Britain’s stuck economy

This is an audio transcript of the FT News Briefing podcast episode: ‘Britain’s stuck economy’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, March 9th, and this is your FT News Briefing.

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EY’s plans to split are on hold. China’s president plans to boost the country’s tech sector in order to compete with the US. And the FT’s Chris Giles briefs us on Britain’s low-growth economy.

Chris Giles
The economy in the UK will be alone in not growing at all, not at . . . not a jot between 2019 and 2025.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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Global accounting giant EY kept delaying plans to split its auditing and consulting businesses. Now, that plan is on pause. Sources told the FT there’s been fierce fighting over how much of EY’s tax business should stay with the audit side after the split. EY had planned to shift most of its tax practice to the consulting and advisory business. But EY’s American auditors campaigned for more of the tax practice to stay on the audit side. That’s partly because of US regulations. Yesterday, the head of EY’s US business told partners that the deal needs to be reworked.

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Chinese president Xi Jinping is preparing to shore up financial stability and boost his country’s tech capabilities. Big changes to financial and tech regulation were revealed this week at the annual gathering of China’s rubber-stamp parliament. Here’s the FT’s Joe Leahy in Beijing.

Joe Leahy
So on the technology sector, the government is reinforcing its Ministry of Science and Technology, and the idea of that is to try to get it to become more innovative and to concentrate on achieving scientific breakthroughs. This is things like building national labs, facilitating technology transfer, looking after tech workers. So the idea is to compete more closely with the US, and Xi’s deeply aware that he needs to build greater industrial capabilities, particularly in this area. And the other aspect of this is that China’s gonna create what it’s calling a national data administration. This is more of a strategic body that’s going to craft a national big data plan and try to come up with a strategy for the digitalisation of China’s economy and of its state.

Marc Filippino
Joe, there are also big changes to financial regulation. How important are these?

Joe Leahy
Most significant reforms seem to be to the financial sector. China’s replacing its existing banking regulator with a new agency that’s gonna oversee the entire financial sector except for markets. The idea is that too many things seem to have been falling between the cracks before. Fintech companies like Alibaba, state-owned conglomerates that had financial arms, these things were not being as well-regulated as the party would like to see. Also, at the local level, there are a lot of financial institutions having bad loans or suffering from bank runs. So I think the party is trying to concentrate financial regulation in the hands of, not a super regulator because it doesn’t control markets, but a much more powerful entity that the party can control more closely. This is all part of Xi Jinping exerting a tighter grip, if you like, on policy in the Chinese economy. And I think this is something that we’re gonna see advancing as he starts on his third five-year term.

Marc Filippino
So the National People’s Congress wraps up on Monday. What else is in store?

Joe Leahy
We’re gonna see some formalities. So Xi Jinping will be elected president of China for his third term. And we’ll also see on Sunday a swath of big appointments, new head of the central bank. We’ll see the new ministers appointed. Even the premier, Xi’s No 2, he’ll be appointed on Saturday. So there’s still a lot of big appointments coming. And this is really a very big moment in terms of setting a new agenda for the country. And of course, the central theme is “Is Xi centralising too much? Is he choking off the market or will this new team, which will have his confidence, will they be able to forge ahead and reopen China for business?”

Marc Filippino
That’s the FT’s Joe Leahy in Beijing.

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Britain has a big problem with its economy. Its growth has lagged behind other developed countries since the pandemic. And unlike other big economies, UK growth hasn’t recovered from pre-Covid levels. The FT’s economics editor Chris Giles says the problems actually started much earlier. He joins me now. Hey, Chris.

Chris Giles
Hey there, Marc.

Marc Filippino
So Chris, when exactly did the UK’s engines of growth begin to stall?

Chris Giles
Well, you can really pinpoint it to the global financial crisis of 2007 to 2009. So the period from after the financial crisis to 2016, the UK’s growth rate of gross domestic product, that declined from being really the fastest in the G7 to still near the top of the G7, because remember, the eurozone was having a horrible time and the US wasn’t having a great time in that period either. And then after 2016, the UK continued to decline when other countries essentially accelerated and got over the growth shock. So we had two shocks: one, a global shock and then one, a UK-specific one after 2016. And you know, in some ways you can guess what happened in 2016 when it was the Brexit referendum.

Marc Filippino
So Brexit is one of the factors here. What are some of the other factors dragging down the economy?

Chris Giles
So the UK’s best sectors, including finance and its best regions, including, particularly London, they have not declined, but their productivity growth rate has fallen very sharply. Part of that is the response to the financial crisis itself. But it’s a wider thing that we haven’t found new growth engines to replace the ones that we had before 2007. And we’re sort of slightly unique in that. We had a really big surge in the numbers of people working, and now that has unfortunately gone into reverse since the pandemic. So we have the really nasty combination of both a longstanding productivity shock and then a new employment decline, which we’ve had over the past three or four years.

Marc Filippino
So Chris, is there a solution that the UK can put in place to fix all this?

Chris Giles
I think the solutions are, again, because these are long-term problems, they’re going to be long term. So you have to think hard about your relationships with other countries and this obviously will go slightly back to the Brexit conversation, but also about what are you doing about things like your property market. We have a real problem with permissions to build and things get done very slowly in this country. So I think that is one of the areas and clearly we need to get business investment going again. We’ve had a lot of policy flip-flopping by governments. So whatever you think about Brexit, you don’t know as a company what the government is going to do and what the business environment is going to be like in six months’ time. And in those circumstances it’s pretty hard to invest.

Marc Filippino
What does this all mean for the average person living in the UK?

Chris Giles
Well, if we don’t get growth back, and that is the central forecast of the Bank of England that we’re, the economy in the UK will be alone in not growing at all, not at . . . not a jot between 2019 and 2025 when eurozone is expected to grow by about 7 per cent over that period and the US by about 10 per cent. So not huge growth rates elsewhere, but much better than the UK. If that happens, then not only are living standards not rising, but also with an ageing population, it makes the public finances and financing our health service, our education service makes that very, very difficult indeed.

Marc Filippino
This all sounds kind of grim, Chris. Any good news on the horizon?

Chris Giles
The big picture, Marc, is pretty grim. But I think it’s not so awful. Forecasts are often wrong. There is, I think, a lot more stability in our political sphere just since the autumn. I think the UK, if it can show it’s a stable, grown-up country again, will find that businesses want to invest there. And I think if you can get a little bit of a virtuous circle going rather than the vicious circle I’ve just been talking about, then things would look less bleak than I’ve maybe painted them.

Marc Filippino
Chris Giles is the FT’s economics editor. Thank you, Chris.

Chris Giles
Thank you, Marc.

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Marc Filippino
Before we go, a reminder of the benefits of being a fund manager. Cathie Wood runs Ark Investment Management. She’s known for her flagship fund called Ark Disruptive Innovation. She made a name for herself by embracing high-flying, often speculative tech stocks. And for a while, that was going great. Then it wasn’t. The FT has calculated that investors have lost a collective $10bn in cash in the nine years since the fund was founded. Cathie Wood, over the same period, made more than $300mn in fees from that fund alone.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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