Pundits wrong on economic gloom, says HSBC’s Turner

The UK economy is not in as bad a state as many commentators are portraying and is “inching its way” to recovery, HSBC chief economist Dennis Turner told the Travolution Summit

The UK economy is not in as bad a state as many commentators are portraying and is “inching its way” to recovery, HSBC chief economist Dennis Turner told the Travolution Summit.

Turner accused the media, and in particular the BBC’s business editor Robert Peston, of talking the economy down “night after night” and predicted a “modest” consumer recovery.

He said what most analysts have missed is that the economy has returned to growth, albeit below what is expected of the UK economy, and some other indicators are looking favourable.

After five quarters of decline the economy has been growing, except for a period at end of last year when the weather had an impact.

However Turner said “people do not feel comfortable with the news” due to reports the economy was sliding back into recession, but he said what commentators forgot to do was “look at the small print”.

Turner said 0.2% growth to June would have been 0.7% if the £300 million spent on Olympics tickets had been in the calculations. Had that been forward booked holidays that figure would have been included, he pointed out.

“Government figures are now so ropy there is more uncertainty about the past than the future. The economy last year grew by 1.8%. That’s not bad considering the last year it shrank by 0.5%,” he said.

Turner added 2009 was the worst year for the UK economy since the 1930s, but the subsequent return to growth is being evaluated against what is widely accepted as the natural growth rate of the UK economy of 2.5% per year.

The doom-mongerers are also undervaluing how the private sector is creating jobs to offset the cuts in the public sector, and the fact that recent inflation has been imported in the form of increased commodity and fuel prices, or created by the government through the VAT rise, Turner claimed.

He said inflation should fall back next year to below the level at which earnings are increasing, ending a period in which people’s incomes are falling in real terms.

Turner forecast growth next year could just exceed 2% and pointed out no one is predicting negative growth. “All forecasts start with the number one, the debate is about what is the first digit after that decimal point,” he said.

Turner praised the former Chancellor Alistair Darling for grasping a fundamental principal of economics that “someone else’s expenditure is someone else’s income” and pumping up the public sector when the private sector was in retreat.

But he said the key task for government now was keeping the UK’s cost of borrowing down by protecting its triple A credit rating, which means tackling the size of the public sector. “Britain can only have the public sector that the private sector is prepared to pay for,” he said.

Britain currently pays less to service its debt, due to low interest rates and its credit worthiness, than it did when John Major was in government 20 years ago when the level of debt was substantially lower.

Turner does not see interest rates going up in the near future as inflation starts to fall back, but warned a potentially damaging legacy issue for the travel industry is the level of personal debt in the UK that is only slowly unwinding.

During the boom years the UK economy was being pumped up by consumer spending that was paid for by debt and accounted for 80% of the growth of the economy, adding 2% to GDP every year.

“We had a confident consumer not worried about unemployment and prepared to spend and borrow and borrow. They now owe £1.5 trillion, debt to income ratio is 160%, we have the most indebted personal sector in the western world, each of us owes about 19 months’ pay.

“The consumer debt overhang will take a while to unwind. Absolutely fundamental to that is keeping interest rates where they are. If the economy is going to grow, British companies are going to have to be able to sell. Who are they going to sell to?”

Turner warned the UK is over-reliant on the European Union and the US for its exports and said more must be done to break into emerging markets, although there were some positive signs on this front.

“It’s hard to be upbeat about the Euro going forward because of debt problem. This is the single biggest threat to the UK economy now,” he said.

With the government needing to see growth in the economy Turner predicted the Chancellor may have tax cuts up his sleeve for next March’s Budget, including bringing the top rate on income tax down to 40%. 

Of the recover Turner said: “It’s slow, it’s fragile, it’s measured. We are not going from the bust to a boom, we are inching forward and there finally is light at the end of the tunnel.”