Evercore Pan Asset

I find it surprising that weak growth figures for the UK for the last nine months have come as a surprise. Britain’s gross domestic product grew by 0.2 percent in the second quarter compared to the first, which took the annual growth rate to 0.7 percent, the lowest since the first quarter of 2010.  The last year has seen rises in VAT, Income Tax, National Insurance, Oil and bank taxes and new carbon taxes. It has seen inflation around 5% on the RPI measure, with earnings growth well below price rises. The private sector has been put into a squeeze, to help cut the public sector deficit, and to pay for the rises in public spending which the Coalition government has continued to put through.
 
The public debate has completely missed the point. It has been dominated by people arguing about the “cuts” in public spending, yet current public spending   rose by 5.3% in 2010-11 overall. The rise in the cost of benefits, interest charges, overseas aid, EU contributions, health and education and various other priorities did require cuts in defence and some local government areas as well as the tax rises. Most have failed to examine the actual cuts in the private sector, as people have wrestled with family budgets, repaying debts, cutting spending and striving to make their falling real incomes go further.
 
The government’s strategy is to have a private sector led recovery, to offset the need to cut the rate of growth in public spending. In turn the private sector led recovery will generate more tax revenues which will bring the public deficit down. There is nothing wrong with this idea. The slow growth so far will lead to government thinking about what more it could do to stimulate that private sector led recovery to make it all come true.
 
Some with the Business Secretary will favour looser money. Some will want to mend and change the banks more, to encourage more private sector lending. Some will seek deregulation, to cut the costs on business. Some will want tax breaks or cuts, to boost confidence and encourage investment. Some will want to find direct means to ease the squeeze on consumers.
 
 I am not expecting a great deal, as the government seems boxed in by the inherited debts and obligation for more public spending. If slow growth persists then all the numbers deteriorate. Spending goes up more, tax revenues disappoint, and borrowing stays high. Gilts are unattractive at these levels. On government forecasts yields are going to rise. That’s one forecast that could well prove accurate.