A Lost Decade Worse Than Japan’s Threatens to Change UK Forever

[beijingwalker]

A Lost Decade Worse Than Japan’s Threatens to Change UK Forever​

Tom Rees, Andrew Atkinson and Philip Aldrick
Sun, March 12, 2023 at 4:00 PM GMT+8·8 min read

A Lost Decade Worse Than Japan’s Threatens to Change UK Forever
(Bloomberg) --

As the UK buckles under the strain of anemic growth, strikes, fraying infrastructure and record hospital waiting lists, Jason James thinks back to another economic crisis that dominated an earlier part of his banking career: Japan’s infamous “lost decade.”

James, 58, spent the 1990s working for HSBC Securities in Tokyo’s Nihonbashi financial district. It was a period that suffered a 60% slump in stocks and a collapse in land values that led to zombie banks and an economy overwhelmed by bankruptcies and bad debt.

But his conclusion is that Britain in the 2020s feels worse.

“The system kept working, the trains kept running,” he said. “I don't think you ever had the sense that everything was falling apart in the way you've got here.”

His perception of economic decay is backed by the numbers. Bloomberg analysis of official data and Bank of England forecasts shows UK growth will average 0.8% a year between 2016 — when Britons narrowly voted to leave the European Union — and 2025. That’s below the average 1% in Japan from 1992 to 2001, the “lost decade” often cited amid warnings of “Japanification” whenever a country endures a prolonged slowdown.

Yet that stigma is only part of the problem in the UK, which faces handicaps including soaring inflation that make it a very different economic environment to 1990s Japan.

UK PREVIEW: Hunt’s Budget Will Keep Powder Dry Until Election

Dire productivity, crumbling public services and a worsening labor supply form the backdrop to Chancellor of the Exchequer Jeremy Hunt’s budget statement on Wednesday, and despite a recent run of stronger-than-expected growth, point to a long-term drag on an economy in which animal spirits are fading. Had the UK maintained the pace of growth it enjoyed before the 2008 global financial crisis, Britons would now have on average about £8,000 ($9,600) more in disposable income. The median salary was £33,000 last year.

The shift down the gears also risks undermining Britain more broadly, from lost dynamism in London to a lack of sway relative to the US, European Union and China on trade and climate change.

It won’t be easily reversed. Japan effectively spent its way out of its asset crash and banking crisis, but after the global financial crisis and the pandemic and Russia’s war in Ukraine, as well as the market turmoil triggered during Liz Truss’s brief premiership, Hunt is likely to reiterate the UK can’t afford to go down the stimulus route again.

It means people who experienced Japan’s stagnation and Britain’s troubles today are likely to continue to see a stark difference.

“Government debt kept rising,” said James, who co-wrote The Political Economy of Japanese Financial Markets in 1999 and is now director general of the Daiwa Anglo-Japanese Foundation in London. Referring to strikes in the National Health Service and across the UK public sector, he said that in Japan “the hospitals and the ambulances and so on were still operating. In that sense, society kept working and keeps working even now.”

Missing Out
In reality, it's already been more than a decade of sub-par growth for the UK. The country's last really vigorous expansion began in the 1990s when Japan was still grappling with a banking crisis. Under the Labour government of Tony Blair, which came to power in 1997, Britain extended a stretch of economic growth that would last for 47 consecutive quarters and then Chancellor of the Exchequer Gordon Brown promised that “boom and bust” economic cycles were a thing of the past.

Instead, the euphoria fed into the global financial crisis, and the collapse of Northern Rock Plc and bailout of other banks put the UK on a different trajectory. The UK has been treading water, initially due to poor productivity and the impact of government spending cuts, compounded by labor supply issues due to Brexit and the pandemic.

UK Wargames a Crash Worse Than Covid If Chip Supplies Shut Off

The Bank of England doesn’t expect the picture to improve, at least during its current forecast period. It judged in February that potential growth — the economy’s speed limit before activity generates excess inflation — will weaken to just 0.7% in 2024 and 2025, a sharp slowdown from 1.7% in the 2010s and 2.7% between 1997-2007.

