Speaker 1: Francie and are your breakfast fan. I'm a huge breakfast
Speaker 1: fan Italian presumably salty. Really I'm a salty I'm actually
Speaker 1: a full English breakfast English no way bacon, sausages, who
Speaker 1: baked beans beans. Wow, I just got back from my
Speaker 1: two weeks. I've basically turned into a cross after. You're
Speaker 1: so continental, I'm so continent. We're sort of inverted. We are.
Speaker 1: I just can't have the English breakfasts too much. I can,
Speaker 1: but it's gotten so expensive. Have you seen the index yet,
Speaker 1: the Bloomberg Breakfast Index. It's pretty it's pretty shocking. Seventeen
Speaker 1: percent more expensive than it was last year. And milk
Speaker 1: was up and like the breakdown all the different bits,
Speaker 1: milk up for I think was the highest increase. And
Speaker 1: this is inflation really where it hurts right the general population.
Speaker 1: They're not going to be able to afford the basics.
Speaker 1: I'll save because I don't have milk and my tea.
Speaker 1: I'm Franci la Well with David Merritt in the London
Speaker 1: studio and this is in the City, Bloomberg's podcast, connecting
Speaker 1: you to the stories at the heart of the City
Speaker 1: of London. Now this week, as we inch closer to
Speaker 1: the election of a new prime minister, we thought it
Speaker 1: would make sense to do a little fact checking on
Speaker 1: the candidates proposals for the struggling economy. That's right, you know,
Speaker 1: obviously inflation a huge topic in everyone's minds. The two
Speaker 1: candidates don't seem to be able to tell us exactly
Speaker 1: what they're going to do to tackle it, do they? Yeah?
Speaker 1: And this is I guess a campaign that's as old
Speaker 1: as times. You promise things and then maybe once you
Speaker 1: get into power, it doesn't really add up because you
Speaker 1: see so many more problems that you have to be
Speaker 1: faced with. And it's a weird campaign, isn't it. Because
Speaker 1: they're not talking to all of us, most of us
Speaker 1: in the population. They're talking to this small group we
Speaker 1: don't even know exactly how many they are, but Tory
Speaker 1: Party members, and you've got to assume their priorities are
Speaker 1: probably a little bit different to the public as a whole.
Speaker 1: So Dave to dissect this difference between what he calls
Speaker 1: campaign economics and the governing kind of economics. I spoke
Speaker 1: to Pania Gordon chief An with Simon French. Sam in French,
Speaker 1: thank you so much for joining us. So we're trying
Speaker 1: to figure out, first of all, where we are in
Speaker 1: the UK economy and how bad is it. It's pretty bad.
Speaker 1: There's no sugarcoating, and I'm afraid we expect a recession
Speaker 1: starting the fourth quarter, lasting for two quarters. Now it
Speaker 1: has to say the Bank of England sea coming five
Speaker 1: successive quarters, which would be a contraction on the scale
Speaker 1: of the global financial crisis. I have to say they
Speaker 1: have to condition those forecasts on a nounced government policy.
Speaker 1: That's an impediment because we expect some more support to come.
Speaker 1: But whichever version you want, the Pamea Gordon's Island French
Speaker 1: version or the Bank of England Andrew Bailey version, it's
Speaker 1: pretty bad going into this winter for the UK, the
Speaker 1: the Andrew Bailey version. So I was in the press
Speaker 1: conference and I have to say people are looking around
Speaker 1: saying I'm a little bit depressed without a very big,
Speaker 1: very big shot. Rising energy prices has exacerbated the fall
Speaker 1: in real income CPR information is now expected to pick
Speaker 1: at just open the UK as slowed and the economy
Speaker 1: is now forecast to enter recession later this year. Were
Speaker 1: they just being honest or is this worst case scenario?
Speaker 1: I think journalists are certainly smart enough to look at
Speaker 1: some of the distribution analysis which isn't necessarily coming across
Speaker 1: in the Monetary Policy report. But we've seen from other
Speaker 1: research organizations the impact on particularly the bottom perhaps even
Speaker 1: the UK population, who by my estimates will be spending
Speaker 1: upwards of one pound in every five on their energy,
Speaker 1: both household energy and petrol for their cars. And that
Speaker 1: is an extraordinary increase and I think the level of
Speaker 1: hardship that that might generate is one of the reasons
Speaker 1: why you look at those macroeconomic forecasts and you look
Speaker 1: at the component part of the distributional impact, and you
Speaker 1: can get quite depressed quite quickly. And what I often
Speaker 1: get asked is why do we not talk about Brexit?
