A coiled spring!

Andy Haldane, the Bank of England’s chief economist, has likened the economy to a ‘coiled spring’. British households have saved an ‘astonishing’ £250 billion equivalent to 20% of normal annual household spending) while businesses are sitting on a £100 billion cash.

Noel Craven of Quartet Asset Management and our Podcast Professional of the week is also upbeat (see his predictions below).

The biggest concern to what I think will undoubtedly be a recovery, is what will Rishi Sunak do in next month’s budget.

According to figures released recently the British economy shrank by the most of any major country in the world during 2020 in a recession that was the deepest in 300 years. It therefore needs time, clarity and help to recover.

These are my ideas as to what I would like the chancellor to do next month.

Top of my list is that businesses need certainty so that they can begin to plan.

They need to know when they can operate freely again – which must be the first priority.

Once the NHS is no longer under threat of being overwhelmed businesses must be allowed to work freely again and if there are to be restrictions what will they be – a vaccine passport before you can go to the theatre, or into a restaurant, a negative testing result to be allowed back to school?

Already we have seen London covid-19 cases shrink by 90% - how much further will it need to shrink before lockdown is lifted. Bristol scientist Profession Adam Finn is on record as saying that the vaccines are now ‘definitely doing the job’ in stopping people getting coronavirus so severely that they had to be hospitalised.

Second, the chancellor must rule out any tax increases, for the foreseeable future. It is not as if the economy cannot bear the increased debt for a while longer given the low rates of interest. We need to signal to the world that we are open for business post Brexit and what sort of business that will be – needs to be clearly set out.

Personally, I think the chancellor should go even further; he should stimulate the economy by reducing taxes such as a lowering of VAT and  suspension of air travel duty. We are no longer part of the EU and therefore we can decide what taxes and at what rates we want to introduce.

Fourthly, I would also like to see a resurrection of a form of entrepreneur’s relief for capital gains tax. A lot of businesses have collapsed in the past twelve months and entrepreneurs need to be encouraged back into business. The lowering of the relief from £10 million to £1million needs to be reversed, our entrepreneurs need to be encouraged to take risks again to get the economy moving

If you have any comments or would like to add your voice to my blog, as a member of Caroline’s Club – please let me know.

The closing of global economies in 2020 means easy comparators for economic figures will see most regions post positive GDP growth for 2021. Not all lockdowns were equal however, with localised measures in some countries, quick complete shut downs allowing sooner re-openings and elsewhere either no centralised policy or less developed economies without the structure to close. Where earlier and fuller economic re-openings from Coronavirus have been possible, economies have recovered stronger and will continue to outperform. This favours Emerging Markets over Developed and within Developed Markets, America over Europe ex-UK. It is not beyond possibility that Europe may suffer a second year of contraction with bureaucracy, an aging population and few growth drivers ahead of the economic closure all formidable headwinds.

As growth returns low base figures will not only create positive headline grabbing figures but also ones that could cause worries for investors. An inflation spike is likely as economies strengthen and particularly if this occurs during Q2 2021. Central Banks have been openly speaking about this concern in an attempt to forewarn markets and reassure that they will retain accommodative policy. Despite these actions there remains a risk that if pent-up demand, reduced supply and easy fiscal policy coincide, a longer-term inflation phenomenon could develop in some economies. A 2% US 10 year treasury yield is a key indicator for this. Currently at 1.21% there is room for markets to express inflation concerns before the level broken below in July 2019 comes into sight.

Structural changes to life in developed economies have been accelerated during the pandemic creating new areas for investment and opportunities for refreshing economies. Build back better has been the political message, with the World Economic Forum one of the leading architects of this policy. Climate goals have come to the fore for Governments with China joining European nations announcing significant green targets and, following the election of Biden, the US re-joining the Paris agreement. Much Infrastructure to facilitate the attainment of these policies needs to be built which will be resource intensive, both natural and financial. A look at past experience suggests expansionary fiscal policy coupled with a resource hungry growth leads to rising commodity prices. Some prices have already started to gain but the likely supply demand imbalances across the board and a low starting point could mean that this is just the beginning.
— A Note from Noel of Quartet Asset Management

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here where you can see what we are up to and if you would like to join simply upgrade your membership.