Slower growth, and the poor productivity underlying it, are adding up to huge amounts of lost output. The difference between the pre-financial crisis 2.7% average growth from 1998 to 2007 and the current “lost decade” equates to about £800 billion in lost GDP, and £300 billion a year in lost tax receipts.

Using more modest growth figures, the average 2.1% from 2010 to 2015, the comparison reveals about £250 billion of lost output. Had that growth trend continued, the average Briton would have about £2,400 more in disposable income.

“The difference between, say, 2% productivity growth and 0.7% productivity growth doesn’t seem very big if you look at it in isolation. But these things accumulate,” said Kevin Loane, senior economist at Fathom Consulting. “Over time, governments and citizens face fewer choices. Climate versus health or education versus war. So really, this is the defining economic challenge of our time.”

Growing Pains
The struggle to get Britain growing has become a political obsession, especially for the ruling Conservatives, who according to polls face a trouncing from voters having overseen a period of national decline. One Tory MP, who asked not to be named, said the party’s focus on Europe and pursuit of Brexit meant it had effectively squandered 13 years in office.

London’s Investment Appeal Is Unraveling as Arm Heads to the US

The UK is the only Group of Seven economy that is still smaller than before the pandemic and appeared to be singled out when the International Monetary Fund handed it one of the biggest downgrades in its latest forecasts. According to EY’s latest annual attractiveness survey, France has taken Britain’s crown as the top destination for foreign investment in Europe, in terms of projects. France also overtook the UK to become Europe’s biggest stock market last year, and London is grappling with companies including Arm Ltd. and CRH Plc opting to list in the US instead.

For Chris Scicluna, an ex-Treasury official who covered Japan during the 1997 Asian financial crisis and now heads economic research at Daiwa Capital Markets in London, it’s the lack of investment — as well as the strikes and overall feeling that things aren’t working in the UK — that stand out. Just getting on a train underscores the difference, he said.

Japanese infrastructure “was good and still is good,” he said. “You sense that you're in an affluent economy, which again is not something necessarily you get in this country anymore.”

Officials in Tokyo responded to stagnation and deflation with huge stimulus, which ultimately made Japan the world’s most indebted country as a share of output at the end of the 1990s, according to data from the Organisation for Economic Co-operation and Development.

But after Truss’s premiership unraveled at least in part because traders recoiled at the scale of tax cuts in her “growth plan,” her successor, Rishi Sunak, and Hunt have made putting the public finances on a sustainable footing their priority.

Slow Decline
Still, despite her dramatic demise, Truss’s warning that the UK faces a managed decline without a dramatic change of course is gaining traction across Westminster, including in the opposition Labour Party.

“We need growth, and all the main parties are coming forward with plans,” said Andy Haldane, a former chief economist at the Bank of England, who worked on the government’s industrial strategy and policy to “level up” poorer areas of the UK. But he said more details are needed on how to meet the goal of closing regional disparities and revitalizing industry.

A major problem is that what many economists say the UK must do to get back on track — watering down Brexit rules that stifled trade with the EU, planning reforms and more migration — is politically difficult. Double-digit inflation also means monetary policy is stuck on a restrictive setting as the Bank of England seeks to constrain demand.

But the immediate issue is the government is stuck firmly in firefighting mode. Amid fierce pressure from the bond markets in the fall, Hunt penciled in major spending restraints and tax rises in a belt-tightening that has been dubbed “austerity 2.0,” after the Conservative-led government dramatically cut spending when they came to power in 2010. It’s a legacy the Tories — and the country — have yet to shake off.

UK Braces for ‘Austerity on Steroids’ With Little Left to Cut
The chancellor left himself just £9 billion of headroom against his fiscal rules and is unlikely to have much more to play with on Wednesday. A long list of expensive demands — including a likely extension of current levels of household energy support — leave little room for growth-enhancing policies such as more funding for childcare.