Speaker 1: Is it can you no longer talk about Brexit without
Speaker 1: being accused of being a remainder And how much impact
Speaker 1: does that have on the economy? We should talk about brexits.
Speaker 1: There is little doubt I think that the UK economy
Speaker 1: is about three smaller today as a result of the
Speaker 1: decision of the UK to leave the European Union. Is
Speaker 1: that as bad as was presented in the worst case
Speaker 1: no deal scenario. If Treasury suggested a shrinkage of about
Speaker 1: eight to nine percent GDP. No, that hasn't crystallized, but
Speaker 1: there is clear obvious impact from additional trade frictions, reduced
Speaker 1: business investment, and the fact on a trade way to
Speaker 1: basis sterling is still trading ten to fifteen percent lower
Speaker 1: than it was ahead of the referendum. Now, bringing that
Speaker 1: back to energy, an energy market that is priced almost
Speaker 1: universally in US dollars clearly a weaker sterling. This is
Speaker 1: U S dollars. Means that there is a bigger inflationary
Speaker 1: impulse and is part of the reasons you quote those
Speaker 1: longer and higher inflation figures the impact of a weak currency,
Speaker 1: but also labor shortages, which must filter through of course
Speaker 1: how much people are asking for wage increases. Act. Again,
Speaker 1: this is one of my frustrations with some of the
Speaker 1: economic commentary we get in the UK is the labor
Speaker 1: shortages are not unique to the UK. You're also seeing
Speaker 1: labor shortage another part of the economy as a legacy
Speaker 1: of people reappraising their options, early retirees, people with long COVID.
Speaker 1: But what you do then is in the UK context,
Speaker 1: you ratchet on top of that a change of the
Speaker 1: migration regime what used to be known as third countries India, Pakistan,
Speaker 1: the Philippines, Nigeria and now a much bigger proportion of
Speaker 1: the total net migration of the UK. Employers in the
Speaker 1: UK since the accession of the additional eight EU states
Speaker 1: in two thousand four have built up strong networks between
Speaker 1: the UK and poland UK Lithrough any part of these
Speaker 1: europe now have to pivot adjust to a different route
Speaker 1: of migration. That takes time. That in the parlance of Brexit,
Speaker 1: what we've done is we put sand in the cogs
Speaker 1: of the economy that sam will eventually work through questions
Speaker 1: how much damage you do In the meantime, what are
Speaker 1: the two or three policies that the next Prime minister
Speaker 1: can put in place to try and mitigate some of
Speaker 1: those shocks if we're talking about economic shocks in terms
Speaker 1: of household incomes. We we touched on this a little
Speaker 1: bit earlier, which is the specific targeted support for the
Speaker 1: bottom to three income cohorts, which isn't necessarily what we've
Speaker 1: heard about in the campaign, particularly from the nest Trust campaign,
Speaker 1: which is about tax cuts, particularly to corporations and national insurance. Well,
Speaker 1: there's a lot of people who will be a zero
Speaker 1: beneficiary of those changes. They cost about thirty billion pounds,
Speaker 1: but actually the benefits will not be those people who
Speaker 1: will feel the biggest pinch this winter. So I would
Speaker 1: suggest from a you know, if you give you if
Speaker 1: you want three one would be to start with specific
Speaker 1: support for low income households. Second thing is I think
Speaker 1: we have to acknowledge that over the medium too long
Speaker 1: term this is only solved by energy independence energy security.
Speaker 1: Now it may well be that the political pressure will
Speaker 1: become too much for the government not to broaden its
Speaker 1: windfall tax that's already introduced on all CEA oil and gas.
Speaker 1: If that is going to happen, what message are you
Speaker 1: sending to the domestic supply chain about ramping up capacity.
Speaker 1: Because one of the reasons I've been critical of the
Speaker 1: energy price cap, which has protected households, it disrupts the
Speaker 1: really important price signals that we get in markets, which
Speaker 1: is not which is not a price cab like European style. Right,
Speaker 1: This is not how the French do it. They they
Speaker 1: cap the price. This is a soft pricing cab, yes,
Speaker 1: which actually beautifully segues into the third and final suggestion,
Speaker 1: which is what is the optimal if you like industrial
Speaker 1: structure for retail energy providers, because if you talk about
Speaker 1: what France have done, they've affectively nationalized DDF. Are we
Speaker 1: going to out the back of this maintain a retail
Speaker 1: market where there is a diversified set of providers who
Speaker 1: it appears, at least to the consumer, that it's heads
Speaker 1: you win, tails we lose in the event of uncertainty
Speaker 1: on the future path of energy prices. When wholesale gas
Speaker 1: prices were as they were for a decade, fifty per firm,
Speaker 1: then you know company profit margins, retail energy profit marginers
Speaker 1: will be pretty constant just to playing your margin. But
Speaker 1: in the event that it's gone four d five ten
Speaker 1: x times on the gas price, we're having potentially bailout
Speaker 1: specific industrial support. Does that suggest the starting structure of
Speaker 1: UK retail energy was fit for purpose? I think there
Speaker 1: are more questions and answers on that one of the moment.
