160 younger cohorts, and this is what the divergence is capturing 0:16:42.320 --> 0:16:45.840 in the confidence data, which means just returning to the economy, 0:16:46.840 --> 0:16:49.400 the wage driven income driven parts of the economy day 0:16:49.400 --> 0:16:51.640 to day spend in are doing okay, that's the reason 0:16:51.680 --> 0:16:54.960 you have this one point seven percent mostly services oriented growth. 0:16:55.520 --> 0:16:58.840 But the stuff that's really asset sensitive, where we need 0:16:58.880 --> 0:17:00.840 to feel better off before we go out and borrow 0:17:00.880 --> 0:17:03.960 and speculate. The people with the real purchasing power at 0:17:04.000 --> 0:17:06.920 the older, richer end of the income spectrum, they have 0:17:07.160 --> 0:17:11.040 such depressed asset values that they are reluctant to go 0:17:11.160 --> 0:17:13.879 out and drive the kind of CycL collectivity. And the 0:17:13.960 --> 0:17:16.800 reason that this is such a confusing concept, I think 0:17:17.200 --> 0:17:20.199 is because at the start of a cycle we are 0:17:20.600 --> 0:17:24.080 viewing an economy that is entirely, entirely the inverse of 0:17:24.119 --> 0:17:26.040 what we typically see the start of a cycle. We 0:17:26.119 --> 0:17:29.840 normally have high unemployment, low real wage growth, low inflation, 0:17:30.359 --> 0:17:33.480 and rapid falls in interest rates, which spur on asset 0:17:33.520 --> 0:17:36.840 price inflation. And the first sectors that usually signal that 0:17:36.880 --> 0:17:39.840 there's a recovery to come are things like the housing sector, 0:17:41.000 --> 0:17:43.720 things like credit. Okay, credits kicking up, let's get excited 0:17:43.720 --> 0:17:46.520 about economic growth. This time around, we have the opposite. 0:17:46.920 --> 0:17:51.400 We have interest rates elevated. We also have elevated real 0:17:51.440 --> 0:17:53.639 wage growth, and so the pattern that's emerging at the 0:17:53.680 --> 0:17:57.320 start of the recovery is very different. And the kicker 0:17:57.600 --> 0:18:01.400 in all of this is to say, I don't think 0:18:01.520 --> 0:18:05.240 that this is a one off in the UK's case. 0:18:05.520 --> 0:18:09.120 We have been here repeatedly through history and the fiscal 0:18:09.240 --> 0:18:16.159 framework that we need to understand in this context is 0:18:16.200 --> 0:18:20.040 that the UK goes through cycles of strong credibility in 0:18:20.119 --> 0:18:23.680 face of markets and it outperforms, followed by periods of 0:18:24.080 --> 0:18:28.280 weakness and impaired credibility that it needs to correct. And 0:18:28.920 --> 0:18:32.040 I'll stop because I suspect there's a question in here, 0:18:32.160 --> 0:18:34.200 but I want to just go through the history to 0:18:34.240 --> 0:18:35.720 help people understand why this is. 0:18:35.920 --> 0:18:38.400 Fiscal matters so much I'd like to do that. I'd 0:18:38.520 --> 0:18:39.960 like to do that, So I just want to want 0:18:40.000 --> 0:18:43.440 to go back. So we're talking about the reasons that 0:18:43.520 --> 0:18:45.600 you've given in your latest piece about why the UK 0:18:45.720 --> 0:18:49.840 economy is looking sis luggage, not stagnating. So we've talked 0:18:49.840 --> 0:18:52.399 about one of the things on your list, which is 0:18:52.480 --> 0:18:55.959 this high household savings and self consumption since twenty twenty two, 0:18:56.000 --> 0:18:58.800 which are the result of this wealth shock in twenty 0:18:58.880 --> 0:19:01.320 twenty two, which is connection to the one markets, et cetera. 0:19:02.000 --> 0:19:04.600 But the other major thing that you pull out is 0:19:04.880 --> 0:19:10.240 this idea that our policy making credibility is damaged. And 0:19:10.400 --> 0:19:12.520 that's a problem, And this is where you want to talk. 0:19:12.560 --> 0:19:15.639 I think about the long term history of our cycle 0:19:15.680 --> 0:19:17.720 of credibility effectively exactly right. 