Grand ambitions including a planned high-speed rail link from London to northern England have already been scaled back due to costs, undermining the key Conservative “leveling up” agenda. The government is trying to end labor disputes from nurses to teachers, and more than 7 million people are on a waiting list for routine NHS health care.

“It's not just what's happened in the economy, it's what's happened for social welfare, the NHS, education,” said Janet Hunter, a professor of Japanese economic history at the London School of Economics who lived there in the 1990s. “You do feel in this country there are so many aspects of it that seem to be falling apart.”

A Lost Decade Worse Than Japan’s Threatens to Change UK Forever

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[beijingwalker]

UK Calls China an ‘Epoch-Defining Challenge’ to Global Security​

By
Kitty Donaldson and
Ellen Milligan
March 13, 2023 at 11:30 PM GMT+8

China poses significant risks to global prosperity and security, UK Prime Minister Rishi Sunak said, describing the country’s economic and military rise as an “an epoch-defining challenge” to international order.

Launching a wide-ranging review of British security, defense, development and foreign policy, Sunak said the UK will continue working with Beijing on issues like climate change, but will join with allies to “push back” against China when necessary.

The so-called integrated review said China’s policies have “implications for almost every area of government policy and the everyday lives of British people.”

The UK is particularly concerned about what it describes as China’s “disregard” for universal human rights and its international commitments, from Tibet and Xinjiang to Hong Kong, as well as its “rapid and opaque” military modernization and refusal to renounce the use of force over Taiwan.

Still, the review stopped short of explicitly labeling China a “threat,” and set out a nuanced approach to relations with Beijing. The UK doesn’t believe its relationship with China is set on a “predetermined course,” the review said, and the country will continue to seek better cooperation. That would hinge on whether China decides to continue pursuing greater authoritarianism and assertiveness overseas, the UK review said.

“Where there are attempts by the Chinese Communist Party to coerce or create dependencies, we will work closely with others to push back against them,” Sunak said in the review’s opening remarks.

By describing China as a challenge rather than a threat, Sunak overlooked lobbying from some senior members of his own governing Conservative Party, who called on him to denounce China as a strategic threat to British security.

The review does say that the UK will further strengthen national security protections in areas where the actions of the CCP “pose a threat to our people, prosperity and security.” The UK will double funding for 2024-25 to build Mandarin language skills and its ability to understand China.

Authoritarian, Assertive​

Foreign Secretary James Cleverly was due to unveil the Integrated Review in Parliament Monday, while Sunak is visiting the US for talks with President Joe Biden and Australian Prime Minister Anthony Albanese in San Diego. The allies will unveil the next phase of the AUKUS nuclear submarine program, a security partnership meant to counter China. Albanese is expected to opt for a British-designed fleet, with US boats being purchased as a stop-gap measure.

Since taking office in October, Sunak has acknowledged the need for trade and diplomatic relations with China, noting the strategic importance of the Taiwan straits for global shipping trade.

“It’s a regime that is increasingly authoritarian at home and assertive abroad and has a desire to reshape the world order,” Sunak told reporters on his way to the US Sunday. “We’ve recognized it as the biggest state-based threat to our economic security.”

Asked by reporters if he would like to visit Beijing as other world leaders are planning, Sunak replied, “It’s not about going there or not going there. I think engagement is the point.”

China-skeptic Conservative MP Alicia Kearns, who chairs Parliament’s Foreign Affairs Committee, said in an interview that she welcomes “the recognition of the threat of China.” She characterized China’s aims as more than an economic challenge: “Because no country can have economic security without national security.”

Former Conservative Party leader Iain Duncan Smith, a longtime critic of Beijing, called the updated strategy “a wasted opportunity to call out China as they are, a threat to our way of life and physically to us.”

The review called Russia’s threat to European security the “most pressing” national security priority in the short-to—medium term. The UK will consider using its counter-terrorism powers to tackle threats from organizations like the Wagner Group, a private paramilitary group with links to President Vladimir Putin’s government that is fighting alongside the Russian army in Ukraine, the review said.

The focus on Russia and its ongoing war in Ukraine saw the UK pledge £5 billion ($6 billion) for UK defense over this year — half the level reportedly requested by Defence Secretary Ben Wallace.