Speaker 1: So you have two candidates that are trying to become
Speaker 1: prime minister, one as a former chancellor, the other is
Speaker 1: Liz Truss. They're going around the country. Who are they
Speaker 1: talking to because it feels like they're really talking to
Speaker 1: the hundred and sixty thousand Conservative members that will vote
Speaker 1: for them. You are absolutely right, and I wrote recently
Speaker 1: about the difference between campaign economics and governing economics. At
Speaker 1: the moment, we are hearing the economics of campaigning and
Speaker 1: not campaigning for the votes of thirty forty million UK electured.
Speaker 1: It's the hundred and sixty two hundred thousand Conservative members.
Speaker 1: Now we know the demographic characteristics. They are somewhat older
Speaker 1: than the average electorate, They're somewhat whiter than the average electorate.
Speaker 1: There's somewhat richer than the average electorate. That tells us
Speaker 1: a little bit about their preferences. If you you look
Speaker 1: at you know the sort of demographic profiles and the
Speaker 1: political preferences of that group, which maybe why we're seeing,
Speaker 1: at least from the lizt Trust side, a lot of
Speaker 1: channeling of Margaret Thatcher, former UK Prime Minister in the
Speaker 1: nine eighties, who was very remains very popular, very potemic
Speaker 1: for that group. The flip side from Rashi sink you
Speaker 1: are seeing more conversations about or more statements of fiscal discipline.
Speaker 1: The idea of we're also channeling actually something Margaret Thatcher's keener,
Speaker 1: which is a good housekeeping of the public finances, but
Speaker 1: as a result of actually generated quite a big gap
Speaker 1: in there sort of the scale of their fiscal plans,
Speaker 1: but also the rhetoric they're using. So let's focus on
Speaker 1: tax cuts. Liszt trust her big thing was as soon
Speaker 1: as I get in power, if I get into power,
Speaker 1: I cut taxes. She can hardly do a U turn
Speaker 1: on that. And so what does that mean for the
Speaker 1: UK economy. We're an inflationary environment. This is the biggest
Speaker 1: headache for households, it's the biggest headache for the Bank
Speaker 1: of England. We're going into tax cuts. I mean, let's
Speaker 1: not beat about the bush on this, because I think
Speaker 1: there's been a lot of misinformation spread. Standard economics is
Speaker 1: that if you increase your budget deficit through either additional
Speaker 1: spending or cutting taxes, then that will be at the
Speaker 1: margin inflationary. It's not gonna be deflationary, it's not gonna neutral,
Speaker 1: it's going to be inflationary. But it is also true
Speaker 1: that in the context of inflation that is likely to
Speaker 1: hit something of the order of thirteen percent in the
Speaker 1: UK by the end of the year. That will be
Speaker 1: you're not quite a rounding error. But the impact of
Speaker 1: thirty million pounds worth of tax thirty billion, where the
Speaker 1: tax cuts is going to be relatively small in the
Speaker 1: context of events that are going on three thousand miles
Speaker 1: to the east of us that are impacting wholesale energy prices.
Speaker 1: So it is one of magnitudes. But there is no
Speaker 1: doubt that you are adding fuel, or be it a
Speaker 1: limited amount of fuel to what is already an inflationary fire.
Speaker 1: But that makes the life of the rich easier, but
Speaker 1: not necessarily the ones that are struggling the most with
Speaker 1: the cost of living. Well that certainly if you're looking
Speaker 1: at the type of tax cuts that are being proposed
Speaker 1: by the Trust campaign, let's be quite specific here. She
Speaker 1: is suggesting reversing the increase in national insurance contributions that
Speaker 1: came in earlier in the year. That was quite a
Speaker 1: progressive You can argue whether it's a good or a
Speaker 1: bad thing, but unambiguously, more affluent households paid more than
Speaker 1: poorer households, and therefore if you reverse them, you do
Speaker 1: go on the reverse journey. And at this point, given
Speaker 1: the distributional impact of higher energy prices, do I think
Speaker 1: that is an appropriate tax cut? Um Personally, I think
Speaker 1: it is poorly targeted. If you've got a finite amount
Speaker 1: of public resources you want to devote to supporting households
Speaker 1: through this period, I'm not sure i'd pick that National
Speaker 1: insurance increases the want to reverse let's trust gets in.