0:19:17.880 --> 0:19:21.680 So just the one line to keep in mind here 0:19:21.840 --> 0:19:24.920 is I do this and I'm not drinking. I don't 0:19:24.960 --> 0:19:27.360 have milk in my coffee because it's apparently it's not bad. 0:19:27.400 --> 0:19:29.160 It's not good for you. But we're all warned about 0:19:29.160 --> 0:19:32.280 the health these healthy lifestyle choices that we should make now, 0:19:32.320 --> 0:19:34.600 and if we don't make them, it gives us inflammation 0:19:34.680 --> 0:19:36.800 in our body. This is the same with the economy. 0:19:37.160 --> 0:19:41.240 Poor policy choices lead to inflation in the economy. It's 0:19:41.320 --> 0:19:44.720 exactly the same thing. When you have persistent inflation, it's 0:19:44.760 --> 0:19:50.280 a signal somewhere that you're organizing your economy badly. Historically, 0:19:50.520 --> 0:19:54.520 the UK, the data I look at starts in the 0:19:54.600 --> 0:19:57.840 late seventies, and just a quick history lesson the late 0:19:57.920 --> 0:20:01.800 seventies the early eighties, the u K underperformed the G 0:20:02.000 --> 0:20:05.320 seven so advanced major economies excluding the UK of course, 0:20:06.560 --> 0:20:09.520 in a major way, and our bond yields rose relative 0:20:09.560 --> 0:20:13.120 to other countries. We then got back on track through 0:20:13.119 --> 0:20:15.480 the eighties until the late eighties, when we had another 0:20:15.520 --> 0:20:20.560 inflationary crisis in the late eighties early nineties and we 0:20:20.720 --> 0:20:23.880 underperformed again. We then through the nineties right up until 0:20:23.920 --> 0:20:26.440 two thousand and seven, go through a long period of outperformance. 0:20:26.720 --> 0:20:30.199 Then we underperformed through the financial crisis. We then outperform 0:20:30.480 --> 0:20:33.280 from two thousand and about twenty eleven to two thousand 0:20:33.320 --> 0:20:37.240 and eighteen. We then start to underperform again. What's the 0:20:37.320 --> 0:20:44.560 consistent theme here? In nineteen eighty one, following the underperformance 0:20:44.560 --> 0:20:47.719 of the late seventies and the early eighties, the Conservative government, 0:20:48.600 --> 0:20:53.600 recognizing that markets feared another decade of huge inflation in 0:20:53.640 --> 0:20:58.360 the UK, issued index link guilts for the first time. Basically, 0:20:58.760 --> 0:21:01.240 we will compensate you for any inflation that we create. 0:21:01.320 --> 0:21:05.720 Will transfer the cost of bad policy choices from the 0:21:05.800 --> 0:21:09.520 people that lend to us in markets to taxpayers, but 0:21:09.960 --> 0:21:13.159 de facto to government. We'll guarantee a real rate of 0:21:13.240 --> 0:21:18.840 return that established credible commitment to low inflation. The UK 0:21:19.000 --> 0:21:22.040 then sees its bond yards come down, the economy outperforms. 0:21:22.560 --> 0:21:25.840 This inflation to crisis the late eighties early nineties gives 0:21:25.920 --> 0:21:28.560 way to another loss of credibility and rise in bond 0:21:28.600 --> 0:21:33.760 yo olds. We join erm to try and stabilize and 0:21:33.960 --> 0:21:38.280 reassert credibility. It doesn't work. In September nineteen ninety two, 0:21:38.280 --> 0:21:41.720 of course we crash out Black Wednesday. Very famous people, 0:21:41.800 --> 0:21:44.960 I think forget that. In October nineteen ninety two we 0:21:45.080 --> 0:21:48.080 introduce inflation targeting for the first time. We say we'll 0:21:48.119 --> 0:21:51.679 commit to inflation between one and four percent retail prices 0:21:51.760 --> 0:21:55.639 excluding mortgages. The banking Land, of course wasn't independent at 0:21:55.680 --> 0:21:58.040 that point, but the Conservatives were viewed as credible enough 0:21:58.320 --> 0:22:01.520 that it helped to restore confidence bring yields down. Then 0:22:01.600 --> 0:22:05.119 into ninety seven when labor Win Gordon Brown makes the 0:22:05.160 --> 0:22:09.720 Bank of England operationally independent and reduces the inflation target, 0:22:09.960 --> 0:22:13.880 switches to CPI and this once again strengthens the commitment. 0:22:14.160 --> 0:22:16.400 He also introduces fiscal rules for the first time, which 0:22:16.400 --> 0:22:19.159 at that point we viewed as credible. The UK then 0:22:19.280 --> 0:22:22.800