NMBS Conference: Putting the economy into perspective
Published: 22 June, 2012
SPAIN: Anthony Hilton, financial editor of the London Evening Standard and a long-time contributor to conference gave his views on the state of the economy, how it will impact on merchants and which areas the industry needs to monitor as he took the first session at the NMBS Conference in Marbella today.
Mr Hilton's forecast back in 2008 about the credit crunch came true and, as he quipped in his introduction, "we haven't had a conference since!"
Striving to put a balanced view on the perceived economic chaos, Mr Hilton pointed out that the latest recession and even the banking crisis is one of many that have occurred in the past. "Recessions aren't what they used to be. Back in 2008 I said it would all end in tears. But now, things are getting better."
The euro, debt and even government cuts, Mr Hilton related, were not areas which merchants should panic about. "We don't need to worry about the euro," he said. "It is just the Deutschmark with some disreputable friends. Hard-working Germans and partying Greeks."
Debt, he said, should be compared to trying to compete with conference host [the Olympic runner] Roger Black without the benefit of performance enhancing drugs. "The real issue for the euro is competitiveness. The Greeks first into debt back in 370 BC.
"The Eurozone has no problem. The trouble is the money is in the wrong place. It is in the North, when it should be spread in the South. German banks are loaded with Greek debt. They should cut Greece out of the equation and deal directly with the banks," Mr Hilton said.
The future, he believes, lies in breaking up the Eurozone. "The country that should be leaving the euro is Germany," he stated.
If Greece left the euro the new drachma would drop 50% and Greece's legacy of debt would go up by an equivalent amount.
If Germany pulled out, they would certainly suffer, but the country could afford it. That, said Mr Hilton, would be his solution.
He pointed out that since World War II, 43 currency unions have broken up with hardly a mention.
"We view debt as a moral issue and that it is somehow immoral to place the burden of it on our children. Debt is a quantum issue," he explained.
The UK's current debt is 80% of GDP. "Taking a lesson from history, after the Napoleonic Wards, the ratio of debt to GDP was 230%," Mr Hilton said.
"In the UK, 70-80% of debt is not unusual. At present, £45bn of debt goes to pension and insurance funds, so it is going around within the system. The leakage is coming from foreign debt."
It is sustainable for the economy to pay for debt interest because it is recycled. "The problem arises because the Government has rolled over debt at about 7%. But Greece and Italy have rolled over their debt at 25%."
On the Government's spending cuts, Mr Hilton explained, "there is a perception that it is slashing investment and that the country is being thrown out of work. The truth is that the Government has never cut expenditure.
"Margaret Thatcher altered the balance between the private and the state sector and business still existed. Only the definitions changed.
"The Government is still talking about cuts because that is the rhetoric of the markets. The cuts won't get worse. The area to worry about is that nothing the Government does seems to be working!"
The engines of growth up to 2007 depended on 'easy money'. "What we need to find now are new engines of growth," said Mr Hilton.
"The UK banking sector has £200bn outstanding in commercial property mortgages. £100bn of that is 'underwater' and cannot be refinanced. So, 70% of loan value has been breached. This takes a long time to recover and that is why the banks appear paralysed," he commented.
Consumers – the other engines of growth – have their own debt problems and they are not spending their cash. And, the companies which do have money are sitting on it, Mr Hilton said.
"Much of the economy is doing reasonably well and companies confident about their prospects, but not investing their cash. They are sitting on their cash balances."
Mr Hilton said we should take our lesson from history. "The 1920s was the era of depression. Back n the 1930s the UK economy grew y more than 30% and there was 3-4% growth from 1931 right up to World War II. This growth was achieved through housing. The UK built more than 300 000 houses a year, every year."
The good news, Mr Hilton added, was that "government is starting to get it. Business Secretary Vince Cable said last week that infrastructure makes our economy competitive. In order to get the economy going, housing is needed and massive investment required with regard to social housing."
The Government, Mr Hilton added, with its eye on re-election, "panics and takes active steps to get the economy going and will use housing as a vehicle to do this."
This may take time, he admits. "It could be another six months before it starts to filter through."
Q: Why has is taken the Government so long to realise that housing is the way forward?
A: David Osborne turned the soundbite "we have been left in a mess" into a policy. It was thought that by removing the dead hand of government, the private sector would go forth and succeed. It was a mix of naivety and political beliefs and that is why the Government has taken so long to come to a logical conclusion. As reported in the Telegraph, George Osborne has a sophisticated understanding of the art of politics but a jaw-dropping naivety about everything else.
Q: How do we ensure government gets the message?
A: Government doesn't listen to lobbying because everybody is lobbying it. Loss of face is a concern. But, it is undisputed that housing it the way forward.