Speaker 1: What's her biggest challenge economically in the next four eight hours.
Speaker 1: How is she going to support UK household incomes through
Speaker 1: this winter? How targeted is that going to be? And
Speaker 1: probably the biggest decision is she's got two broad options.
Speaker 1: She can either give money directly to households, you support
Speaker 1: specific cohorts and indeed not support specific codes to govern
Speaker 1: is to choose. She has to make those choices in
Speaker 1: the first forty eight hours um. But then if she
Speaker 1: doesn't want to support household incomes, will she just cap
Speaker 1: the energy tariffs at a level below what the futures
Speaker 1: market is pointing to effectively tear up the formula. If
Speaker 1: she were to do that, most UK retail energy companies
Speaker 1: in the UK would immediately become insolvent and therefore effectively
Speaker 1: you're talking about nationalization. So two very very different paths
Speaker 1: with very very different implications. She's going to decide which
Speaker 1: of those two broad paths she has to pick early on,
Speaker 1: and do you think she'd be prime Minister to the
Speaker 1: people or a prime minister to the Conservatives. The problem,
Speaker 1: if you like, in answering that question about let's trust,
Speaker 1: is let's trust, and her opponents have used this and
Speaker 1: I'm not I'm not jumping on a political Bandmarcon. It's
Speaker 1: just a statement of fact. She was a Republican, she's
Speaker 1: now a monarchist. She was a lib Dem she's now
Speaker 1: a conservative. She was a remainer, she's now a leaver. Therefore,
Speaker 1: it's quite difficult actually to answer your question. I'm not
Speaker 1: going to, sort of, if you like, an criticize her
Speaker 1: for that. I actually think it's a virtue. If you
Speaker 1: experience different stuff in life, you change your views. That's
Speaker 1: that's that's that's a good thing. I don't like ideal
Speaker 1: logues who don't change their view regardless of the evidence.
Speaker 1: But in terms of being able to answer your question,
Speaker 1: it's quite difficult to know how pragmatic she will be
Speaker 1: when the electorate change from the aforementioned hundred sixty two
Speaker 1: thousand to trying to win a re election in late
Speaker 1: The problem is whichever choice she picks, she'll have to
Speaker 1: upset someone by promising if you like campaign economics, you
Speaker 1: want to be all things to all people, which, let's
Speaker 1: be honest, the current UK Prime Minister Boris Johnson made
Speaker 1: a has made a career of doing. Eventually you'll disappoint
Speaker 1: someone because you have to make those decisions in government
Speaker 1: when you campaign. You don't have to make them when
Speaker 1: you are in government. You have to choose. And will
Speaker 1: she disappoint if you like her base who swept her
Speaker 1: to power by promising them stuff on Brexit, on tax
Speaker 1: cuts which the realities of office may may make it
Speaker 1: very difficult to achieve. I guess that the economists and
Speaker 1: the city no, she soon act better because he was
Speaker 1: in charge of finances for this country. Is that what
Speaker 1: he will be as prime minister? Will he put the
Speaker 1: same policies in place? He's been quite public and it's
Speaker 1: no secret I think to any of your listeners that
Speaker 1: him and the current ime Minister Boris Johnson did not
Speaker 1: see eye to eye on the economic path and therefore
Speaker 1: this wasn't I feel like a pure economic strategy of
Speaker 1: Richie Sunk. This was always as it was in the
Speaker 1: latter days of Gordon Brown and Tony Blair. It was
Speaker 1: a compromise which avoided the two hit it and punching
Speaker 1: each other. I don't think it ever came to that,
Speaker 1: but at least metaphorically punching each other. And therefore we
Speaker 1: don't necessarily get a read from his period in office
Speaker 1: as a Chancellor how he would be as Prime minister.
