Richard Buxton: Foundations set for long-term UK growth


The UK economy is now set fair for an extended period of economic growth, moving solidly from recovery to expansion. As throughout the last three years, this is firmly underpinned by growth in the labour market. Impressive quarterly gains in the number of people in work look set to continue, as job vacancies have hit a new all-time high at around three-quarters of a million.

These are largely private sector jobs, as the Government clearly intends to continue to cut public spending. This means corporate sector confidence must be rising, as company management does not hire people to sit around doing nothing. Yes, it is an extremely competitive world. Yes, companies across hugely varied types of business are all struggling to embrace and adapt to technological change and disruptive challengers. But established companies are hiring and new business formation is running at a healthy clip.

At last we are also starting to see some growth in people’s incomes. Real incomes are rising as inflation is negligible. But households are starting to see modest growth in absolute levels of income as well, which increased tightness in the labour market can only support. This underpins growth in consumption, the largest element of GDP.

Meanwhile, housing transactions have risen from their very depressed levels of six years ago to a steady run rate of around 100,000 a month. Equally interesting, post-financial crisis debt aversion remains entrenched in the consumer psyche. People are spending what they can. Bank lending is rising but modestly. Mortgage approvals are growing but slowly. There is no new credit-fuelled boom on the horizon.

By contrast, it appears likely that, for the foreseeable future, the UK is going to deliver the right sort of growth: not a debt-fuelled credit or housing bubble but one founded on growth in employment, incomes and investment. Quarterly growth in GDP looks to be settling into a steady 0.5 per cent a quarter run rate – sometimes a little more, sometimes a little less. What a great backdrop for companies to engage in long-range business planning.

And then we have the profound long-term implications of the general election result. For the first time in almost 20 years we have a wholly Conservative Government dedicated to restoring sound public finances, limiting the growth of the public sector relative to the private sector and supportive of business and free markets.

I for one do not believe further necessary reductions in public spending will derail Britain’s economic recovery. There is sufficient self-sustaining momentum in activity to prevent that. Already it is clear some modest pause in activity in advance of the election has seen a post-election rebound.

Very real fears of a government seemingly hostile to business and wealth creation have vanished overnight. Moreover, given the constituency boundary changes likely to occur during this Parliament, the election of 2020 is the Conservatives to lose. While clearly five years is a long time in politics, it is highly likely we are set for 10 years of business-friendly, market-oriented government. This has to be positive for corporate sector confidence, long-range planning by companies and individuals, and for economic growth.

Indeed UK economic history suggests periods where the private sector is expanding as a percentage of GDP relative to the public sector are times of better economic growth and vice versa. This is precisely the goal of the new Government and, over time, everyone should feel the benefit.

What of the uncertainty surrounding the UK’s membership of Europe? Will business investment not be deferred until we know the result of the 2017 referendum? Clearly it is possible some foreign direct investment decisions may well be postponed until we have clarity on this issue but I am extremely confident we are not heading for Brexit.

Ignore all the commentary on the UK’s negotiations with its European partners over the next 18 months. You will save a lot of time. Ignore the grandstanding of politicians across Europe as public posturing in a political negotiation. There is no need for treaty change, merely protocols and side agreements.

The UK will not impede the free movement of people but it can seek restrictions on welfare payments to migrants. It can look to reduce Britain’s contribution to the European Union coffers. There is much shared ground with other EU countries on arresting the notion of “ever closer union”.

Germany does not want to lose the UK from Europe. Meaningful changes to Britain’s relationship with the EU can and will be agreed – with luck in time for a 2016 vote rather than 2017. On the basis of such changes, the Government will be able to campaign for our continued membership and I am confident it will win the referendum by a comfortable margin.

Interestingly, this will disembowel the eurosceptic Tory right-wing that so troubled Sir John Major’s premiership. Changes agreed, referendum won, move on.

Over the coming months, the UK market will rightly twist and turn over every data point through to the eventual start of US interest rate rises. But lift your eyes to the longer-term outlook for the UK economy as a consequence of this transformational election result and the economic foundations for long-term returns from UK equities look set fair.

Richard Buxton is head of equities and Old Mutual UK Alpha fund manager.