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Economic green shoots may not blossom for some time yet, brokers warned

At a glance

  • Renowned economist Roger Martin-Fagg, who was one of the few to actually predict the financial crisis, gives his prognosis for the year ahead
  • Recovery finally taking hold but there may be speed bumps on road ahead, despite dose of confidence currently being given to economy
  • Martin-Fagg also concerned about ‘unbalanced growth’ in UK

The UK economy is still far from firing on all cylinders and it has now taken over five years to show signs of recovering from the worst crisis since the Great Depression of 1929.

Just last month, the Bank of England Governor Mark Carney announced that the recovery had “taken hold” and that you didn’t need to be an optimist to see the “glass is half full”.

But despite a raft of recent positive British economic data figures, including another large fall in unemployment – suggesting the financial crisis is now finally behind us – it must be noted that much of this improvement has come from a very low base.

Looking into the 2014 economic crystal ball

Here are Roger Martin-Fagg’s economic predictions for 2014:

  • Unemployment: Currently at 7.6%, I don’t think it will dip below 7% next year, there are an awful lot of under-utilised employees at the moment and I think employers will take the opportunity to raise productivity before increasing the number of employees
  • Wage growth: I would like to see 4%, but the best we will get is 2%
  • UK inflation: It will sit around 3%
  • Interest rates: The Bank of England will keep interest rates at 0.5% for 2014. Although it is difficult to predict, rates will rise some time in the middle of 2015

“If you look at this in a historical context, this is an incredibly anaemic recovery,” said Roger Martin-Fagg, an economist turned strategist who speaks regularly about economic trends and its impact on business.

“The reason why the recovery has been muted is that British banks were extremely highly leveraged before the crisis and the recession was so prolonged because British banks have since been deleveraging their balance sheets.

“When a bank deleverages, it essentially destroys money and British banks collectively have destroyed, in round figures, £320 billion since the crisis took hold.”

Weak wages are another reason why any economic revival has so far stuttered, as consumption will remain subdued as long as pay remains meagre.

“In the labour market, people have preferred a job rather than a wage award and so, unusually, wages in real terms have actually fallen in the past five years for the majority of people,” said Martin-Fagg, who was one of the few to actually predict the financial crisis.

Housing bubble?

One section of the economy that has reinvigorated itself, though, is the housing market. London, especially, has seen prices rise almost 10% so far this year, although much of the rest of the country has struggled to keep pace.

“It’s a pity prices weren’t allowed to fall to what would be the right market clearing level, which is around 15% average below where they currently are,” noted Martin-Fagg, who is also an Associate of Ashridge Business School.

“However, the current increase in prices outside London, which is 3.4% year-on-year, that is not a bubble. A bubble would be where prices are rising in excess of 5% outside London.

“And the London bubble is unlikely to burst as the market is driven by overseas money. The only thing to derail it is if the value of sterling goes back to two dollars, which is highly unlikely.”

Economy on the move

So, the green shoots of recovery are finally appearing, but Martin-Fagg is still slightly concerned that any economic improvement may be being built on sand.

“The European Central Bank has just dropped interest rates to 0.25% and that means Europe is in a worse position than we thought,” he said. “And in the UK, the growth in retail in the last couple of months or so has been mostly financed by a reduction in savings and use of the credit card.

I don’t care if the UK recovery is based on unbalanced growth as any growth is a good start. It may lead to problems down the line, but it is a short-term boost

“So it is a bit of a repeat of what got us into the problem in the first place.”

For insurance brokers, Martin-Fagg issues this advice for the year ahead.

“Make sure all your staff understand what it is that makes you compelling,” he said. “In this low earnings environment, you need a distinctive and compelling reason for customers to purchase your product or services.”

But, in the end, it all comes back to the word confidence. As the US author Mark Twain once observed: “All you need in this life is ignorance and confidence; then success is sure.”

Martin-Fagg added: “I don’t care if the UK recovery is based on unbalanced growth, as any growth is a good start. It may lead to problems down the line, but it is a short-term boost.

“Confidence comes from all sorts of places and the media is full of positive economic headlines right now and if this encourages finance directors to release the £400 billion in cash corporates are sitting on, then that will be a good thing and we may be surprised.

“In fact, I might even be surprised by the growth rate into 2015.”

Image © Getty

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