Speaker 1: Having said that, I do think his fiscal conservatism small
Speaker 1: c is genuine. He does worry about debt, he does
Speaker 1: worry about sustainable finances. He is quite from everyone who's
Speaker 1: worked with him, people I have a lot of respect
Speaker 1: for saying he's very, very diligent. I think it is
Speaker 1: that diligence and that work ethic that is, from my perspective,
Speaker 1: was trying to understand his economics the most appealing because
Speaker 1: it's likely therefore to be a consistent and logical So
Speaker 1: it is up to the Prime minister really to set
Speaker 1: the economic targets or the economic trend or a really
Speaker 1: be you know, at the end of the day, the
Speaker 1: Chancellor and their advisors. Well, I think you're alluding to
Speaker 1: a very interesting point, which is who will be the
Speaker 1: chancellor under either Liz Trust or Rishi sink Um. But
Speaker 1: I think the smart money is on current Energy Secretary
Speaker 1: Quasi Quarte being the Chancellor for Trust. For trust and
Speaker 1: what we know about quasi quarteng is he co authored
Speaker 1: with Donic rab and Liz Trust Britannia Unchained, which had
Speaker 1: a very different vision for the UK economy than the
Speaker 1: current UK economy. Will that crystallize in the stuff that's
Speaker 1: coming out of the Treasury or will he be selected
Speaker 1: because this trust thinks as Prime Minister, she wants a
Speaker 1: treasury who are lockstep with what she's setting out. There's
Speaker 1: a very different challenge actually for Rishi Sink, which was
Speaker 1: a challenge that Alisa Darling faced when he took over
Speaker 1: as Chancellor from Gordon Brown, is if the permer Chancellor,
Speaker 1: who knows the Treasury inside out then moves into number ten,
Speaker 1: you can't get much past someone who might want to
Speaker 1: sort of continue to take quite a detailed look at
Speaker 1: the economic brief. I think the reality is whoever they
Speaker 1: surround themselves by, they will be impacted by events that
Speaker 1: even sat here now with the if you like the
Speaker 1: foresight of what is to come in terms of the
Speaker 1: economic slowdown, the economic pressures, it will be shaped by
Speaker 1: events that none of us can predict and What you
Speaker 1: therefore look for is someone who has the intellectual rigor
Speaker 1: consistency to appraise those options in real time and make bold,
Speaker 1: evidence lead decisions. And that's what you would want to
Speaker 1: see from the advisory base, rather than necessarily a makeup
Speaker 1: that has preconceived ideological attachments. Does the city and do
Speaker 1: bankers have a favorite candidate? Oh, to the degree that
Speaker 1: I can ever speak for the city, that anybody can
Speaker 1: ever speak for the city, I think, Um, there is
Speaker 1: probably a slight preference for Rishi Sunak, but I wouldn't
Speaker 1: say it was overwhelming. What are you doing for lunch?
Speaker 1: Last time the podcast crashed a working lunch you had
Speaker 1: at Sweeting? You remember that you're like our first guest
Speaker 1: presenter at Sweeting. I do, and it was it was
Speaker 1: a brilliant way to end that lunch to come and
Speaker 1: chat to you guys. You ran away. I didn't run away.
Speaker 1: I tried to run away because then you know, UM,
Speaker 1: no a client lunch which I'm very much looking putty
Speaker 1: because there is so much for UK focus. Is there's
Speaker 1: a small MidCap UK investor who is looking at the
Speaker 1: UK situation. And we've talked about this for years. Franc
Speaker 1: which is since the Brexit vote, UK assets have been
Speaker 1: at a considerable discount. Global investors have taken a dim
Speaker 1: view of politics and economics in the UK, and this
Speaker 1: individual in question I'm lunching with today has a conviction
Speaker 1: that there's still and its conviction I share the UK
Speaker 1: still has some great companies, some great intellectual property there
Speaker 1: at attractive valuations. But actually, and if you're just going
Speaker 1: to encompass all we've just chatted about in the last
Speaker 1: twenty minutes half an hour, it is if that can
Speaker 1: just be put together with some stable governance. Gosh, I
Speaker 1: was one thing I would agree with the trust campaign
Speaker 1: is the UK's best years could still be in front
Speaker 1: of her. So the business lunch is back. It is
Speaker 1: with a vengeance, even in August. Definitely, Simon French, thank
Speaker 1: you so much. It's been a huge pleasure. Thank you Franz.
Speaker 1: Thanks for listening to this week's in the City. We'll
Speaker 1: be back next week with a look at the London
Speaker 1: housing market for the ultra rich. But in the meantime,
Speaker 1: if you like our show, please head on over to
Speaker 1: Apple Podcasts or wherever you listen to podcasts and rate,
Speaker 1: review and subscribe. This episode was hosted by Me franc
Speaker 1: I Laqua, with a small appearance by ME David Harritt.
Speaker 1: It was produced by Summer Sadi and special thanks to
Speaker 1: Simon French