An economic update with Philip Shaw
Investec Chief Economist Philip Shaw analyses the UK's recent economic performance and outlook.
Andrew Mitchell MP on the outlook for UK politics
The Rt Hon Andrew Mitchell MP gives his insight into the UK's most significant political issues, including Scottish independence, international trade, and the economic rebound from the pandemic.
A Q&A with Philip Shaw and Andrew Mitchell MP
The panellists answer audience questions, including the risk of a breakup of the UK, the implications of refusing a new Scottish independence referendum, devolution, fiscal policy, the economic impact of Brexit, and the outlook for taxes.
Owing to a successful vaccination programme, Shaw said he is positive on the outlook for the UK economy, citing stronger-than-expected retail and growth data, as well as substantial excess consumer savings. "The economy has gained resilience throughout the lockdowns, and the direction of travel is obvious," he said.
Shaw said he believes UK growth could top 8% this year and that an optimistic Bank of England (BOE) economic assessment on 6 May could be the catalyst for private-sector economic forecasts to be increased, putting upward pressure on the pound.
While he thinks the central bank is unlikely to change its monetary policy stance for another year, the government may soon need to address the gap in the public finances brought on by the costs of the pandemic.
"Unless you begin to pay down debt, you are going to have to reservice it when it matures, and in the meantime, the deficit has to be financed." Mitchell agreed that the extra borrowing that funded efforts to combat the pandemic and support the economy over the last year must be paid off in time. "The laws of economics have not changed," he said.
In terms of monetary policy, Shaw highlighted the importance of the potential sequence of policy changes. In 2017, BOE policymakers decided to raise interest rates before reversing quantitative easing (QE), but Governor Andrew Bailey has said this time he favours the opposite. Shaw said he expects a reversal of QE in about a year, with rates subsequently rising to 0.25%.
Looking ahead to the government's Autumn Budget, both Shaw and Mitchell said they believe there will be some changes to the tax regime, depending on the state of the budget and the economy. While Mitchell said he anticipates some equalisation of capital gains tax and income tax, Shaw cautioned that the changes might be limited.
"The economy should be able to grow successfully even with a degree of fiscal tightening over the medium term", Shaw said.
The 6 May could also help shape the country's political landscape over the coming years. While local and regional elections are taking place that day across the country, including London, the West Midlands and Wales, all eyes will be turned to the parliamentary election in Scotland. That's because if the Scottish National Party secures a parliamentary majority, it could reignite momentum for a new independence referendum. However, Shaw explained that recent indications show support for Scotland's First Minister Nicola Sturgeon, an SNP member, had slipped and the party could fall short.
Mitchell said that while he agreed that the SNP faces challenges under the Scottish electoral system, if the SNP won a majority, pressure for a new independence vote would build. "It would be harder to resist the argument that they have a democratic mandate for another referendum."
If a new vote was to occur, Mitchell said it would be important that the implications of independence are fully explored as he doesn't believe that happened at the 2014 referendum. "We need to understand what independence would actually mean. The previous referendum took place in a vacuum. No-one knew the answer to the question of what the currency arrangements would be, what the debt arrangements would be."
Business will prevail
On Brexit, Shaw explained that the impact of the UK leaving the European Union (EU) had so far proved challenging to assess. Although businesses are incurring more costs, having a deal ensures we should not see a material shift in economic growth this year, he said.
Asked whether the EU was a friend or foe to the UK, Mitchell replied, "friend". The UK remains a major European power, sharing common interests with the EU, he said. Looking at the big picture, "all the problems coming down the runway – climate change, migration, pandemics, protectionism, terrorism – require more international cooperation".
However, he said that the two powers remain trade and investment competitors.
Shaw echoed this sentiment, explaining that several rules resulting from the trade cooperation agreement have created tensions within British industry – including on rules of origin and the memorandum of understanding on financial services.
Nevertheless, Mitchell highlighted the adaptable nature of markets and the private-sector innovation that had been born out of the pandemic. For example, while commercial property has undoubtedly been hit, he pointed to the City of London's ambitions to turn unused offices into homes, which should provide a boost to struggling retail. "Footfall will put the heart back into the town centre," he said.