It also outlined an ambition to increase defense spending to 2.5% of gross domestic product in the longer term, with further spending to be set out in 2025. The UK was already on a trajectory to reach 2.5% by 2030, and the decision not to push for 3% is likely to draw criticism from the military and Conservative Party hawks.

Speaking on the plane, Sunak said the review would show the UK is “ready to stand our ground” and “ensure we are never vulnerable to the actions of a hostile power.”

UK Calls China an ‘Epoch-Defining Challenge’ to Global Security

China poses significant risks to global prosperity and security, UK Prime Minister Rishi Sunak said, describing the country’s economic and military rise as an “an epoch-defining challenge” to international order.

www.bloomberg.com

 

[DabbuSardar]

Uks been a faithful second fiddle to the US for decades in geopolitics, it might slip down further in the hierarchy of US running dogs if this joke of politics continues unabated.

 

[beijingwalker]

 

[beijingwalker]

GDP was overtaken by India last year, UK becomes an irrelevant state on the world stage, should be kicked out of UNSC.
I don't support expansion of UNSC, but have no problem for India to replace UK in it.

 

[tower9]

Britain can go get fucked. No amount of suffering can be enough karma for all of their crimes against humanity.

 

[beijingwalker]

Why is the UK economy poised to tumble into a recession and fall behind Europe, US and even Russia?​

BY:JACK BARNETT
THURSDAY 16 FEBRUARY 2023 7:00 AM

Britain avoided a much-tipped recession at the end of last year. Phew.

“However, we are not out of the woods yet,” warned Chancellor Jeremy Hunt after last Friday’s GDP figures from the ONS revealed the economy stagnated at the end of 2022, meaning it narrowly avoided the technical recession definition of two consecutive quarters of contraction.

The Chancellor is right to be cautious, especially when the UK is set in contrast to its peers.

New forecasts out from the European Commission this week projected the bloc’s economy is poised to avoid a slump this year, with EU-wide growth coming in at 0.8 per cent.

The Republic of Ireland will grow just under five per cent, powering the area’s output away from a reversal.

Our friends across the pond in the US are looking increasingly likely to avoid a recession after their economy added an unexpected 517,000 jobs last month, despite the US Federal Reserve’s best efforts to choke demand.

We, on the other hand, have been told to expect to shrink 0.6 per cent this year by the International Monetary Fund (IMF), making us the only rich country to finish 2023 with a smaller economy. Even Russia is forecast to grow.

It should be said the IMF routinely bungle their projections.

So just why is the UK on track to stumble behind the rich world?

Steeper energy bills​

Inflation has been the main factor kneecapping the world’s top economies.

Households and businesses are being squeezed by rising costs, forcing them to cut spending, weighing down economic growth.

This rise in inflation, especially in Europe and initially in the US, has been driven by “stratospheric increases in [gas] prices,” Philip Shaw, economist at Investec, told City A.M.

That jump has pretty much entirely unwound now, but the damage has already been done to family and corporate balance sheets in Britain and Europe (less so in America).


The UK’s dependance on gas to power homes engineered “a bigger impact on consumers and businesses here than elsewhere,” Shaw added.

The impact of rising gas prices has also hit the UK harder as Chancellor Jeremy Hunt has offered “less generous” support than his European counterparts, Dean Turner, chief eurozone and UK economist at UBS Wealth Management, told City A.M.

UK inflation has outpaced US and Europe​

France’s state owned energy giant EDF was forced to cap price increases at four per cent for most of 2022, while the German government paid household energy bills in December and launched around £175bn of support.

While Hunt stuck to Liz Truss’s £2,500 price cap, family energy bills have still skyrocketed over the last year or so. The current price cap mechanism also means bills will not begin falling until the summer.

Inflation has definitely turned a corner in Britain, cooling for three straight months now in the UK to 10.1 per cent. But it did outstrip the rate of price increases in Europe and the US for most of 2022, meaning there is set to be a bigger spending drop in the UK as a result of a steeper living standards collapse.


