HAMISH MCRAE: If world economy is going to experience several years of growth, UK will get growth too – but we’ll need plenty of talented people to help
It is going to be a glum winter, so let’s look beyond it. Growth will resume, disruption will ease, and though it will take a painful effort to get inflation back under control, eventually that too will subside.
What matters most then will be what happens to the global economy. It matters massively for the UK. The Bank of England published an article on Friday headed: No country is an island: how foreign shocks affect UK macro-financial stability.
The thrust of the piece was that we are more vulnerable to outside shocks than most other countries because we are more connected with the global economy.
On the march: UK economy will need plenty of talented people to help it grow
The UK is not as dependent on foreign trade as Germany or France, but it does have more foreign assets and liabilities than any other country.
In other words, foreign countries own more assets in the UK, as a percentage of our GDP, than in any other major economy. And we own relatively more abroad than anywhere else too. We see one side of that in Britain. Most people know that Jaguar Land Rover was bought by India’s Tata, or that Bentley and Rolls-Royce cars are now owned by VW and BMW.
But if we stay in the US in a Holiday Inn, or perhaps a more upmarket Crowne Plaza, we probably are not aware that the place is managed, franchised or owned by InterContinental Hotels Group, headquartered in Denham, Buckinghamshire.
So is this good or bad? Well, that depends on whether the world economy has a good few years ahead or not. There lies the peril, or the benefit, of being an unusually open economy.
On the face of it, the 2020s have started off about as badly as one could imagine. Quite aside from the human and economic impact of the pandemic, we have rising tensions between the world’s largest and second largest economies, the US and China, and the added disruption between the UK and the EU.
We have the surge in inflation everywhere, and some sort of asset bubble. US house prices are up 19 per cent on the year, while UK prices here are up 10 per cent, according to the Nationwide. Things have to slow down.
But remember this. There is a global economic cycle. The duration from one peak (or one trough) to another is about ten years. We had world recessions in the early 1990s, the early 2000s, after the banking crash of 2008/9 – and now.
It would be great if we knew how to escape from these cycles but we are not clever enough to do so.
However, since we have just had a really bad downturn, it is reasonable to assume that we are in the early stages of another long expansion. Maybe too much of this expansion is being anticipated by the financial markets. There may be some sort of bump in the coming months. Indeed that seems quite likely.
But if you take, say, a seven-year view and ask whether UK house prices will be higher or lower then than they are now, I think we all would be pretty confident that they will be higher. This is important not only for people buying homes. If there is general growth in the world there will be jobs for people in an open economy such as the UK.
Just as we are particularly vulnerable to international shocks, so we benefit from an international boom. One task of the Bank of England is to protect the UK financial system from disruption, be that home-grown or imported.
But the Bank also notes that openness brings many benefits to the UK. We need to remember that through the rough months ahead.
And next year? The crucial thing, in my book, is not only that we remain open to foreign capital coming into the country, and to investing funds abroad, but also to welcoming foreign talent.
There is a specific problem at the moment in the City, which wants the Government to allow six-month visas for foreign bankers to do a stint here.
But there is a more general issue about the UK remaining a magnet for human capital.
If the world economy is indeed going to experience several years of decent growth, the UK will get decent growth too.
And we’ll need plenty of talented people to help us.