American inflation never hit double digits, though it did in the eurozone, peaking at 10.6 per cent.

No such energy cap was launched in the US, mainly because their inflation surge has been driven by excess spending fuelled by president Biden dishing out cash during the pandemic.

Jobs market weakness​

Probably the single biggest area where Britain’s weakness stands out is its slimming workforce.

An outflow of around 500,000 from the workforce since the start of the Covid-19 crisis is peculiar.

No other rich country has suffered this level of desertion. Most have actually seen their labour market expand.

A smaller pool of available workers has prompted firms to hike wages to attract and lure talent, which has boosted domestic inflation.

Staff shortages have also stopped companies from seeing through expansion plans, holding back output.

In the US, the jobs market is racing ahead, exactly the opposite of what Fed chief Jerome Powell wants to happen. While strong worker demand could keep inflation higher for longer, it will prop up spending by leaving incomes unscathed.

Aggressive rate hikes​

The Bank of England has tightened policy much more aggressively than the European Central Bank (ECB), but less forcefully than the US Federal Reserve.

Rates have climbed 390 basis points collectively since Bank governor Andrew Bailey and co’s first rise in December 2021, sending borrowing costs to 15-year high of four per cent.

ECB resident Christine Lagarde has bumped them 300 basis points, while Fed chair has backed 450 basis points of rises.

The BoE and Fed are probably going to ease off the brake soon, while the ECB is expected to back around 100 basis points of hikes this year.

A steep rate peak in the UK of, probably, 4.25 per cent is poised to be a clamp on growth this year, the IMF said in its latest forecasts.

In fact, analysts at Goldman Sachs reckon every 100 basis point increase “lowers the level of real GDP by roughly 0.5 per cent,” mainly by raising mortgage rates.

However, a wave of homeowners switching to fixed rate mortgages after the financial crisis has delayed the transmission of higher rates to the real economy.

“Britain has among the lowest percentage of mortgages on variable rates,” James Smith, developed markets economist at Dutch bank ING, told City A.M.

“The bigger issue is corporate borrowing where 70 per cent of SME lending is on floating rates, but I don’t think that’s unique to the UK,” he added.

Return of austerity​

Britain’s tax and spending policy has become much more stingy after Hunt sought to shore up investor confidence following Liz Truss’s ill-fated mini budget.

Tax band freezes and levy rises launched in his November £55bn autumn statement – most notably a six percentage point corporation tax rise – are scheduled to land soon.

“The return of austerity [and] less support for the energy crisis… will also play a part” in choking production, Frédérique Carrier, head of investment strategy for RBC Wealth Management in the British Isles, told City A.M.

“Britain’s fiscal metrics look worse than other European countries. The need for the UK government to tighten policy to achieve a sustainable fiscal position in the medium-term is therefore more pressing,” Shaw said.

Hunt’s biggest single support measure has been the £2,500 energy price cap.

At the moment, the cap is on course to jump to £3,000 in April. After the recent collapse in energy costs, the policy now “isn’t smoothing prices, it’s causing the spike,” the Resolution Foundation said this week.

Coming down the line is a brief period where the price cap will be above the amount retailers would charge based on lower wholesale gas prices. To avoid that, Hunt “almost certainly will” delay the cap increase for three months “to give wholesale prices time to feed through,” the Foundation said.

The EU has urged the likes of Germany, France and Italy to roll back support for risk of re-igniting turbulence in the euro debt markets.

“It is unlikely that fiscal policy among our peers stays as easy as it is today… the UK may not look like such an outlier [soon],” Turner added.

Tax rises and spending cuts are working together with the Bank of England’s aggressive rate rises to squeeze the economy.

Hunt’s 15 March budget is unlikely to be a silver bullet to prevent a slump.

Why is the UK economy poised to tumble into a recession and fall behind Europe, US and even Russia?

Britain avoided a much-tipped recession at the end of last year. Phew. “However, we are not out of the woods yet,” warned Chancellor Jeremy Hunt after

www.cityam.com